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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1999
REGISTRATION NO. 333-89179
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 4812 58-2424258
(State or of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Identification No.) Classification Code Number)
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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)
CHAD S. WACHTER
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
KNOLOGY, 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 registrant's 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 any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES OFFERING PRICE REGISTRATION
TO BE REGISTERED (1) FEE
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Common Stock $.01 par value Series A Preferred Stock, $.01
par value Options to Purchase Series A Preferred Stock...... $234,980,443 $65,324.56
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) A fee of $66,334.58 was paid previously.
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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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The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and is not
seeking an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 27, 1999
PRELIMINARY PROSPECTUS
KNOLOGY, INC.
(KNOLOGY LOGO)
43,211,531 SHARES OF SERIES A PREFERRED STOCK
OPTIONS TO PURCHASE 6,258,036 SHARES OF SERIES A PREFERRED STOCK
We are sending you this prospectus in connection with the distribution by
ITC Holding Company of all of its 43,211,531 shares of Series A preferred stock,
which is approximately 90% of the capital stock, of KNOLOGY, Inc. to ITC Holding
stockholders and options to purchase 6,258,036 shares of Series A preferred
stock of KNOLOGY to ITC Holding option holders.
In the distribution, you will receive the following:
- 1.09153 shares of our Series A preferred stock for every share of ITC
Holding common stock that you own.
- 4.36612 shares of our Series A Preferred Stock for every share of ITC
Holding preferred stock that you own, which is four times the common
stock number since there is a 4:1 conversion ratio.
- An option to purchase 1.09153 shares of our Series A preferred stock for
every option to purchase one share of common stock of ITC Holding that
you own. The aggregate exercise price of your KNOLOGY option will equal a
fixed percentage of the aggregate exercise price of your ITC Holding
option.
This distribution is being made by ITC Holding to each holder of record of ITC
Holding securities at the close of business on December 15, 1999. Cash in the
amount of $4.75 per share is being paid in lieu of fractional shares or options.
You are receiving the distribution in your capacity as an ITC Holding
Company stockholder or option holder. YOU DO NOT NEED TO MAKE ANY DECISIONS OR
TAKE ANY ACTION TO RECEIVE YOUR SHARE OF THE DISTRIBUTION.
This prospectus also relates to the common stock into which our preferred
stock is convertible and the common stock underlying the preferred stock
issuable upon exercise of our stock options being distributed by ITC Holding.
ITC Holding may be deemed an underwriter and a distributing stockholder under
applicable law with respect to the securities being distributed by it. ITC
Holding will not own any KNOLOGY stock or options upon completion of the
distribution.
THE SECURITIES THAT YOU RECEIVE IN THIS DISTRIBUTION WILL NOT BE TRADED ON
ANY EXCHANGE OR LISTED ON THE NASDAQ MARKET SYSTEM.
THE SECURITIES BEING DISTRIBUTED PURSUANT THIS PROSPECTUS INVOLVE A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE
HEADING "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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DECEMBER 30, 1999
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 8
THE DISTRIBUTION............................................ 22
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION............................................. 31
NO MARKET FOR OUR STOCK..................................... 38
DIVIDEND POLICY............................................. 38
CAPITALIZATION.............................................. 39
SELECTED CONSOLIDATED FINANCIAL DATA........................ 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................ 43
OUR BUSINESS................................................ 63
MANAGEMENT.................................................. 100
CERTAIN TRANSACTIONS AND RELATIONSHIPS...................... 112
PRINCIPAL STOCKHOLDERS...................................... 119
DESCRIPTION OF SECURITIES................................... 122
LEGAL MATTERS............................................... 128
EXPERTS..................................................... 128
WHERE YOU CAN FIND MORE INFORMATION......................... 129
INDEX TO OUR CONSOLIDATED FINANCIAL STATEMENTS.............. F-1
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i
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PROSPECTUS SUMMARY
This summary highlights more detailed information and financial statements
contained later in this prospectus. This summary does not contain all of the
information that you should consider with respect to owning the shares or
options. You should read the entire prospectus carefully, especially the risks
of holding the shares discussed under "Risk Factors."
KNOLOGY, INC.
We were formed in September 1998. We own 100% of KNOLOGY Holdings, Inc. and
100% of several other companies previously owned by ITC Holding Company, Inc.
KNOLOGY Holdings is our principal subsidiary. We currently offer our residential
and business customers broadband communication services, including:
- Video. We offer traditional cable television and digital cable
television services. Digital cable uses advanced technology to deliver
many more channels over the same amount of transmission capacity.
- Telephone. We offer local and long distance telephone service.
- Internet. We offer high-speed connections to the Internet using cable
modems.
Our customers have the choice of receiving these services individually or as
part of a bundle of services. We provide these services using high-speed,
high-capacity networks which are called broadband networks because they can
handle large volumes of voice, video and data at high speeds.
We presently have broadband networks in Montgomery, Alabama; Columbus,
Georgia; Augusta, Georgia; Panama City, Florida; and Charleston, South Carolina.
We also provide traditional analog and digital cable television services in
Huntsville, Alabama, and these facilities are being upgraded to provide
telephone and Internet services. Further, we provide local telephone services
and broadband services throughout the Georgia/Alabama border area known as the
valley.
We also provide access to our networks and various network-related services
to other telecommunications carriers. We refer to these services as broadband
carrier services. Other local telephone companies use our broadband carrier
services to provide local telephone service and long distance carriers use our
broadband carrier services to deliver long distance telephone service.
We are incorporated in the State of Delaware. Our principal executive
offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833, and
our telephone number is (706) 645-8553. We maintain a website at www.knology.com
where general information about our business is available. Reference to this
website shall not be deemed to incorporate the contents of our website into this
prospectus.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
We have determined that we will need substantial capital in the near future
to fund our planned upgrades and expansion, as discussed in more detail below
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations." As described in that section, we intend to seek
additional capital through private and public equity and debt financings. We
determined that our access to capital in the private equity market and our
ability to achieve a higher per share value would be enhanced if we no longer
had a single stockholder, ITC Holding, holding 90% of our capital stock.
ITC Holding is distributing the stock of KNOLOGY it holds to eliminate the
large block of KNOLOGY stock while allowing ITC Holding stockholders to maintain
directly the interest in KNOLOGY that they held indirectly before the
distribution. ITC Holding is also distributing KNOLOGY options to ITC Holding
option holders so they can maintain the economic value of their ITC Holding
options, which otherwise would be diluted as a result of the distribution. The
option distribution ratio is the same as the common stock distribution ratio,
and the exercise price of each KNOLOGY option has been set in a manner intended
to prevent this dilution. ITC Holding is also reducing the exercise price of
outstanding ITC Holding options for the same reason.
See the section under the caption "The Distribution" for a fuller
discussion of the background and reasons for the distribution. If you are an ITC
Holding option holder, please review carefully the information under the caption
"The Distribution -- Option Distribution" for a fuller description of the
rationale for the option distribution and the terms of the option distribution.
TERMS OF THE DISTRIBUTION
In the distribution, ITC Holding is distributing to its stockholders and
option holders all of the 43,211,531 shares of our Series A preferred stock and
options to purchase 6,258,036 shares of our Series A preferred stock held by ITC
Holding. The distribution is expected to be completed concurrently with the
circulation of this prospectus.
In the distribution, you will receive the following:
- 1.09153 shares of our Series A preferred stock for every share of ITC
Holding common stock that you own.
- 4.36612 shares of our Series A preferred stock for every share of ITC
Holding preferred stock that you own.
- An option to purchase 1.09153 shares of our Series A preferred stock, for
every option to purchase one share of common stock of ITC Holding that
you own.
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Only ITC Holding security holders of record as of December 15, 1999 are
receiving securities in the distribution. Cash in the amount of $4.75 will be
paid in lieu of fractional shares or options.
Example:
As an example, suppose before the distribution you hold 1,000 shares of ITC
Holding common stock and you hold options to buy 100 shares of ITC Holding
common stock for an aggregate exercise price of $500. Also suppose that ITC
Holding determines that KNOLOGY's value as a company before the distribution is
10% of the value of ITC Holding.
- Stock. In the distribution, you would receive 1,091 shares of KNOLOGY
Series A preferred stock, determined by multiplying your 1,000 shares
times the common stock distribution ratio of 1.09153. You would also
receive $2.52 in cash, equal to 0.53 fractional shares of KNOLOGY Series
A preferred stock times the cash value for fractional shares of $4.75 per
share.
Since the distribution by ITC Holding of its KNOLOGY shares is pro rata,
the value of the 1,000 shares of ITC Holding common stock and 1,091
shares of KNOLOGY Series A preferred stock you would hold after the
distribution would equal the value of the 1,000 shares of ITC Holding
common stock you held before the distribution.
As for all other ITC Holding stockholders, the effect of the distribution
is that you will hold directly as a KNOLOGY stock the interest in KNOLOGY
that you held indirectly through your ITC Holding stock prior to the
distribution.
- Options. In the distribution, you would receive options to purchase 109
shares of KNOLOGY Series A preferred stock, determined by multiplying
your options to purchase 100 shares times the option distribution ratio
of 1.09153. You would also receive $0.73 in cash, equal to options to
purchase 0.153 fractional shares of KNOLOGY Series A preferred stock
times the cash value for fractional options of $4.75 per share.
The value of your ITC Holding option would have declined in the
distribution because part of ITC Holding, worth 10% of its value, would
no longer belong to ITC Holding after the distribution. ITC Holding
would therefore reduce the aggregate exercise price of your ITC Holding
option by 10%, to $450. The $50 difference would become the aggregate
exercise price of your KNOLOGY option, since 10% of the value of your
old ITC Holding option is now represented by your KNOLOGY option.
Since the distribution by ITC Holding of its KNOLOGY options is pro rata,
the value of the two options you would hold after the distribution would
equal the value of your ITC Holding option before the distribution.
Similarly, since the option distribution ratio is based on the stock
distribution ratio, you would pay the same exercise price and you would
own the same number of shares whether (1) you exercised your ITC Holding
option immediately before the distribution
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and received stock in the distribution or (2) you exercised both your ITC
Holding option and your KNOLOGY option immediately after the
distribution.
As for all other ITC Holding option holders, the effect of the
distribution is that you will hold directly as a KNOLOGY option the
interest in KNOLOGY that you held indirectly through your ITC Holding
option prior to the distribution.
NO ACTION REQUIRED BY ITC HOLDING STOCKHOLDERS OR OPTION HOLDERS
In this distribution:
- You are not required to pay cash or any other consideration for the
securities you receive.
- You do not need to make any decisions or take any action to receive your
shares or options. You do not need to surrender your ITC Holding stock or
options.
- There are no conditions to the completion of the distribution. No further
board action is necessary and no stockholder vote is necessary.
- There are no proceeds to us or to ITC Holding.
- No recipients of the distribution or stockholders of KNOLOGY are entitled
to appraisal rights in connection with the distribution.
KNOLOGY STOCK AND OPTIONS DISTRIBUTED IN THE DISTRIBUTION CANNOT EASILY BE
TRANSFERRED
The securities that you receive in this distribution will not be traded on
any exchange or listed on the NASDAQ market system. They are also subject to
restrictions on transfer described below under the caption "Description of
Capital Stock."
THE DISTRIBUTION MAY HAVE INCOME TAX CONSEQUENCES TO YOU
The following summarizes the material federal income tax consequences of
the distribution. You should review this section carefully.
Material Federal Income Tax Consequences of the Stock Distribution to ITC
Holding Stockholders
ITC Holding has received rulings from the IRS that the distribution of our
stock to ITC Holding stockholders as described to the IRS would qualify as a
tax-free spin-off under Section 355 of the Internal Revenue Code. Based on these
rulings, if you receive KNOLOGY stock in the distribution:
- Upon the receipt of our stock in the distribution, you will not recognize
any gain or loss, and no amount will be included in your income.
- The total amount of the basis of our stock plus the basis of the ITC
Holding stock held by you after the distribution will be the same as the
basis of the ITC Holding stock held by you immediately before the
distribution.
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- If you receive cash in lieu of a fractional share of our stock, you will
be taxed as if you had received the fractional share and we redeemed it
for the amount of cash. The gain or loss, based on the difference between
the amount of cash and your basis in the stock, will be a capital gain or
loss if you hold the fractional share interest as a capital asset.
These IRS rulings are subject to factual representations made by ITC Holding to
the IRS. If those factual representations and assumptions made by ITC Holding
are or become incorrect in any material respect, the reliability of the IRS
rulings will be jeopardized. However, ITC Holding is not aware of any facts and
circumstances that would cause those representations and assumptions to be
untrue.
If the distribution were not to constitute a tax-free spin-off, then the
distribution could have adverse tax consequences to you. These potential adverse
tax consequences are discussed in detail below under the caption "Material
Federal Income Tax Consequences of the Distribution."
Material Federal Income Tax Consequences of the Option Distribution to ITC
Holding Option Holders
The tax treatment of the option distribution was not the subject of the IRS
rulings.
However, KNOLOGY has received a tax opinion regarding the tax treatment of
the option distribution from Hogan & Hartson LLP. The opinion is based upon the
discussion and various assumptions described below under the caption "The
Distribution -- Material Federal Income Tax Consequences of the
Distribution -- Option Holders."
The tax opinion states that the holders of ITC Holding incentive stock
options will not recognize taxable income as a result of the distribution of the
options to purchase KNOLOGY Series A preferred stock and the adjustments to ITC
Holding options in connection with the distribution.
The opinion also states that the holders of ITC Holding non qualified
options will likely not recognize income as a result of the distribution of the
options to purchase KNOLOGY Series A preferred stock and the adjustments to the
ITC Holding options in connection with the distribution. However, the tax
opinion cautions that, given the lack of published authority, there is a risk
that the IRS could treat the distribution of options to purchase KNOLOGY Series
A preferred stock and the adjustments to the ITC Holding non qualified options
as a taxable event to holders of ITC Holding non qualified options that are both
vested and deeply in the money, meaning options with an exercise price much
lower than the fair market value of the stock underlying the options. In this
event, those option holders would recognize ordinary income in an amount equal
to the fair market value of the underlying stock less the exercise price of the
purported KNOLOGY and ITC Holding options.
The potential tax consequences for holders of ITC options and the related
risks associated with the distribution of options to purchase our stock are
discussed in detail below under the caption "The Distribution -- Material
Federal Income Tax Consequences of the Distribution -- Option Holders."
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INTENDED SUBSEQUENT PRIVATE PLACEMENT
Shortly after this distribution, we intend to make a private offering of
shares of our Series B preferred stock. This offering is expected to be to a
small group of institutional investors for approximately $100 million. Once
issued, the Series B preferred stock would represent approximately 25% of our
total outstanding shares on a fully diluted basis. Each share of Series B
preferred stock is expected to be convertible initially into one share of our
common stock. We have received firm commitments from some of the proposed
institutional investors to purchase the Series B preferred shares at $4.75 per
share, and we expect to sell the Series B preferred shares at this price. The
terms of this private offering could change and it is possible that the offering
will not be consummated. The private offering is contingent upon the completion
of the distribution described by this prospectus.
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data. The
summary financial data set forth below should be read in conjunction with the
section of the prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations", our financial statements and
related notes, and other financial data included elsewhere in this prospectus.
See Note 1 to our financial statements regarding the Reorganization.
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NINE NINE
YEAR YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998(a) 1998 1999
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(UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Operating Revenues........................ $17,527,208 $ 17,633,313 $ 45,132,522 $ 30,285,049 $ 48,824,228
Operating expenses:
Cost of services........................ 2,991,412 3,121,108 12,739,540 9,010,401 18,573,719
Selling, operations and
administrative........................ 8,331,795 9,498,461 37,323,345 24,256,479 35,760,116
Depreciation and amortization........... 3,022,056 2,781,800 17,108,034 8,925,933 28,697,148
----------- ------------ ------------ ------------ ------------
Total operating expenses.......... 14,345,263 15,401,369 67,170,919 42,192,813 83,030,983
----------- ------------ ------------ ------------ ------------
Operating income (loss)................... 3,181,945 2,231,944 (22,038,397) (11,907,764) (34,206,755)
----------- ------------ ------------ ------------ ------------
Other income and expense.................. (379,889) (2,048,506) (18,645,199) (12,389,198) (22,754,426)
----------- ------------ ------------ ------------ ------------
Income (loss) before minority interest,
income tax (provision) benefit and
cumulative effect of a change in
accounting principle.................... 2,802,056 183,438 (40,683,596) (24,296,962) (56,961,181)
Minority interest......................... -- -- 13,294,079 11,292,126 3,267,653
Income tax (provision) benefit............ (1,371,865) (1,010,779) 5,631,618 1,704,350 11,011,711
Cumulative effect of a change in
accounting principle.................... -- -- (582,541) (582,541) --
----------- ------------ ------------ ------------ ------------
Net income (loss)......................... 1,430,191 (827,341) (22,340,440) (11,883,027) (42,681,817)
Subsidiary preferred stock dividends...... -- (4,193,276) (1,424,222) (63,907) --
----------- ------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders............................ $ 1,430,191 $ (5,020,617) $(23,764,662) $(11,946,934) $(42,681,817)
=========== ============ ============ ============ ============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common stockholders..... $ 14,301.91 $ (50,206.17) $(237,646.62) $(119,469.34) $(426,818.17)
Basic and diluted weighted average number
of common shares outstanding............ 100 100 100 100 100
OTHER FINANCIAL DATA:
Capital expenditures...................... $ 995,320 $ 1,727,079 $120,227,057 $ 80,913,266 $ 64,290,709
Cash provided by (used in) operating
activities.............................. 4,770,730 3,680,116 23,035,488 9,515,039 (3,069,133)
Cash (used in) provided by investing
activities.............................. (197,362) (22,223,940) (34,586,803) (22,997,766) 1,021,793
Cash (used in) provided by financing
activities.............................. (4,457,176) 18,726,407 16,083,187 15,176,704 18,088,543
EBITDA(b)................................. 5,640,550 2,509,854 8,564,129 8,475,265 (2,067,832)
Ratio of earnings to fixed charges........ 3.57 1.03 -- -- --
Insufficient earnings to cover fixed
charges................................. -- -- $ 27,389,517 $ 13,004,836 $ 53,693,528
</TABLE>
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DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Working capital..................................... $ 2,977,835 $(1,240,180) $ 49,965,918 $ 12,646,729
Property and equipment, net......................... 11,374,950 11,260,846 211,885,668 258,655,902
Total assets........................................ 22,883,276 30,196,492 369,847,446 359,663,248
Long-term debt, including accrued interest.......... -- -- 276,165,900 321,413,741
Total liabilities................................... 7,235,555 6,656,317 314,414,049 350,205,359
Minority interest................................... -- -- 3,267,653 --
Retained earnings (accumulated deficit)............. 9,598,225 3,181,179 (20,583,483) (63,265,300)
Total stockholders' equity.......................... 15,647,721 23,540,175 49,678,784 6,970,929
</TABLE>
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(a) See note 9 to our financial statements, Cable Alabama acquisition, for
further information regarding presentation.
(b) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is not a measurement of financial
performance under generally accepted accounting principles. It 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. We believe the
presentation of EBITDA provides relevant and useful information to our
investors because it is a financial performance measure commonly used in the
industry. Additionally, we do not currently believe that there are any legal
or functional requirements that limit management's discretionary use of
funds depicted by EBITDA.
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RISK FACTORS
The securities being distributed pursuant to this prospectus involve a high
degree of risk, including those risks described below.
WE HAVE LOST MONEY ON OUR OPERATIONS TO DATE, AND WE EXPECT TO LOSE MORE MONEY
DURING THE NEXT SEVERAL YEARS.
As of September 30, 1999, we had an accumulated deficit of $63.3 million.
We expect to incur net losses and negative cash flow during the next several
years as we build our networks. Our ability to generate profits and positive
cash flow will depend in large part on our obtaining enough subscribers for our
services to offset the costs of constructing and operating our networks. If we
cannot achieve operating profitability or positive cash flows from operating
activities, our business, financial condition and operating results will be
adversely affected.
FAILURE TO OBTAIN ADDITIONAL FUNDING WOULD LIMIT OUR ABILITY TO EXPAND OUR
BUSINESS.
We expect to spend approximately $170 million during the next three years
to expand or upgrade our Panama City, Augusta, Charleston and Huntsville
networks. If we expand to new cities, we estimate the cost of constructing and
implementing networks in additional cities at approximately $50 million to $75
million per city, though costs could be as much as $85 million to $90 million
per city for larger markets. Actual costs may exceed this estimate. We will need
significant additional financing to complete this expansion and upgrade, to
expand into additional cities, for new business activities and for any
additional acquisitions. If we cannot obtain sufficient funds we may be required
to defer or abandon our expansion plans, which could limit our growth and
prospects.
NO TRADING MARKET EXISTS FOR OUR SECURITIES, AND OUR SECURITIES ARE SUBJECT TO
TRANSFER RESTRICTIONS.
Our stock is not listed on any stock exchange or on the Nasdaq market
system, and no market makers currently make a market in our stock. We do not
expect that an active public market for our stock will develop after the
distribution. In addition, all shares of our stock are subject to transfer
restrictions. If one of our stockholders decides to sell his shares of our
stock, he must first offer those shares to us to purchase before he can offer
the shares to a third party. With the lack of an active public market for our
stock and our rights of first refusal on the sale of our stock, your ability to
sell our securities will be limited.
ITC HOLDING AND ITS STOCKHOLDERS, INCLUDING YOU, COULD RECOGNIZE SIGNIFICANT TAX
IF OUR TAX RULINGS BECOME INVALID.
The IRS tax rulings relating to the distribution are subject to factual
representations made by ITC Holding to the IRS. If those factual representations
are or become incorrect in any material respect, the rulings might not apply to
the distribution. If the
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distribution were not to constitute a tax-free spinoff, then the distribution
could have the following significant tax consequences to you:
- ITC Holding stockholders, including you -- Each holder of ITC Holding
stock who received shares of our stock in the distribution would be
treated as having received a taxable dividend in an amount equal to the
fair market value of our stock received at the time of the distribution,
to the extent of such holder's share of ITC Holding's current and
accumulated earnings and profits.
- ITC Holding -- ITC Holding would recognize a taxable gain equal to the
difference between the fair market value of the shares of our stock and
its adjusted basis in those shares at the time of the distribution. This
could reduce the value of your existing ITC Holding stock.
THE DISTRIBUTION OF NONQUALIFIED OPTIONS, ESPECIALLY OPTIONS THAT ARE VESTED AND
DEEPLY IN THE MONEY, AND THE ADJUSTMENTS TO THESE OPTIONS COULD RESULT IN
ADVERSE TAX CONSEQUENCES TO THE ITC HOLDING OPTION HOLDERS.
The opinion received from our tax counsel relating to the tax consequences
of our option distribution states that for options that do not qualify as
incentive stock options, referred to as nonqualified options, there is very
little authority with respect to adjustments made in connection with a spin-off.
The IRS may find the distribution to be a taxable event for some holders of
nonqualified stock options which will be both vested and have an option exercise
price that is much less than the fair market value of the stock underlying the
option. The IRS may take the position that these nonqualified options are not
treated as options for tax purposes at the time of the distribution, but as new,
outright grants of stock. In that event, the distribution of these nonqualified
options and the adjustment of the outstanding ITC Holding options would result
in immediate and possibly substantial taxation for the option holders.
ITC HOLDING COULD RECOGNIZE SIGNIFICANT TAX IF THE DISTRIBUTION IS PART OF A
PLAN IN WHICH A 50% OR GREATER INTEREST IS ACQUIRED, WHICH COULD AFFECT THE
VALUE OF YOUR EXISTING ITC HOLDING STOCK.
Even if the distribution is otherwise treated as a tax-free spin-off, ITC
Holding would recognize a large taxable gain if the distribution is part of a
plan or series of related transactions in which a 50% or greater interest in
KNOLOGY or ITC Holding is being acquired by one or more persons. Any cumulative
50% change of ownership within the four-year period beginning two years before
the date of the distribution will be presumed under applicable tax law to be
part of such a plan. If this presumption applies, it would need to be rebutted
to avoid a large taxable gain. Proposed regulations interpreting this provision
could make it extremely difficult for us to rebut this presumption with respect
to the distribution and a cumulative 50% change of ownership.
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OUR TAX SEPARATION AGREEMENT WITH ITC HOLDING MAY LIMIT OUR ABILITY TO RAISE
EQUITY FUNDING OR CONDUCT ACQUISITIONS FOR STOCK, AND BREACH OF THIS AGREEMENT
COULD SUBJECT US TO SUBSTANTIAL DAMAGES.
ITC Holding and KNOLOGY have entered into a tax separation agreement in
which they have made representations and covenants that impose limitations on
the future actions of KNOLOGY. Because we could have substantial liability, up
to $50 million under the tax separation agreement, if we breach our
representations and covenants, KNOLOGY could be discouraged from entering into
transactions that might result in a breach. KNOLOGY might not pursue any
transaction that would be presumed to be part of a plan or series of related
transactions which results in any cumulative 50% change of ownership within the
four-year period beginning two years before the date of the spin-off.
Transactions that could involve a possible breach include an actual or
constructive change of control of KNOLOGY, and exceeding limits on the raising
of equity capital or the use of our stock to acquire other companies. We may
have to forego some growth opportunities that may occur during the two years
subsequent to the distribution because of our representations and covenants.
COMPETITION FROM OTHER TELEVISION PROVIDERS COULD CAUSE US TO LOSE SUBSCRIBERS.
To be successful, we will need to attract cable television subscribers away
from our competitors. We often are not the first cable television provider in
our markets, and we have to compete with other companies that have long-standing
customer relationships with the residents in these areas. Some of our
competitors have other competitive advantages over us, such as greater
experience, resources, marketing capabilities and name recognition. In addition,
a continuing trend toward business combinations and alliances in the cable
television area and in the telecommunications industry as a whole may create
significant new competitors for us. In providing television service, we
currently compete with AT&T Cable Services, Comcast Cable Communications, Time
Warner Cable, Mediacom and Charter Communications, Inc. We also compete with
satellite television providers DirecTV and Echostar. Our other competitors
include:
- other cable television providers;
- broadcast television stations;
- other satellite television companies;
- wireless cable services; and
- private satellite dishes.
We expect in the future to compete with telephone companies providing cable
television service within their service areas.
New legislation will allow satellite providers to offer local programming.
This could reduce our current advantage over satellite providers in this area
and hurt our ability to attract and maintain subscribers.
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COMPETITION FROM OTHER TELEPHONE SERVICE PROVIDERS COULD CAUSE US TO LOSE
CUSTOMERS.
In providing local and long distance telephone services, we compete with
the incumbent local phone company in each of our markets. We are not the first
provider of telephone services in most of our markets, and we have to convince
people in our markets to switch from other telephone companies to us. BellSouth
is the incumbent local phone company and is a particularly strong competitor in
our current markets and throughout the southeastern United States where we hope
to expand. We also compete with long distance phone companies such as AT&T, MCI
WorldCom and Sprint. Our other competitors include:
- independent or competitive local exchange carriers, which are local phone
companies other than the incumbent phone company that provide local
telephone services and access to long distance services over their own
networks or over networks leased from other companies;
- regional Bell operating companies other than BellSouth;
- wireless telephone carriers; and
- utility companies.
COMPETITION FROM OTHER PROVIDERS OF INTERNET SERVICES COULD CAUSE US TO LOSE
SUBSCRIBERS OR HINDER THE GROWTH OF OUR INTERNET SERVICES.
Providing Internet access services is a rapidly growing business and
competition is increasing in each of our markets. Some of our competitors have
competitive advantages over us, such as greater experience, resources, marketing
capabilities and stronger name recognition.
In providing Internet access services, we compete with:
- traditional dial-up Internet service providers;
- providers of satellite-based Internet services;
- other long distance telephone companies; and
- cable television companies.
Other technologies also offer high-speed, high capacity connections to the
Internet. We will compete with companies offering broadband connections such as
DirecPC, one of the principal providers of satellite- based Internet services in
the United States; long distance telephone companies such as AT&T and MCI
WorldCom; traditional dial-up Internet service providers; and cable modem
services such as Excite@Home, a joint venture among several major cable
companies.
OUR PROGRAMMING COSTS ARE INCREASING, WHICH COULD REDUCE OUR CASH FLOW AND
OPERATING MARGINS.
Programming has been our largest single operating expense item and we
expect this to continue. In recent years, the cable industry has experienced a
rapid increase in the
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cost of programming, particularly sports programming. This increase may continue
and we may not be able to pass programming costs increases on to our customers.
In addition, as we increase the channel capacity of our systems and add
programming to our basic and expanded basic programming tiers, we may face
additional market constraints on our ability to pass programming costs on to our
customers. The inability to pass programming cost increases on to our customers
would have an adverse impact on our cash flow and operating margins.
PROGRAMMING EXCLUSIVITY IN FAVOR OF OUR COMPETITORS COULD ADVERSELY AFFECT THE
DEMAND FOR OUR CABLE SERVICES.
We obtain our programming by entering into contracts or arrangements with
cable programming vendors. A cable programming vendor may enter into an
exclusive arrangement with one of our cable television competitors. This would
create a competitive advantage for the cable television competitor by
restricting our access to programming. Each of AT&T Cable Services, Comcast
Cable Communications and Time Warner Cable have entered into exclusivity
arrangements with the WeB channel, which is the distribution channel for WB
programming, in different markets. We provide programming in each of these
markets as well, and these exclusivity arrangements restrict our access to
programming. Limiting our ability to offer certain programming on our cable
television systems may adversely affect the demand for our cable services.
THE SIGNIFICANT AMOUNT OF DEBT WE HAVE COULD HARM OUR BUSINESS.
As of September 30, 1999, we had $321.4 million of debt, including accrued
interest, and our stockholders' equity was $7.0 million. We anticipate that we
will incur more debt as we expand our existing networks and move into new
markets in the future. Our debt could adversely affect our business in a number
of ways, as:
- we have to use a lot of our money to pay interest and repay principal on
debt;
- we may have trouble obtaining future financing;
- we may have limited flexibility in planning for or reacting to changes in
our business;
- we may have more debt relative to our competitors, which may place us at
a disadvantage; and
- we may be more vulnerable to any economic downturn.
Our earnings were not sufficient to cover our fixed charges in 1998 and through
the first nine months of 1999. We will need to grow and generate profits in
order to generate the cash to repay our debt. If we cannot meet our debt
payments, we may need to seek additional financing or sell some of our assets,
which would affect our business, operations and the value of our company.
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RESTRICTIONS ON OUR BUSINESS IMPOSED BY OUR DEBT AGREEMENTS COULD LIMIT OUR
GROWTH OR ACTIVITIES.
Our indenture and credit facility agreements place operating and financial
restrictions on us and our subsidiaries. These restrictions affect our and our
subsidiaries' ability to:
- incur additional debt;
- create liens on our assets;
- use the proceeds from any sale of assets; and
- make distributions on or redeem our stock.
In addition, our credit facility requires us to maintain certain financial
ratios. These limitations may affect our ability to finance our future
operations or to engage in other business activities that may be in our
interest. If we violate any of these restrictions, we could be in default under
one or both of these agreements and be required to repay our debt immediately
rather than at the maturity of the debt.
WE MAY ENCOUNTER DIFFICULTIES EXPANDING INTO ADDITIONAL MARKETS.
To expand into additional cities we will have to obtain pole attachment
agreements, construction permits, franchises and other regulatory approvals.
Delays in receiving the necessary construction permits and in conducting the
construction itself have adversely affected our schedule in the past and could
do so again in the future. Further, we may face resistance from competitors who
are already in these markets. A competitor may oppose or delay our franchise
application or our request for pole attachment space. These difficulties could
harm the development of our business in new markets.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH, OUR BUSINESS WILL BE HARMED.
Our ability to grow will depend, in part, upon our:
- successfully implementing our strategy;
- evaluating markets;
- securing financing;
- constructing facilities;
- obtaining any required government authorizations; and
- hiring and retaining qualified personnel.
In addition, as we increase our service offerings and expand our targeted
markets, we will have additional demands on our customer support, sales and
marketing, administrative resources and network infrastructure. If we cannot
effectively manage our growth, our business and results of operations will be
harmed.
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ACQUISITIONS AND JOINT VENTURES COULD STRAIN OUR BUSINESS AND RESOURCES.
If we acquire existing companies or networks, or enter into joint ventures,
we may be subject to:
- miscalculation of the value of the acquired company or joint venture;
- diversion of resources and management time;
- difficulties in integration of the acquired business or joint venture
with our operations;
- relationship issues as a result of changes in management;
- additional liabilities or obligations as a result of the acquisition or
joint venture; and
- additional financial burdens or dilution incurred with the transaction.
Ongoing consolidation in the telecommunications industry may be shrinking
the number of attractive acquisition targets.
WE OPERATE OUR NETWORKS UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL OR
TERMINATION, EITHER OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Our networks generally operate pursuant to franchises, permits or licenses
typically granted by a municipality or other state or local government
controlling the public rights-of-way. Often, franchises are terminable if the
franchisee fails to comply with material terms of the franchise order or the
local franchise authority's regulations. Further, franchises generally have
fixed terms and must be renewed periodically. Local franchising authorities may
resist granting a renewal if they consider either past performance or the
prospective operating proposal to be inadequate. Our franchises for Montgomery,
Columbus, Panama City, Augusta, Charleston, Huntsville and the Georgia/Alabama
border area will expire in March 2005, March 2009, July 2007, January 2013,
April 2013, March 2001 and January 2013, respectively. If one of our franchises
is not renewed or terminated, our business will be harmed.
IF WE ARE NOT ABLE TO OBTAIN AND RENEW OUR FRANCHISES IN A TIMELY MANNER AND ON
ACCEPTABLE TERMS AND CONDITIONS, OUR BUSINESS WILL BE HARMED.
Our business depends on our ability to obtain and renew our franchises in a
timely manner and on acceptable terms and conditions. We cannot predict whether
we will obtain franchises in new cities on terms that will make construction of
a network and provision of broadband communications services economically
attractive for us.
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SINCE WE OPERATE OUR SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE, LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE MORE
COMPETITION FOR US IN OUR MARKETS.
Our franchises are non-exclusive. The local franchising authorities can
grant franchises to competitors who may build networks in our market areas. This
could adversely affect our growth and our profitability.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE REGULATORY CONSTRAINTS OR
REQUIREMENTS ON OUR BUSINESS, WHICH COULD INCREASE OUR EXPENSES.
Local franchise authorities can impose regulatory constraints by local
ordinance or as part of a grant or renewal of a franchise. They also may impose
customer service or other requirements. This would increase our expenses in
operating our business.
LOSS OF ACCESS TO OTHER COMPANIES' NETWORKS COULD IMPAIR OUR TELEPHONE SERVICE.
We rely on other companies to provide:
- communications capacity between our facility that switches telephone
calls and our local networks;
- long distance telephone services;
- space at areas along our network or in switching centers to locate
equipment. Since for efficiency reasons our equipment needs to be located
near and often connected to similar equipment operated by other
providers, which is called co-location, available space can be quite
limited;
- special network services for internet transport requirements.
We purchase these services from two primary vendors, Business Telecom, Inc. and
ITC*DeltaCom, both of which compete with us. ITC*DeltaCom, which was spun off by
ITC Holding to its stockholders in 1998, may be deemed a related party. We have
a minimum purchase commitment of $50,000 with Business Telecom. We do not have a
minimum purchase commitment with ITC*DeltaCom. If we lost services from either
of these companies, we would have to find another entity who could provide these
services for us and may have to pay more for the same services or meet a higher
minimum purchase commitment. Further, if either of these companies reduced our
access to its facilities because that company did not have the capacity to
provide these services to us, our business would be harmed.
LOSS OF INTERCONNECTION ARRANGEMENTS COULD IMPAIR OUR TELEPHONE SERVICE.
We rely on other companies to connect with users of telephone service who
are not our customers. We presently have access to BellSouth's telephone network
under a nine-state interconnection agreement which expires in April 2000. This
agreement may not be renegotiated on favorable terms or at all, since BellSouth
is our competitor. If our interconnection agreement is not renewed, we will have
to negotiate another interconnec-
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tion agreement with BellSouth. The renegotiated agreement could be on terms less
favorable than our current terms.
It is generally expected that the Telecommunications Act of 1996 will
continue to undergo considerable interpretation and implementation over the next
several years, which could have a negative impact on our interconnection
agreement with BellSouth. Our ability to compete successfully in the provision
of services will depend on the timing of such implementing regulations and
whether they are favorable to us.
CHANGES IN DEMAND FOR OUR TELEPHONE SERVICES COULD HARM OUR BUSINESS.
We could be affected by changes in demand for our local and long distance
telephone services, including:
- traditional telephone services;
- premium telephone services;
- additional access lines per household;
- billing and collection services; and
- local competition in the Georgia/Alabama border area.
Any downturn in demand will harm our business, profitability and growth
prospects. In addition, recent price decreases and promotional activities by
major long distance carriers could have a material adverse impact on our cash
flow and margins.
WE DO NOT KNOW THE DEMAND FOR OUR BUNDLED COMMUNICATIONS SERVICES.
Our plan to provide bundled broadband communications services is fairly new
and untested. It could be unsuccessful due to:
- competition;
- pricing;
- regulatory uncertainties; or
- operating and technical difficulties.
In addition, the demand for some of our planned broadband communications
services, either alone or as part of a bundle, cannot readily be determined. Our
business could be adversely affected if demand for bundled services is
materially lower than we expect.
FUTURE TECHNOLOGICAL DEVELOPMENTS MAY HURT OUR BUSINESS.
Future technological developments may reduce our network's competitiveness
or require expensive and time-consuming upgrades or additional equipment. In
addition, we may be required to select in advance one technology over another
and may not choose the technology that turns out to be the most economic,
efficient or attractive to customers.
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WE DEPEND UPON A VERY SMALL NUMBER OF SUPPLIERS FOR OUR CABLE EQUIPMENT.
Since the cable equipment industry is a consolidated industry, there are
relatively few manufacturers of cable equipment. We purchase digital cable
equipment from one supplier, Scientific Atlanta. This supplier has informed us
that it may decide not to sell equipment to us in some markets to which we may
expand in the future because of its existing relationship with Time Warner
Cable, which is one of our large competitors. If we are unable to resolve this
issue with Scientific Atlanta favorably or are unable to identify an alternate
source of digital cable equipment, our ability to expand into these markets may
be impaired.
All of our contracts with Scientific Atlanta are short term contracts. If
Scientific Atlanta decides not to renew our contracts and we are unable to
secure an alternate source of digital cable equipment on equivalent terms, our
business may be adversely affected.
WE HAVE EXPERIENCED DIFFICULTY ENGAGING SUFFICIENT CONSTRUCTION CONTRACTORS AND
OUR CONSTRUCTION COSTS ARE INCREASING.
The expansion and upgrade of our existing networks and the development of
future networks require us to hire construction contractors. We could have
difficulty hiring experienced contractors because of increases in demand for
cable construction services. Our construction costs may increase significantly
over the next few years as demand for cable construction services continues to
grow.
WE COULD BE HURT BY FUTURE INTERPRETATION OR IMPLEMENTATION OF REGULATIONS.
The current communications and cable legislation is complex and in many
areas sets forth policy objectives to be implemented by regulation.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' capacity available to other Internet service providers,
such as telephone companies. AT&T recently announced that it would open its
systems to competing Internet service providers, including MindSpring, with
which it already has entered into an agreement. Certain local franchising
authorities are considering or have already approved similar open access
requirements. If regulators decide to require us to provide competing telephone
or Internet service providers with access to our broadband networks, much of the
competitive advantage we have from owning our own networks could be eliminated.
Competing Internet service providers could stream video over their systems, in
direct competition with our programming services. Our interconnection
agreements, which we depend on to reach users who are not our customers, are
subject to regulation by the Federal Communications Commission and state
authorities. Unfavorable regulation that delays interconnection or increases the
cost of interconnection would hurt our business.
As stated earlier, it is generally expected that the Telecommunications Act
of 1996 will continue to undergo considerable interpretation and implementation
over the next
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several years. Our ability to compete successfully will depend on the timing of
such implementing regulations and whether they are favorable to us.
OUR RELATIONSHIPS WITH ITC HOLDING'S COMPANIES AND AT&T'S VENTURE FUNDS MAY
CAUSE CONFLICTS OF INTERESTS.
We have relationships with several of ITC Holding's subsidiaries and
affiliated companies. Some of our directors are directors, stockholders, and/or
officers of various ITC Holding companies. AT&T's venture funds collectively are
a significant stockholder and also have a representative on our board of
directors. When the interests of ITC Holding, other ITC Holding companies or
AT&T's venture funds differ from ours, the ITC Holding companies and AT&T
venture funds act in their own respective best interests, which could be adverse
to our interests.
SOME OF OUR MAJOR STOCKHOLDERS OWN STOCK IN OUR COMPETITORS AND MAY HAVE
CONFLICTS OF INTEREST WITH RESPECT TO THOSE COMPANIES AND US.
Campbell B. Lanier, the chairman of our board of directors and one of our
major stockholders following the distribution, owns approximately 16% of the
outstanding stock of ITC*DeltaCom. South Atlantic Venture Funds, another one of
our major stockholders following the distribution, owns 4.6% of ITC*DeltaCom.
When the interests of one of our competitors differs from ours, these
stockholders may support our competitor or take other actions which could
adversely affect our interests.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD DISRUPT OUR OPERATIONS AND HARM
OUR BUSINESS.
The year 2000 issue affects our owned and licensed computer systems and
equipment used in connection with internal operations. It also affects our non-
information technology systems, including embedded systems in our buildings and
other infrastructure. Additionally, we rely directly and indirectly, in the
regular course of business, on the proper operation and compatibility of third
party systems, and the year 2000 problem could cause these systems to fail, err
or become incompatible with our systems.
Much of our assessment effort regarding the year 2000 problem has involved,
and depends on, inquiries to third party service providers. If we, or
significant third parties with whom we communicate and do business through
computers, fail to become year 2000 ready, or if the year 2000 problem causes
our systems to become internally incompatible or incompatible with key third
party systems, our business could suffer material disruptions. We could also
face disruptions if the year 2000 problem causes general widespread problems or
an economic crisis. We cannot now estimate the extent of these potential
disruptions. We cannot assure you that our efforts to date and our ongoing
efforts to prepare for the year 2000 problem will be sufficient to prevent a
material disruption of our operations. If any such disruption occurs, our
growth, profitability and operating results could suffer materially.
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WE WILL NOT BE ABLE TO RELY ON ITC HOLDING FOR ACCESS TO CAPITAL.
As a subsidiary of ITC Holding, we had access to capital that we may not
have as a stand-alone company. Following the distribution, we will not have
access to capital through ITC Holding and it will be less likely that ITC
Holding will be willing to provide financing to us or enter into other
transactions with us. In the past, ITC Holding has contributed equity to us and
has lent money to us. We can no longer rely on financing from ITC Holding, and
we must depend on our own resources.
SINCE OUR BUSINESS IS CONCENTRATED IN SPECIFIC GEOGRAPHIC LOCATIONS, OUR
BUSINESS COULD BE HURT BY A DEPRESSED ECONOMY IN THESE AREAS.
We provide our services to areas in Alabama, Georgia, Florida and South
Carolina, which are all in the southeastern United States. Our networks are
built in small to mid-sized markets. A stagnant or depressed economy in the
southeastern United States could affect all of our markets, and our entire
business and profitability would be damaged.
OUR SERVICE NETWORK OR OTHER FACILITIES COULD BE DAMAGED BY NATURAL CATASTROPHE.
Our success depends on the efficient and uninterrupted operation of our
communications services. Our networks are attached to poles and other structures
in our service areas, and our ability to provide service depends on the
availability of electric power. A tornado, hurricane, flood or other
catastrophic event in one of these areas could damage our network, interrupt our
service and harm our business in the affected area. In addition, many of our
markets are close together, and a single natural disaster could damage several
of our networks.
ALTHOUGH OUR STOCK IS NOT PUBLICLY TRADED, THE VALUE OF OUR STOCK COULD BE HURT
BY SUBSTANTIAL PRICE FLUCTUATIONS.
The value of our capital stock could be subject to sudden and material
increases and decreases, even though it is not publicly traded. The value of our
stock could fluctuate in response to:
- our quarterly operating results;
- changes in our business;
- changes in the market's perception of our bundled services;
- changes in the businesses or market perceptions of our competitors; and
- changes in general market or economic conditions.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the value of
securities of many companies. The changes often appear to occur without regard
to specific operating performance. The value of our capital stock could increase
or decrease based on change of this type, even though our stock is not publicly
traded. These fluctuations could materially reduce the value of our stock.
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IF WE ISSUE MORE STOCK IN FUTURE OFFERINGS, THE PERCENTAGE OF OUR STOCK THAT YOU
OWN WILL BE DILUTED.
Following this distribution, we will have 2,476 shares of common stock and
48,035,531 shares of Series A preferred stock outstanding. Shortly after this
distribution, we intend to make a private offering of shares of our Series B
preferred stock to a small group of institutional investors for approximately
$100 million at $4.75 per share. Each share of Series B preferred stock issued
is expected to be convertible into one share of our common stock. This private
offering, if consummated, will significantly dilute your percentage ownership in
KNOLOGY. Future stock issuances also will reduce your percentage ownership.
FOLLOWING THE DISTRIBUTION, A SMALL NUMBER OF STOCKHOLDERS WILL CONTROL A
SIGNIFICANT PORTION OF KNOLOGY.
Following the distribution, approximately 22.6% of our outstanding voting
stock will be beneficially owned by Campbell B. Lanier, the chairman of our
board of directors, and members of Mr. Lanier's family. Our directors and
executive officers as a group will beneficially own 36.6% of our outstanding
voting stock. Further, AT&T venture funds, SCANA Communications, Inc., American
Water Works Company, Inc. and South Atlantic funds beneficially own
approximately 8.9%, 15.0%, 7.9% and 7.4% of our outstanding voting stock,
respectively. As a result, these stockholders will each have a dominant voting
position with respect to the ability to:
- elect our directors;
- amend our certificate of incorporation or bylaws; or
- effect a merger, sale of assets or other corporate transaction.
The extent of ownership by these stockholders may also discourage a potential
acquirer from making an offer to acquire KNOLOGY. This could reduce the value of
our stock.
WE EXPECT TO ENTER INTO A STOCKHOLDERS' AGREEMENT WITH SERIES B PREFERRED
STOCKHOLDERS WHEN WE ISSUE OUR SERIES B PREFERRED STOCK, WHICH AGREEMENT MAY
EFFECT THE RIGHTS OF HOLDERS OF OUR COMMON AND SERIES A PREFERRED STOCK.
We intend to make a private offering of shares of our Series B preferred
stock in the near future, and we expect to enter into a stockholders' agreement
with the Series B stockholders. This stockholders' agreement is expected to give
the Series B stockholders rights to subscribe when we offer additional stock in
the future and rights to elect two directors. The subscription right may inhibit
our ability to conduct sales of our securities to strategic investors and limit
our ability to dilute the interests of the Series B stockholders. The right to
elect two directors may give the Series B stockholders disproportionate
representation on our board of directors.
WE COULD BE DAMAGED BY THE LOSS OF OUR KEY PERSONNEL.
Our business is currently managed by a small number of key management and
operating personnel. We do not have any employment agreements with, nor do we
maintain "key man" insurance on, these or any other employees. As we have
numerous new employees resulting from our recent growth, we are particularly
dependent upon our
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management and longer-term employees who are familiar with our company and our
needs and can train our new hires.
ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD MAKE IT
HARD FOR A THIRD PARTY TO ACQUIRE US.
As a Delaware company we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. Section 203 could delay or
prevent a third party or a significant stockholder from acquiring control of us.
In addition, our charter and bylaws may have the effect of discouraging,
delaying or preventing a merger, tender offer or proxy contest involving our
company. Any of these anti-takeover provisions could lower the market price of
our stock. No active market for our stock exists.
FORWARD-LOOKING STATEMENTS SHOULD BE READ WITH CAUTION.
This prospectus contains certain forward-looking statements regarding our
operations and business. Statements in this document that are not historical
facts are "forward-looking statements." Such forward-looking statements include
those relating to:
- future business developments;
- projected or anticipated expansion or construction;
- possible acquisitions and alliances;
- projected revenues, working capital, liquidity, capital needs, interest
costs and income; and
- year 2000 readiness.
The words "estimate," "project," "intend," "expect," "believe," "may,"
"could" and similar expressions are intended to identify forward-looking
statements. Wherever they occur in this prospectus or in other statements
attributable to us, forward-looking statements are necessarily estimates
reflecting our best judgment. However, these statements still involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. We caution you not to
place undue reliance on these forward-looking statements, which speak only as of
today's date.
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THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
Decision to Conduct a Private Placement to Raise Needed Funds. We have
determined that to maintain and increase stockholder value we must continue to
grow by upgrading and expanding our networks. We will need substantial capital
in the near term to fund our planned upgrades and expansion, as discussed in
more detail below under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We intend to seek additional
capital through private and public equity and debt financings. Our board of
directors, together with the KNOLOGY Holdings board of directors, has decided
that at present KNOLOGY should pursue equity capital by making a private
offering of our capital stock. In reaching this decision the boards of directors
considered many factors, including:
- the amount of indebtedness at KNOLOGY Holdings and the impact of that
indebtedness on our ability to raise additional debt financing
- the stage of our development, our financial performance to date, and our
current and projected cash flows
- the perceived timing, valuation and risks involved in a public equity
financing
- the expected availability of funding from various possible funding
transactions and perceived costs of that funding
- the apparent condition of the capital markets at the present time.
This private offering will not satisfy all of our capital needs, and we
will need to raise additional capital from future private and public equity and
debt offerings, as described more fully under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Decision to Make the Distribution. The reason our board of directors
decided to make the distribution was to enhance our ability to complete a
private placement at a higher per-share value. Our board of directors and the
board of KNOLOGY Holdings considered making a private offering of our stock as a
majority-owned indirect subsidiary of ITC Holding, which would remain our parent
company. However, the boards decided that our access to capital in the private
equity market and our ability to achieve a higher per-share value would be
enhanced if we did not have a single stockholder holding a majority of our
capital stock. The boards determined that we could achieve broader and diverse
equity ownership by having ITC Holding complete the distribution prior to our
making the private offering of our stock.
The boards of directors of KNOLOGY and KNOLOGY Holdings also considered
factors weighing against approving the distribution. The material factors
considered by the boards were:
- the significant time required and expenses expected to be incurred in
completing the distribution
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- the possible limitations arising out of the tax separation agreement on
our ability to raise equity funding or conduct acquisitions for stock
- the loss of intercompany loans and other favorable arrangements with ITC
Holding and/or its subsidiaries and affiliates.
The boards concluded that these negative factors do not outweigh the
benefits of the distribution. The boards determined that the costs of the
distribution, together with the costs of the proposed private placement, are
significantly less than the costs of pursuing other types of financing. Also,
the possible limitations created by the tax separation agreement would still
leave room for some additional equity financing or stock acquisitions, and it is
better to have possible limits on growth in the future than risk having present
growth stop due to lack of funding. In addition, if the growth generated by the
current proposed private placement results in an increase in stock value, the
increase in value would allow KNOLOGY to increase the amount of additional
equity financing it could raise without violating the 50% cumulative change
limitation discussed below under the caption "Material Federal Income Tax
Consequences of the Distribution -- Tax Separation Agreement". The intercompany
loans and other favorable arrangements with ITC Holding are expected to be not
as important if we obtain significant outside funding, such as that offered by
the proposed private placement.
The boards believe that so far their decision to proceed with the
distribution is supported by the progress to date of the proposed private
placement of the Series B preferred stock. This private placement, which is
contingent upon our completing the distribution, would raise up to $100 million
in equity funding. It is possible that this proposed offering would not be
consummated.
The decision to proceed with the distribution was made in consultation with
ITC Holding. As the principal stockholder of KNOLOGY, ITC Holding strongly
supported KNOLOGY's plan for growth and plan for raising additional funding in a
private placement. ITC Holding has been a principal source of funding for
KNOLOGY Holdings to date, and favored KNOLOGY raising funds from third parties
at this stage. ITC Holding concurred with the determination that the
distribution would improve our ability to complete a private placement of stock
and improve the terms of that offering.
ITC Holding was willing to pursue the distribution if ITC Holding could
obtain a ruling from the Internal Revenue Service that the distribution would
qualify as a tax-free spin-off, as discussed below. ITC Holding applied for a
ruling in September 1998, and tax rulings ultimately were obtained.
ITC Holding did consider the tax risks to option holders in connection with
the distribution. However, ITC Holding decided to proceed with the distribution
notwithstanding these risks since
- ITC Holding believed that the importance to KNOLOGY, and to ITC Holding
and its stockholders and option holders, of KNOLOGY raising funding in
the private placement and continuing its growth and development
outweighed the tax risks to ITC Holding option holders
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- many of ITC Holding's option holders hold incentive stock options, and an
opinion of tax counsel has been obtained that the distribution will not
be taxable to holders of incentive stock options
- an opinion of tax counsel has been obtained that the distribution will
likely not be taxable to holders of nonqualified options
- if holders of ITC Holding options did not receive KNOLOGY options in the
distribution, they would not have the same economic value after the
distribution as they had before
- ITC Holding determined that holders of nonqualified options would be
better off economically receiving the distribution, despite the tax
risks, than not receiving the distribution.
TERMS OF THE DISTRIBUTION
In the distribution, ITC Holding is distributing to its stockholders and
option holders all of its 43,211,531 shares of our Series A preferred stock and
options to purchase 6,258,036 shares of our Series A preferred stock.
Immediately after the distribution, ITC Holding will not own any shares of our
capital stock or options to purchase any of our stock.
In this distribution:
- You are not required to pay cash or any other consideration for the
securities you receive.
- You do not need to make any decisions or take any action to receive your
shares or options. You do not need to surrender your ITC Holding stock or
options.
- There are no conditions to the completion of the distribution. No further
board action is necessary and no stockholder vote is necessary.
- There are no proceeds to us or to ITC Holding.
- No recipients of the distribution or stockholders of KNOLOGY are entitled
to appraisal rights in connection with the distribution.
ITC Holding and InterCall, the ITC Holding subsidiary that held the Series
A preferred stock and options to purchase Series A preferred stock of KNOLOGY
prior to the distribution, may be deemed underwriters and distributing
stockholders under applicable law with respect to the securities being
distributed in the distribution. Neither of these companies is receiving any
compensation or undertaking any selling efforts in connection with the
distribution. InterCall, a wholly owned subsidiary of ITC Holding, operates a
separate operator-assisted conference call business. InterCall held the KNOLOGY
securities until shortly before the distribution. InterCall first distributed
the KNOLOGY securities to ITC Holding, which then distributed them to ITC
Holding stockholders and option holders.
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STOCK DISTRIBUTION.
Terms of Stock Distribution. The stock portion of the distribution is
being effected by a dividend payable to the 359 holders of record of ITC
Holding's capital stock at the close of business on December 15, 1999. This
dividend is pro rata to all ITC Holding stockholders on an as-converted basis,
which takes into account the fact that each share of ITC Holding preferred stock
will be convertible into ITC Holding common stock at a 4:1 ratio after March 14,
2002. The dividend includes:
- 1.09153 shares of our Series A preferred stock for every share of ITC
Holding common stock and
- 4.36612 shares of our Series A preferred stock for every share of ITC
Holding preferred stock.
The distribution ratio for the ITC Holding common stock was determined by
dividing the number of shares of our Series A preferred stock held by ITC
Holding, which was 49,469,567 as of the December 15, 1999 record date, by the
number of shares of capital stock of ITC Holding outstanding on December 15,
1999, which was 45,322,031. The resulting common stock distribution ratio is
1.09153. In making this calculation, each share of ITC Holding preferred stock
was treated as four shares of ITC Holding common stock based on the 4:1
conversion ratio. The distribution ratio for the ITC Holding preferred stock was
then determined by multiplying the distribution ratio for the ITC Holding common
stock by four, which equals 4.36612.
ITC Holding will not issue any fractional interests in our capital stock as
part of the distribution. Cash in the amount of $4.75 per share is being paid in
lieu of fractional shares. The amount of cash payable per share was determined
by our board based upon the value implicit in the November 1999 exchange
transactions described under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Overview" and the expected
price of our stock in the proposed private placement.
Effect on ITC Holding Stock Outstanding Prior to the Distribution. ITC
Holding stock certificates will continue to represent shares of ITC Holding's
capital stock after the distribution in the same amount as prior to the
distribution.
Example of Stock Distribution. As an example, suppose before the
distribution you hold 1,000 shares of ITC Holding common stock and that ITC
Holding determines that KNOLOGY's value as a company before the distribution is
10% of the value of ITC Holding. In the distribution, you would receive 1,091
shares of KNOLOGY common stock, determined by multiplying your 1,000 shares
times the common stock distribution ratio of 1.09153. You would also receive
$2.52 in cash, equal to 0.53 fractional shares of KNOLOGY times the cash value
for fractional shares of $4.75 per share.
The value of your ITC Holding common stock outstanding prior to the
distribution would decline as a result of the distribution because part of ITC
Holding, worth 10% of its value, would no longer belong to ITC Holding after the
distribution. However, since the distribution by ITC Holding of its KNOLOGY
shares is pro rata, the value of the
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1,000 shares of ITC Holding common stock and 1,091 shares of KNOLOGY common
stock you would hold after the distribution would equal the value of the 1,000
shares of ITC Holding common stock you held before the distribution.
After the distribution you would hold the same interest in KNOLOGY
directly, as KNOLOGY stock, that before the distribution you held indirectly
through your ITC Holding stock.
OPTION DISTRIBUTION.
Rationale of the Option Distribution. The ITC Holding options were all
issued to employees of ITC Holding or its subsidiaries and, in a few cases, to
nonemployee directors or consultants, in connection with the performance of
services. Pursuant to the terms of the ITC Holding options, adjustments are to
be made to maintain the value of the options if a transaction such as the
distribution of our stock by ITC Holding occurs.
ITC Holding has determined that, with respect to each option holder, the
adjustment should take the form of
- the distribution of an option to purchase 1.09153 shares of our Series A
preferred stock for each option to purchase one share of ITC Holding
common stock held prior to the distribution, and
- the adjustment of the exercise price of the options to purchase the ITC
Holding common stock held prior to the distribution such that the
aggregate spread in the options to purchase ITC Holding stock and the
options to purchase our stock is equal to the aggregate spread in the
options to purchase the ITC Holding stock immediately prior to the
distribution. The aggregate spread means the aggregate difference between
the exercise price and the fair market value of the stock underlying the
options at the time of the distribution.
This adjustment assures that the economic value of the ITC Holding options
will not be diluted as a result of the distribution even though ITC Holding
declines in value in the transaction. It also permits the option holders to
participate directly through KNOLOGY options in the potential appreciation of
the value of our stock to the same extent as they participated indirectly
through their ITC Holding options before the distribution. The option
distribution ratio is the same as the common stock distribution ratio, and the
exercise price of each KNOLOGY option has been set in a manner intended to
maintain the value of the options.
The ITC Holding Option Holders. The holders of outstanding ITC Holding
options are generally current and former employees of ITC Holding, its various
subsidiaries or its former subsidiaries. A few options are held by current or
former nonemployee directors or consultants to ITC Holding, its subsidiaries or
its former subsidiaries.
Many of the options awarded under the ITC Holding option plan were
incentive stock options. Options that were awarded by ITC Holding as incentive
stock options clearly indicate this in the option agreements relating to the
options. In some cases options awarded as incentive stock options became
nonqualified under applicable tax laws
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and regulations. Where actions taken by ITC Holding have caused those options to
become nonqualified, ITC Holding has generally notified the option holders.
ITC Holding did not wish its employees and other option holders to suffer
dilution in the value of their options as a result of the distribution, or to
create an incentive for option holders to exercise their ITC Holding options
prior to the distribution. ITC Holding is making a special distribution of the
KNOLOGY options to ITC Holding option holders and is adjusting the exercise
price of ITC Holding options held prior to the distribution to maintain the
value of the ITC Holding options. Most ITC Holding option holders are not ITC
Holding stockholders, and if they are stockholders do not have stock holdings
that reflect the interests that they would have in ITC Holding if they exercised
their options.
Terms of the Option Distribution. ITC Holding is distributing to each of
the 861 ITC option holders as of December 15, 1999 an option to purchase 1.09153
shares of our Series A preferred stock for each option to purchase one share of
ITC Holding common stock then outstanding. The exercise price of each of these
options will be determined by ITC Holding by multiplying the percentage of ITC
Holding's value attributed to us at the time of the distribution by the exercise
price of the ITC option to which the KNOLOGY option relates. This determination
is made under the ITC Holding option plan or option agreements under the
authority of the ITC Holding board of directors, and any authorized committee of
that board, to make appropriate adjustments under that plan or option
agreements. The option agreements evidencing the KNOLOGY options being
distributed in the distribution reflect this determination.
ITC Holding will not issue any fractional interests in our options as part
of the distribution. Cash in the amount of $4.75 per share is being paid in lieu
of fractional options. The amount of cash payable per share was determined by
our board based upon the value implicit in the November 1999 exchange
transactions described under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Overview" and the expected
price of our stock in the proposed private placement.
Effect on ITC Holding Stock Options. ITC Holding stock options held
before the distribution will continue to represent options to purchase the same
number of shares of ITC Holding capital stock following the distribution. ITC
Holding is reducing the aggregate exercise price of your ITC Holding stock
options in an amount equal to the aggregate exercise price of the option to
purchase our stock that is being distributed to you. The sum of the aggregate
exercise prices of the ITC Holding stock options you hold following the
distribution, as adjusted, and the options to purchase our stock that you
receive in the distribution will be the same as the aggregate exercise price of
the ITC Holding stock options you held prior to the distribution.
Example of Option Distribution. As an example, suppose before the
distribution you hold options to buy 100 shares of ITC Holding common stock for
an aggregate exercise price of $500 and that ITC Holding determines that
KNOLOGY's value as a company before the distribution is 10% of the value of ITC
Holding.
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In the distribution, you would receive options to purchase 109 shares of
KNOLOGY Series A preferred stock, determined by multiplying your options to
purchase 100 shares times the option distribution ratio of 1.09153. You would
also receive $0.73 in cash, equal to 0.153 fractional shares of KNOLOGY Series A
preferred stock times the cash value for fractional options of $4.75 per share.
The value of your ITC Holding options would have declined in the
distribution because part of ITC Holding, worth 10% of its value, would no
longer belong to ITC Holding after the distribution. ITC Holding would therefore
reduce the aggregate exercise price of your ITC Holding option by 10%, to $450.
The $50 difference would become the aggregate exercise price of your KNOLOGY
option.
Since the distribution by ITC Holding of its KNOLOGY options is pro rata,
the value of the two options you would hold after the distribution would equal
the value of your ITC Holding option before the distribution. Similarly, since
the option distribution ratio is based on the stock distribution ratio, you
would pay the same exercise price and you would own the same number of shares
whether (1) you exercised your ITC Holding option immediately before the
distribution and received stock in the distribution or (2) you exercised both
your ITC Holding option and your KNOLOGY option immediately after the
distribution.
Provisions of KNOLOGY options and ITC Holding options. As shown in the
example above, from an economic point of view each ITC Holding option
outstanding before the distribution is essentially split into two parts, a
modified ITC Holding option and a KNOLOGY option that collectively have the same
value as the old ITC Holding option had before the distribution. The aggregate
exercise price of the old ITC Holding option is allocated over the modified ITC
Holding option and a KNOLOGY option as discussed above under "Terms of the
Option Distribution."
Since many ITC Holding options have been outstanding for a substantial
period of time during which the value of ITC Holding stock has appreciated, ITC
Holding options have a range of exercise prices, from well below current fair
market value for older options to at or near current fair market value for newer
options. Because the aggregate exercise price of the old ITC Holding option is
allocated over the modified ITC Holding option and the KNOLOGY option on a fixed
percentage basis, as shown on the example above, the KNOLOGY options being
distributed also have a range of exercise prices. The exercise prices of KNOLOGY
options relating to older ITC Holding options may be significantly lower than
the exercise prices of KNOLOGY options relating to more recently granted ITC
Holding options.
Other than for the reduction in the option price, the provisions of the
modified ITC Holding options remain the same as before the distribution. Since
the option holder is to have the same economic value and rights after the
distribution as before, the provisions of the KNOLOGY option being distributed
resembles closely those of the ITC Holding option held prior to the
distribution. The option terms for vesting and termination of each individual
KNOLOGY option match the terms of the existing ITC Holding option to which it
relates. KNOLOGY options relating to older ITC Holding options generally
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are more fully vested and terminate sooner, and KNOLOGY options relating to more
recently granted ITC Holding options generally are less fully vested and
terminate later.
The KNOLOGY options are covered by a stock option plan, the KNOLOGY, Inc.
Spin-off Plan, created solely for the options covered by the distribution. The
KNOLOGY, Inc. Spin-off Plan is substantively the same as the ITC Holding stock
option plan under which the ITC Holding stock options were granted.
Acquisition of the KNOLOGY options by ITC Holding. As discussed above,
the economic effect of the option distribution is essentially to split the ITC
Holding options held prior to the distribution into two parts, a modified ITC
Holding option and a KNOLOGY option that collectively have the same value as the
ITC Holding option held prior to the distribution. However, ITC Holding does not
have the power to grant KNOLOGY options and had to obtain them from KNOLOGY to
carry out the option distribution.
In many spin-offs, the parent company owns 100% of the subsidiary being
spun off and simply causes the subsidiary to issue options to the parent
company's option holders. In this case, since KNOLOGY has stockholders other
than ITC Holding, ITC Holding purchased the options from KNOLOGY for fair value.
ITC Holding, through its subsidiary InterCall, acquired the KNOLOGY options
that it is distributing to you by converting a loan to KNOLOGY into options. In
December 1999, InterCall, an ITC Holding subsidiary, entered into a loan
agreement with KNOLOGY under which InterCall loaned KNOLOGY approximately $29.7
million. The note issued under the loan agreement provided that InterCall could
elect, in lieu of repayment, to convert the amount outstanding under the note
into options to purchase shares of KNOLOGY Series A preferred stock. Prior to
the distribution the entire amount of the note was converted into options to
purchase 6,258,036 shares of KNOLOGY Series A preferred stock. InterCall
distributed the KNOLOGY options to ITC Holding, which is then distributing them
to ITC Holding option holders in the distribution.
As mentioned above, ITC Holding needed to set an appropriate exercise price
for each KNOLOGY option to effect the allocation of the aggregate exercise price
of the ITC Holding option held prior to the distribution over the modified ITC
Holding option and a KNOLOGY option. ITC Holding also needed to ensure that the
option terms for vesting and termination for each individual KNOLOGY option, and
all the other provisions of the option, matched the terms of ITC Holding options
held prior to the distribution to which they relate. The note therefore provides
that ITC Holding has the right to specify the terms of the KNOLOGY options,
including the exercise price and option terms for vesting and termination.
Prior to being converted, the note had a maturity date of March 31, 2000.
Amounts outstanding under the note bore interest at 11 7/8%.
Residual Note. When InterCall converted its loan into KNOLOGY options and
assigned them to ITC Holding, ITC Holding received a residual note which
provides that KNOLOGY will pay to ITC Holding any proceeds received by KNOLOGY
from
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the exercise of KNOLOGY options distributed in the option distribution. In the
event of a cashless exercise of any of the KNOLOGY options, KNOLOGY must pay to
ITC Holding in cash an amount equal to the exercise price.
These provisions were designed to make an appropriate economic adjustment
between ITC Holding and KNOLOGY. When the InterCall loan was converted into
options, an appropriate purchase price for the options needed to be determined.
Since the option exercise prices of the KNOLOGY options vary significantly, and
since it is uncertain when the options will be exercised, the parties were not
able to place a value on the KNOLOGY options acquired by InterCall in the
conversion. InterCall paid $4.75 per share subject to each of the KNOLOGY
options, which is the value placed on the shares underlying the options for
purposes of the distribution, as discussed above. Since the purchase price was
not being reduced by the exercise prices of the KNOLOGY options, the parties
agreed as part of the conversion transaction that KNOLOGY would pay the option
exercise prices to ITC Holding when they were received by KNOLOGY.
ACCOUNTING FOR THE DISTRIBUTION
For financial statement purposes, the distribution to the ITC Holding
shareholders will be recorded at historical cost. The stock options purchased by
ITC Holding (through its wholly owned subsidiary, InterCall) for its current
option holders will be accounted for as a capital contribution in our financial
statements and the amount of approximately $29.7 million recorded as additional
paid in capital. The number of options ITC Holding will receive for the
conversion of the $29.7 million loan will be based on the current fair value of
Knology common stock, $4.75. As a result, ITC Holding will receive approximately
6.3 million options which will be distributed to its option holders.
ITC Holding option holders are primarily employees and directors of ITC
Holding, its subsidiaries, or its affiliates. After the distribution of Knology
options to ITC Holding option holders, Knology's option holders, other than its
employees and directors, will include employees and directors of ITC Holding,
its subsidiaries and its affiliates (through common ownership). Compensation
expense will not be recorded by Knology when the options are distributed to the
ITC Holding option holders because all terms of the modified ITC Holding option
and the distributed Knology option will be equivalent to the ITC Holding options
prior to the distribution. These terms include the ratio of the exercise price
to the fair value of stock, the vesting provisions, the expiration dates, and
the amount by which the aggregate exercise price is less or greater than the
aggregate fair value of ITC Holding's and Knology's stock when compared to that
of the ITC Holding option prior to the distribution.
Since ITC Holding will have already paid the fair value per share when the
options are purchased, ITC Holding will be entitled to the proceeds when the
options are exercised. When the options are exercised, Knology will receive the
proceeds and will issue the shares to the option holder. Knology will then remit
the proceeds to ITC Holding simultaneous with the exercise of the option. If no
cash proceeds are received by Knology because the option holder elects a
cashless exercise, Knology will remit the exercise price of the options to ITC
Holding in cash.
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If the exercise price is paid in cash or if a cashless exercise is elected
and the option holder tenders Knology shares held for six months or more as
consideration for the exercise price of the options, Knology will not record
compensation expense but will record the fair value of shares received as
consideration for the exercise price as treasury stock with a corresponding
decrease in cash which results from the remittance of cash to ITC Holding for
the exercise price of the options. Additionally, Knology will record a
reclassification between par value of preferred stock and additional paid in
capital upon exercise of the options.
If a cashless exercise is elected and the option holder tenders Knology
shares held for six months or less or tenders no shares as consideration for the
exercise price of the options, Knology will record treasury stock for the fair
value of shares received or retained (when no shares are tendered) and a
corresponding decrease in cash which results from the remittance of cash to ITC
Holding for the exercise price of the options. Knology will also record
compensation expense by increasing paid in capital for the value of the net
shares received by the optionee. Additionally, Knology will record a
reclassification between par value of preferred stock and additional paid in
capital upon exercise of the options.
The six month time period related to the Knology shares that may be
tendered as consideration for cashless exercises of the Knology options will
include periods prior to the reorganization and distribution in which the option
holder held ITC Holding shares because the shareholder's interest in Knology was
indirectly held through their ownership of ITC Holding.
EXPENSES
There is no underwriter compensation or commissions earned as a result of
the distribution. We estimate that the expenses of the distribution will be
approximately $600,000, of which we will pay approximately 26% and ITC Holding
will pay approximately 74%. This amount includes expenses for accounting and
legal services, printing and other miscellaneous expenses to be incurred in the
distribution.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION
The following discusses the material federal income tax consequences of the
distribution. The discussion is based on the Internal Revenue Code of 1986, as
amended, all applicable U.S. Treasury regulations under the Internal Revenue
Code, administrative rulings and judicial authority, all as of the date of this
registration statement. All of these authorities are subject to change, and any
change could affect the continuing validity of this discussion. This discussion
does not cover all federal income tax consequences that may apply to all
categories of stockholders and option holders. All stockholders and option
holders should consult their own tax advisors regarding the particular federal,
foreign, state and local tax consequences to them of the distribution.
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FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING STOCKHOLDERS
Tax consequences to ITC Holding stockholders based on IRS rulings. ITC
Holding has received rulings from the IRS that the distribution of our stock to
ITC Holding stockholders as described to the IRS would qualify as a tax-free
spin-off under Section 355 of the Internal Revenue Code. Based on these rulings,
with respect to the ITC Holding stockholders receiving KNOLOGY stock in the
distribution:
- No gain or loss will be recognized by, and no amount will be included in
the income of, the holders of ITC Holding stock upon their receipt of our
stock.
- The holding period applicable to our stock for federal income tax
purposes in the hands of a holder of ITC Holding stock receiving the
distribution would include the stockholder's holding period for the ITC
Holding stock.
- The total of the basis of our stock plus the basis of the ITC Holding
stock held by each ITC Holding stockholder after the distribution will be
the same as the basis of the ITC Holding stock held by the stockholder
immediately before the distribution. The total basis will be allocated in
proportion to the relative fair market values of our stock and the ITC
Holding stock as of the date of the distribution, less the amount of
basis allocable to any fractional share interests in our stock for which
ITC Holding stockholders receive cash. We have been informed by ITC
Holding management that it will notify each ITC Holding stockholder in
the near future, for the purpose of this basis allocation, of ITC Holding
management's estimate regarding the relative fair market values of our
stock and the ITC Holding stock as of the date of the distribution.
- The receipt of cash in lieu of fractional share interests in our stock
will be treated as received in exchange for the fractional share and gain
or loss will be recognized to a recipient stockholder to the extent of
the difference between the stockholder's basis in the fractional share
and the amount received for the fractional share. If the fractional share
interest is held as a capital asset by the recipient stockholder, the
gain or loss will be capital gain or loss.
Tax consequences to ITC Holding stockholders if IRS rulings are or become
invalid. The IRS rulings are premised on the accuracy of factual representations
and assumptions. If those factual representations and assumptions made by ITC
Holding are or become incorrect in any material respect, the reliability of the
IRS rulings could be jeopardized. However, ITC Holding is not aware of any facts
and circumstances that would cause those representations and assumptions to be
untrue.
If the distribution were not to constitute a tax-free spin-off, then the
distribution could have the following tax consequences to you:
- Except as provided in the next paragraph, each holder of ITC Holding
stock who received shares of our stock in the distribution would
generally be treated as having received a taxable dividend from ITC
Holding in an amount equal to the fair market value of our stock received
at the time of the distribution. If the stockholder's allocable share for
tax purposes of ITC Holding's current-year and
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accumulated earnings and profits is less than this amount, the amount taxable as
a dividend will be reduced by the difference.
- The difference would be treated first as a tax-free return of capital,
reducing the stockholder's adjusted basis in his ITC Holding stock (but
not below zero) and then, if the basis is reduced to zero, the remainder
would be treated as capital gain to the extent of the remaining excess if
the stockholder has held the ITC Holding stock as a capital asset.
- The holder of ITC Holding stock would have a basis in KNOLOGY stock
received in the distribution equal to the fair market value of the stock
at the time of the distribution, and his holding period would begin on
the day after the date of the distribution.
- Except as set forth above with respect to distributions in excess of ITC
Holding's earnings and profits, the basis of the stockholder's existing
ITC Holding stock would be unchanged.
- ITC Holding would be treated as recognizing a taxable gain equal to the
difference between the fair market value of the shares of KNOLOGY stock
distributed and its adjusted basis in these shares at the time of the
distribution.
Tax consequences if the distribution is part of a plan in which a 50% or
greater interest is acquired. Even if the distribution is otherwise treated as a
tax-free spin-off to the ITC Holding stockholders, ITC Holding would recognize a
large taxable gain if the distribution were considered to be part of a plan or
series of related transactions in which a 50% or greater interest in KNOLOGY or
ITC Holding were acquired by one or more persons.
Although neither ITC Holding nor KNOLOGY believes the distribution is part
of a plan to effect a 50% ownership shift, any cumulative 50% change of
ownership within the four-year period beginning two years before the date of the
distribution, including any change in the ownership of shares distributed to ITC
Holding stockholders in the distribution, will be presumed by applicable tax
rules and regulations to be pursuant to such a plan. The Internal Revenue Code
states that this presumption may be rebutted by a showing that the distribution
and the 50% ownership shift are not part of such a plan. However, regulations
proposed by the U.S. Department of Treasury interpreting this provision could
make it extremely difficult for us to rebut this presumption with respect to the
distribution and any subsequent 50% ownership shift.
IRS regulations provide that each ITC Holding stockholder who receives
shares of our stock in the distribution must attach to his or her federal income
tax return for 1999 a detailed statement with respect to the applicability of
Code Section 355. ITC Holding will make available the required information to
each stockholder of record of ITC Holding as of the record date for the
distribution.
33
<PAGE> 37
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING OPTION
HOLDERS
The tax treatment of the option holders was not the subject of either of
the IRS rulings. We have received an opinion from Hogan & Hartson L.L.P. in
connection with the proposed distribution of the options. The entire description
of tax consequences for holders of the incentive stock options and the
nonqualified stock options discussed below is based on that opinion.
An opinion of counsel merely represents counsel's best judgment with
respect to the probable outcome on the merits and is not binding on the IRS or
the courts. Positions contrary to the opinion of counsel may be taken by the IRS
and a court considering the issues may hold contrary to the opinion. In
addition, the opinion of counsel is premised on the accuracy of factual
representations and assumptions. Among other things, ITC Holding has advised us,
and the opinion assumes, that almost all ITC Holding options were granted under
ITC Holding's employee and director option plans and all ITC Holding options
were granted in connection with the performance of services. If those factual
representations or assumptions, or the additional assumptions described below,
are or become incorrect in any material respect, the opinion may cease to apply.
Counsel has disclaimed any obligation to advise us of any new developments in
the application or interpretation of the federal income tax laws subsequent to
the date of the opinion or to update the opinion in the future.
INCENTIVE STOCK OPTIONS.
Discussion and additional assumptions set forth in the tax opinion. For
tax purposes, the distribution of our options to holders of ITC Holding options,
combined with the reduction of the exercise price of ITC Holding options, will
be treated generally as if ITC Holding options outstanding prior to the
distribution were split into two options: an ITC Holding option and a KNOLOGY
option.
Modifications to the terms of incentive stock options once the options are
granted may cause the options to become disqualified or to be treated as a new
grants of options. However, the applicable tax regulations provide that the
adjustment of an old option in the context of a transaction such as the
distribution will not be viewed as a modification of the old option if the
aggregate spread in the new option and the adjusted old option does not exceed
that in the old option and the new option does not otherwise have more favorable
terms than the old option.
ITC Holding has advised us, and the tax opinion assumes, that the reduction
of the aggregate exercise prices of the ITC Holding options in connection with
the distribution of the options to purchase our stock will be made in proportion
to the relative fair market values of ITC Holding and KNOLOGY stock to satisfy
the requirements of the applicable tax regulations. In addition, ITC Holding has
advised us, and the tax opinion assumes, that the terms of the KNOLOGY options,
other than with respect to exercise price and stock subject to the option, will
be the same as the terms of the corresponding ITC Holding options.
34
<PAGE> 38
The tax opinion states that, based upon these facts and the fact that the
options are non-transferable, not publicly traded, and were granted in
connection with the performance of services and mostly under employee or
director option plans, facts which are assumed in the opinion, the adjustment of
the ITC Holding incentive stock options and the distribution of the KNOLOGY
options will not be a taxable event for the holders of the incentive stock
options.
Incentive stock options for KNOLOGY stock held by ITC Holding employees
will cease to be incentive stock options three months after the distribution.
Similarly, ITC Holding stock options which are held by our employees and which
are incentive stock options will cease to be incentive stock options three
months after the distribution. However, the tax treatment in connection with the
distribution of an option which is an incentive stock option at the time of the
distribution will not be effected if that option ceases to be an incentive stock
option at a later time.
Tax opinion with respect to incentive stock options. The opinion states
that, based upon the foregoing discussion and assumptions, the distribution of
the options to purchase KNOLOGY Series A preferred stock and the adjustments to
the ITC Holding options in connection with the distribution will not result in
taxable income to the holders of ITC Holding incentive stock options.
NONQUALIFIED STOCK OPTIONS
Discussion and additional assumptions set forth in the tax
opinion. Unlike incentive stock options, there are no tax regulations or
published rulings that could be relied on by an option holder describing the tax
consequences to the holder of a nonqualified stock option when that option is
split into two options in connection with a transaction such as the distribution
of our stock by ITC Holding to its stockholders.
However, the IRS has issued private letter rulings, which can not be relied
upon by taxpayers other than the taxpayers to whom they are issued, that hold
that adjustments to nonqualified stock options in connection with transactions
such as the distribution are not taxable events for the option holders.
Moreover, as stated in the opinion, there is no apparent tax policy reason for
treating holders of nonqualified options less favorably then holders of
incentive options with respect to the splitting of options in connection with a
transaction such as the distribution of our stock by ITC Holding, particularly
where the splitting of the options is made in accordance with the original terms
of the options.
Tax opinion with respect to nonqualified stock options. The opinion
states that, based upon the foregoing discussion and assumptions, the
distribution of the options to purchase KNOLOGY Series A preferred stock and the
adjustments to the ITC Holding options in connection with the distribution will
likely not result in taxable income for the holders of ITC Holding nonqualified
stock options.
Cautionary language included in the tax opinion with respect to
nonqualified stock options that are both vested and deeply in the money. The
tax opinion cautions that, given the lack of published authority, there is a
risk that the IRS could treat the splitting of the options as a taxable event to
holders of options that are both vested and deeply in
35
<PAGE> 39
the money, meaning options with an exercise price much lower than the fair
market value of the stock underlying the options. With respect to this group of
option holders, the IRS may take the position that the nonqualified options are
not in fact options for tax purposes at the time of the distribution, but rather
are new, outright grants of stock. In this event, those option holders would
recognize ordinary income in an amount equal to the fair market value of the
underlying stock less the exercise price of the purported KNOLOGY and ITC
Holding options.
* * *
The summary of federal income tax consequences and the Hogan & Hartson
L.L.P. opinion set forth above do not purport to cover all federal income tax
consequences that may apply to all categories of stockholders. All stockholders
and option holders should consult their own tax advisors regarding the
particular federal, foreign, state and local tax consequences of the
distribution to such stockholders and option holders.
TAX SEPARATION AGREEMENT
ITC Holding and KNOLOGY have entered into a tax separation agreement to
reflect KNOLOGY ceasing to be included in ITC Holding's consolidated tax return
and to allocate the risk of potential adverse tax consequences stemming from the
distribution.
In the tax separation agreement ITC Holding and KNOLOGY have made
representations to each other regarding the distribution and covenants regarding
future actions. Under the tax separation agreement KNOLOGY represents as of the
date of the distribution that:
(1) KNOLOGY has no plan or intention to purchase any of its outstanding
stock after the distribution,
(2) KNOLOGY has no plan or intention to liquidate KNOLOGY, merge KNOLOGY
with any other corporation, or sell or otherwise dispose of the assets
of KNOLOGY other than in the ordinary course of business,
(3) immediately after the distribution, at least 90% of the fair market
value of the gross assets of KNOLOGY will consist of the stock and
securities of members of the KNOLOGY group of companies that are
engaged in the active conduct of a trade or business,
(4) payments made in connection with all continuing transactions between
either ITC Holding or KNOLOGY and entities in their respective groups
will be at fair market value based on the terms and conditions arrived
at by the parties bargaining at arm's length,
(5) the distribution is not part of a plan or series of related
transactions in which one or more persons acquire directly or
indirectly KNOLOGY stock representing a 50% or greater interest within
the meaning of Section 355(e) of the Internal Revenue Code,
36
<PAGE> 40
(6) there is no plan or intention by KNOLOGY to enter into any
negotiations, agreements, or arrangements with respect to transactions
or events, including stock issuances, pursuant to the exercise of
options or otherwise, option grants, capital contributions, or
acquisitions, but not including the distribution, that may cause the
spin-off to be treated as part of a plan in which one or more persons
acquire directly or indirectly KNOLOGY stock representing a 50% or
greater interest within the meaning of Section 355(e) of the Internal
Revenue Code, and
(7) KNOLOGY is not aware of any present plan or intention by the current
stockholders of ITC Holding to sell, exchange, transfer by gift or
otherwise dispose of any of their stock in, or securities of, ITC
Holding or KNOLOGY subsequent to the distribution.
KNOLOGY covenants in the tax separation agreement that it will not take any
action or fail to take any action that would cause any of the representations
listed as (1) through (6) above to be untrue.
KNOLOGY also covenants in the tax separation agreement that:
- during the two-year period following the spin-off, KNOLOGY will not cease
to be engaged in the active trade or business relied upon for purposes of
satisfying the requirements of the spin-off ruling request, and
- during the applicable period provided in the Internal Revenue Code with
respect to the distribution, KNOLOGY will not enter into any transaction
or make any change in equity structure, including stock issuances
pursuant to the exercise of options, option grants or otherwise, capital
contributions, or acquisitions, but not including the distribution, that
may cause the distribution to be treated as part of a plan in which one
or more persons acquire directly or indirectly KNOLOGY's stock
representing a 50% or greater interest within the meaning of Section
355(e) of the Internal Revenue Code.
The tax separation agreement permits KNOLOGY to take actions inconsistent
with its representations and covenants if it either obtains a ruling from the
IRS or an opinion of expert tax counsel that the actions should not result in
the distribution being taxable, or if the proposed actions are approved by
holders of at least two-thirds of KNOLOGY's voting stock. If KNOLOGY breaches
its representations and covenants by taking actions not permitted in the tax
separation agreement and the breach causes the distribution not to be treated as
tax-free, KNOLOGY could be subject to significant damages. KNOLOGY's maximum
liability for breach of its representations and covenants in the tax separation
agreement is limited by agreement to $50 million.
ITC Holding made similar representations and covenants under the tax
separation agreement. Stockholders of ITC Holding who will hold 20,000 shares or
more of ITC Holding's capital stock have entered into agreements with ITC
Holding generally agreeing not to transfer any of their KNOLOGY stock for two
years following the distribution.
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<PAGE> 41
NO MARKET FOR OUR STOCK
Our stock is not traded on any exchange or listed on the Nasdaq market
system. No market makers currently make a market in our stock and we do not plan
to engage a market maker. Therefore, there is no established public trading
market and no high and low bid information or quotations available. We do not
expect that an active trading market will develop after the distribution.
In addition, all shares of our stock are subject to transfer restrictions,
including the shares you will receive in the distribution. If you decide to sell
your shares of stock of our company, you will first have to offer those shares
to us to purchase, before you can sell to a third party. This, along with the
lack of a public market, limits your ability to sell your shares.
Following the distribution, we expect to have 2,476 shares of common stock
outstanding held of record by three stockholders and 48,035,531 Series A
preferred stock outstanding held of record by 347 stockholders. Prior to the
distribution our common stock was held by three stockholders and our Series A
preferred stock was held by 14 stockholders, including ITC Holding. We intend to
issue in a private placement approximately 21,157,895 shares of Series B
preferred stock to approximately 20 stockholders. The Series B preferred stock
would represent approximately 25% of our total outstanding shares on a fully
diluted basis. The terms of this private offering could change and it is
possible that the offering will not be consummated. The private offering is
contingent upon the completion of the distribution described by this prospectus.
DIVIDEND POLICY
As we are a holding company, our ability to pay cash dividends depends on
us receiving cash dividends, advances and other payments from our subsidiaries.
The ability of our subsidiary KNOLOGY Holdings to pay dividends is restricted
under the terms of its credit facility, as discussed in more detail under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources." While two of our
subsidiaries, Interstate Telephone and Valley Telephone, have declared dividends
to their former parent company, ITC Holding, in the past, we plan to retain
earnings to finance the expansion of our operations. Future declaration and
payment of dividends, if any, will be determined based on the then-current
conditions, including our earnings, operations, capital requirements, financial
condition, and other factors the board of directors deems relevant. In addition,
our ability to pay dividends is limited by the terms of the indenture governing
our outstanding notes and by the terms of our credit facility.
38
<PAGE> 42
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999,
and as adjusted to give effect to:
- the purchase by SCANA of 753 shares of preferred stock of KNOLOGY
Holdings pursuant to its exercise in November 1999 of warrants associated
with previous borrowings whose terms were agreed to in October 1999,
including a charge of $0.8 million associated with SCANA warrants, equal
to their fair market value as determined by the Black-Scholes model;
- the exchange of the remaining 15% of KNOLOGY Holdings held by minority
stockholders, equal to the fair market value of $22.4 million;
- contribution of ITC Holding's approximate 6% interest in ClearSource,
cash of $5.7 million, and subscription rights to purchase additional
shares of ClearSource, which were valued for purposes of the exchange at
its fair market value of $10.8 million and is reflected on our books as
an investment at ITC Holding's historical cost of assets contributed of
$7.5 million, in exchange for 2,280,702 shares of our Series A preferred
stock;
- recording the exchange of our warrants for KNOLOGY Holdings warrants
issued in connection with senior discount notes in 1997 at fair market
value and the cancellation of the KNOLOGY Holdings warrants;
- $39.4 million of loans from ITC Holding that have been or are being
exchanged for or converted into 2,029,724 shares of our Series A
preferred stock and options to purchase 6,258,036 shares of our Series A
preferred stock;
- the distribution
- reversal of the $8.3 million net income tax benefit previously recognized
when we were included in the consolidated tax return of ITC Holding. We
will record a full valuation allowance against any income tax benefit as
a stand alone entity; and
- $30 million in firm commitments from the private placement of Series B
preferred stock.
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<PAGE> 43
To better understand this table, you should review "Management's Discussion and
Analysis of Financial Condition and Results of Operations" our consolidated
financial statements and pro forma financial information, including the
accompanying notes, included in this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
---------------------------
AS ADJUSTED
FOR THIS
ACTUAL DISTRIBUTION
------------ ------------
<S> <C> <C>
Advances from affiliates.......................... $ 1,171,252 $ 1,171,252
Long-term debt, including current maturities:
Senior Discount Notes including accrued
interest payable............................ 302,297,245 302,297,245
Senior secured credit facility................. 19,000,000 19,000,000
Other.......................................... 128,670 128,670
------------ ------------
Total long-term debt, including
current maturities................. $321,425,915 $321,425,915
------------ ------------
Warrants.......................................... $ 2,486,960 $ 4,726,065
------------ ------------
Stockholders' equity:
Series A preferred stock, $.01 par value,
75,000,000 authorized; 0 and 48,035,531
shares issued and outstanding at September
30, 1999 and as adjusted, respectively...... $ -- $ 480,355
Series B preferred stock, $.01 par value,
50,000,000 authorized; 0 and 6,315,789
shares issued and outstanding at September
30, 1999 and as adjusted, respectively...... -- 63,158
Common Stock, $.01 par value, 200,000,000
shares authorized; 100 and 2,476 shares
issued and outstanding at September 30, 1999
and as adjusted, respectively............... 1 25
Additional paid-in-capital..................... 70,259,878 168,686,862
Accumulated deficit............................ (63,265,300) (72,375,659)
Unrealized losses.............................. (23,650) (23,650)
------------ ------------
Total stockholders' equity............ $ 6,970,929 $ 96,831,091
============ ============
Total capitalization.................. $332,055,056 $424,154,323
============ ============
</TABLE>
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<PAGE> 44
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The selected financial data as of and for the years ended December 31, 1996,
1997 and 1998 have been derived from our audited financial statements. The
selected financial data as of and for the nine months ended September 30, 1998
and 1999 have been derived from our unaudited consolidated financial statements
and, in our opinion, 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, 1999 are not necessarily
indicative of the results that we may expect for the entire year. The selected
financial data set forth below should be read in conjunction with our section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations", our financial statements and related notes, and other
financial data included elsewhere in this prospectus. See Note 1 to our
financial statements regarding the Reorganization.
<TABLE>
<CAPTION>
NINE
YEAR YEAR YEAR YEAR YEAR MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997 1998(a) 1998
------------ ------------ ------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..................... $17,679,873 $18,929,279 $ 17,527,208 $ 17,633,313 $ 45,132,522 $ 30,285,049
Operating expenses:
Cost of services...................... 5,253,503 5,593,083 2,991,412 3,121,108 12,739,540 9,010,401
Selling, operations and
administrative...................... 7,664,748 8,740,090 8,331,795 9,498,461 37,323,345 24,256,479
Depreciation and amortization......... 1,965,874 3,185,901 3,022,056 2,781,800 17,108,034 8,925,933
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses............... 14,884,125 17,519,074 14,345,263 15,401,369 67,170,919 42,192,813
----------- ----------- ------------ ------------ ------------ ------------
Operating income (loss)................ 2,795,748 1,410,205 3,181,945 2,231,944 (22,038,397) (11,907,764)
----------- ----------- ------------ ------------ ------------ ------------
Other income and expense............... 603,847 (362,331) (379,889) (2,048,506) (18,645,199) (12,389,198)
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) before minority interest,
income tax (provision) benefit and
cumulative effect of a change in
accounting principle.................. 3,399,595 1,047,874 2,802,056 183,438 (40,683,596) (24,296,962)
Minority interest...................... -- 667,038 -- -- 13,294,079 11,292,126
Income tax (provision) benefit......... (1,208,939) (573,327) (1,371,865) (1,010,779) 5,631,618 1,704,350
Cumulative effect of a change in
accounting principle.................. -- -- -- -- (582,541) (582,541)
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss)...................... 2,190,656 1,141,585 1,430,191 (827,341) (22,340,440) (11,883,027)
Subsidiary preferred stock dividends... -- -- -- (4,193,276) (1,424,222) (63,907)
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss) attributable to
common stockholders................... $ 2,190,656 $ 1,141,585 $ 1,430,191 $ (5,020,617) $(23,764,662) $(11,946,934)
=========== =========== ============ ============ ============ ============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common stockholders... $ 21,906.56 $ 11,415.85 $ 14,301.91 $ (50,206.17) $(237,646.62) $(119,469.34)
Basic and diluted weighted average
number of common shares outstanding... 100 100 100 100 100 100
OTHER FINANCIAL DATA:
Capital expenditures................... $ 3,686,035 $ 3,079,108 $ 995,320 $ 1,727,079 $120,227,057 $ 80,913,266
Cash provided by (used in) operating
activities............................ 5,230,950 94,418 4,770,730 3,680,116 23,035,488 9,515,039
Cash (used in) provided by investing
activities............................ (2,753,862) (3,544,192) (197,362) (22,223,940) (34,586,803) (22,997,766)
Cash (used in) provided by financing
activities............................ (248,942) 1,535,595 (4,457,176) 18,726,407 16,083,187 15,176,704
EBITDA(b).............................. 5,515,186 5,565,993 5,640,550 2,509,854 8,564,129 8,475,265
Ratio of earnings to fixed
charges(c)............................ 23.71 2.89 3.57 1.03 -- --
Insufficient earnings to cover fixed
charges............................... -- -- -- -- $ 27,389,517 $ 13,004,836
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER 30,
1999
-------------
(UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..................... $ 48,824,228
Operating expenses:
Cost of services...................... 18,573,719
Selling, operations and
administrative...................... 35,760,116
Depreciation and amortization......... 28,697,148
------------
Total operating expenses............... 83,030,983
------------
Operating income (loss)................ (34,206,755)
------------
Other income and expense............... (22,754,426)
------------
Income (loss) before minority interest,
income tax (provision) benefit and
cumulative effect of a change in
accounting principle.................. (56,961,181)
Minority interest...................... 3,267,653
Income tax (provision) benefit......... 11,011,711
Cumulative effect of a change in
accounting principle.................. --
------------
Net income (loss)...................... (42,681,817)
Subsidiary preferred stock dividends... --
------------
Net income (loss) attributable to
common stockholders................... $(42,681,817)
============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common stockholders... $(426,818.17)
Basic and diluted weighted average
number of common shares outstanding... 100
OTHER FINANCIAL DATA:
Capital expenditures................... $ 64,290,709
Cash provided by (used in) operating
activities............................ (3,069,133)
Cash (used in) provided by investing
activities............................ 1,021,783
Cash (used in) provided by financing
activities............................ 18,088,543
EBITDA(b).............................. (2,067,832)
Ratio of earnings to fixed
charges(c)............................ --
Insufficient earnings to cover fixed
charges............................... $ 53,693,528
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 4,073,761 $ 832,057 $ 2,977,835 $(1,240,180) $49,965,918 $ 12,646,729
Property and equipment, net............ 14,847,334 20,406,060 11,374,950 11,260,846 211,885,668 258,655,902
Total assets........................... 29,521,533 38,544,328 22,883,276 30,196,492 369,847,446 359,663,248
Long-term debt, including accrued
interest.............................. 1,440,569 11,075,698 -- -- 276,165,900 321,413,741
Total liabilities...................... 12,688,392 22,034,469 7,235,555 6,656,317 314,414,049 350,205,359
Minority interest...................... -- 2,981,968 -- -- 3,267,653 --
Retained earnings (accumulated
deficit).............................. 15,658,238 8,168,034 9,598,225 3,181,179 (20,583,483) (63,265,300)
Total stockholders' equity............. 16,833,141 13,527,891 15,647,721 23,540,175 49,678,784 6,970,929
</TABLE>
41
<PAGE> 45
- ---------------
(a) See note 9 to the financial statements, Cable Alabama acquisition, for
further information regarding presentation.
(b) EBITDA represents earnings before preferred stock dividends, interest
expense, income taxes, depreciation and amortization. EBITDA is not a
measurement of financial performance under generally accepted accounting
principles. It 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. We believe the presentation of EBITDA provides relevant and
useful information to our investors because it is a financial performance
measure commonly used in the industry. Additionally, we do not currently
believe that there are any legal or financial requirements that limit
management's discretionary use of funds depicted by EBITDA.
(c) Earnings consist of income before preferred stock dividends, income taxes,
plus fixed charges. Fixed charges consist of interest charges and the
portion of rent expense under operating leases representing interest, which
is estimated to be 1/3 of such expense.
42
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our "Selected
Consolidated Financial Data" section and our financial statements and related
notes elsewhere in this prospectus. The following discussion contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. Our actual results may differ significantly from the
results discussed in the forward-looking statements.
Our historical financial statements include the assets, liabilities and
results of operations of our subsidiaries which have been majority-owned by ITC
Holding during each year. Accordingly, our financial statements include the
assets, liabilities and results of operations of all of our subsidiaries for the
years 1995, 1998 and the first nine months of 1998 and 1999, but do not include
the assets, liabilities and results of operations of KNOLOGY Holdings for 1996
and 1997, when it was not majority-owned by ITC Holding.
OVERVIEW
We are a newly formed holding company that owns 100% of KNOLOGY Holdings,
Inc., Interstate Telephone Company, Valley Telephone Company, Globe
Telecommunications, Inc. and ITC Globe, Inc.
We acquired these interests in November 1999 from ITC Holding Company,
Inc., and other stockholders of KNOLOGY Holdings. Our structure is as follows:
- Interstate Telephone, Valley Telephone and Globe Telecommunications are
our direct subsidiaries.
- KNOLOGY Holdings is a direct subsidiary of Valley Telephone.
- ITC Globe is a direct subsidiary of Globe Telecommunications.
In November 1999, InterCall, Inc., a subsidiary of ITC Holding, contributed to
us:
- stock representing 85% of the outstanding equity of KNOLOGY Holdings;
- stock representing 100% of each of Interstate Telephone, Valley
Telephone, Globe Telecommunications and ITC Globe, which together provide
telephone, cable and Internet access services in western Georgia and
eastern Alabama;
- a note of KNOLOGY Holdings in the principal amount of up to $13 million;
and
- 272,832 shares of preferred stock of ClearSource, Inc., and subscription
rights to purchase an additional 810,501 shares of preferred stock of
ClearSource in future ClearSource financings, together with cash in the
amount of $5.6 million to be used to make the subscription payments.
ClearSource is a company planning to operate broadband systems in Texas
and other southern or mid-western states similar to our services in the
southeast. Currently, our investment in ClearSource represents
approximately 17% ownership interest in this company.
43
<PAGE> 47
We also completed the exchange of warrants to purchase shares of KNOLOGY
Holdings preferred stock for 994,961 shares of our Series A preferred stock.
Concurrent with this contribution, we completed the exchange of other KNOLOGY
Holdings common stock and preferred stock for our common stock and Series A
preferred stock. We now hold 100% of the outstanding stock of KNOLOGY Holdings.
The November 1999 transactions were effected primarily to combine the
businesses of KNOLOGY Holdings, Interstate Telephone, Valley Telephone, Globe
Telecommunications and ITC Globe. Together with ITC Holding, we determined that
KNOLOGY Holdings and these other companies have parallel growth in the broadband
market, and that combining the businesses would enhance their ability to take
advantage of the opportunities in that market. Although Interstate Telephone and
Valley Telephone primarily have been telephone companies, they have recently
through ITC Globe begun offering cable television and Internet access services
in the same geographic area in which they provide telephone service. Combining
these businesses under KNOLOGY is expected to allow all of the companies to
benefit from KNOLOGY Holdings' experience as a provider of cable television
services and as a provider of a bundle of broadband services. It also permits
KNOLOGY Holdings to take advantage of the more than 100 years of experience of
Interstate Telephone and Valley Telephone as telephone companies.
Since ClearSource proposes to conduct a similar broadband business in
southern or mid-western states, ITC Holding and we determined that the
ClearSource investments also should be under KNOLOGY. The KNOLOGY Holdings note
was contributed to KNOLOGY to terminate the lender-borrower relationship between
ITC Holding and KNOLOGY Holdings.
In December 1999, after the contribution and exchange discussed above, we
entered into a note agreement and a promissory note with a subsidiary of ITC
Holding. This subsidiary loaned us approximately $29.7 million. The proceeds of
this loan are to be used for construction of the network by KNOLOGY Holdings and
for working capital. This loan accrued interest at a rate of 11 7/8% per year
and had a maturity date of March 31, 2000. The note issued under the loan
agreement provided that ITC Holding subsidiary could elect, in lieu of
repayment, to convert the amount outstanding under the note into options to
purchase shares of our Series A preferred stock. Prior to the distribution the
entire amount of the note was converted into options to purchase 6,258,036
shares of our Series A preferred stock. These options, which were transferred to
ITC Holding, are the ones being distributed to ITC Holding option holders. Under
a residual note, ITC Holding has the right to specify the terms of those
options, including the exercise price and vesting and termination provisions.
In connection with the conversion we issued to ITC Holding a residual note
which provides that KNOLOGY will pay to ITC Holding any proceeds of option
exercises received by KNOLOGY. In the event of a cashless exercise of any of the
KNOLOGY options, KNOLOGY must pay to ITC Holding in cash an amount equal to the
exercise price. A fuller description of the option conversion and the residual
note is set forth under the caption "The Distribution -- Option Distribution."
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THE DISTRIBUTION
Concurrently with the circulation of this prospectus ITC Holding is
distributing approximately 90% of the capital stock of KNOLOGY to ITC Holding
stockholders and options to purchase stock of KNOLOGY to ITC Holding option
holders. ITC Holding is distributing 43,211,531 shares of our Series A preferred
stock to its stockholders, pro rata based upon the percentages of ITC Holding's
capital stock that they hold. ITC Holding also is distributing options to
purchase 6,258,036 shares of our Series A preferred stock to its option holders,
pro rata based upon the percentages of ITC Holding's common stock options that
they hold. Cash in the amount of $4.75 per share is being paid in lieu of
fractional shares or options. The distribution is intended to enhance our
ability to complete a private placement at a higher per-share value. A fuller
description of the distribution is set forth under the caption "The
Distribution."
In connection with the distribution ITC Holding and KNOLOGY entered into a
tax separation agreement in which they have made representations and covenants
that impose limitations on the future actions of KNOLOGY. Because we could have
substantial liability of up to $50 million if we breach our representations and
covenants, KNOLOGY could be discouraged from entering into transactions that
might result in a breach. KNOLOGY might not pursue any transaction that would be
presumed to be part of a plan or series of related transactions which results in
any cumulative 50% change of ownership within the four-year period beginning two
years before the date of the distribution. Transactions that could involve a
possible breach include an actual or constructive change of control of KNOLOGY,
and exceeding limits on the raising of equity capital or the use of our stock to
acquire other companies. Although we believe we can complete our intended
private placement and some additional capital raising or stock acquisition
transactions without violating the tax separation agreement, we may have to
forgo some growth opportunities that may occur during the two years subsequent
to the distribution. The tax separation agreement is discussed more fully under
the caption "The Distribution -- Tax Sharing Agreement."
HISTORY
Interstate Telephone began as West Point Telephone and Electric Company,
founded in 1896 by J. Smith Lanier. Interstate Telephone has been a provider of
local telephone service in western Georgia and a small part of eastern Alabama
since 1896. In 1961, the Lanier Company bought Valley Telephone from West Point
Manufacturing Co. Globe Telecommunications was formed in 1983 to be a
deregulated provider of services for Valley Telephone. Globe Telecommunications
has been providing deregulated services to Interstate Telephone since 1996. ITC
Holding was formed in 1989 as a holding company for the combined Interstate
Telephone, Valley Telephone and Globe Telecommunications companies. ITC Holding
Company formed ITC Globe in 1997 to be a provider of local broadband services in
the West Point, Georgia and Alabama/Georgia border area.
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ITC Holding formed KNOLOGY Holdings in 1995, but its percentage ownership
fell below 50% during 1996. ITC Holding acquired additional stock in KNOLOGY
Holdings in 1998, becoming the holder of approximately 85% of KNOLOGY Holdings.
KNOLOGY Holdings, which is now our wholly-owned subsidiary, has been
providing cable television service since 1995, telephone and high-speed Internet
access services since 1997 and broadband carrier services since 1998. KNOLOGY
Holdings owns, operates and manages interactive broadband networks in the five
metropolitan areas of Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida and Charleston, South Carolina; and it plans to expand to
additional mid-sized cities in the southeastern United States. In addition,
KNOLOGY Holdings provides traditional analog and digital cable television
services in Huntsville, Alabama. The Huntsville facilities are being upgraded to
provide local and long distance telephone and high-speed Internet access
services.
KNOLOGY Holdings began providing cable television service by acquiring
cable television systems in Montgomery, Alabama and Columbus, Georgia in 1995
and using those systems as a base for constructing new interactive broadband
networks. Since acquiring the Montgomery and Columbus systems, we have
significantly expanded these networks and upgraded the acquired networks to
offer additional broadband communications services.
In December 1997, KNOLOGY Holdings acquired a cable television system in
Panama City Beach, Florida. We are currently upgrading this cable system and
extending the network into the Panama City metro area. We expect to complete
this upgrade in 2000.
In early 1998, KNOLOGY Holdings began expanding into Augusta, Georgia and
Charleston, South Carolina by obtaining new franchise agreements with the local
governments and by constructing new interactive broadband networks. We expect to
complete construction of these networks by 2003.
In June 1998, KNOLOGY Holdings acquired TTE Inc., a non-facilities based
reseller of local, long distance and operator services to small and medium-sized
business customers throughout South Carolina.
In October 1998, KNOLOGY Holdings acquired the Cable Alabama cable
television system serving the Huntsville, Alabama area. The existing Cable
Alabama plant is being upgraded to an interactive broadband network which will
be completed by 2001.
Interstate Telephone and Valley Telephone provide local exchange services
throughout the Georgia/Alabama border area known as the valley, which includes
the towns of West Point, Georgia, Lanett, Alabama and Valley, Alabama and
unincorporated portions of counties in both states. Globe Telecommunications
provides local long distance services to residential and small business
customers. Globe Telecommunications also has been providing competitive local
exchange carrier services to residential and business customers located in the
Newnan, Georgia area since April 1998 and likely will begin providing these
services to Fairburn and Union City, Georgia in the fourth quarter
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of 1999. ITC Globe, under the trade name "KNOLOGY Connecting The Valley," also
provides analog cable television, digital cable television and high-speed
Internet access to customers within the local exchange territory of Interstate
Telephone and Valley Telephone.
REVENUES AND EXPENSES
We can group our revenues into four categories: video revenues, telephone
revenues, Internet revenues and other revenues.
- Video revenues. Our video revenues consist of fixed monthly fees for
basic, premium and digital cable television services, as well as fees
from pay-per-view movies and events such as boxing matches and concerts,
that involve a charge for each viewing. Video revenues accounted for
approximately 50% and 53% of our consolidated revenues for the year ended
December 31, 1998 and the nine months ended September 30, 1999,
respectively.
- Telephone revenues. Our telephone revenues consist primarily of fixed
monthly fees for local service, enhanced services such as call waiting
and voice mail and usage fees for long distance service. Telephone
revenues accounted for approximately 49% and 43% of our consolidated
revenues for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively.
- Internet revenues and other revenues. Our Internet revenues consist
primarily of fixed monthly fees for Internet access service and rental of
cable modems. Other revenues resulted principally from broadband carrier
services and video production services. These combined revenues accounted
for approximately 1% and 4% of our consolidated revenues for the year
ended December 31, 1998 and the nine months ended September 30, 1999,
respectively.
Our operating expenses include cost of services expenses, selling,
operations and administrative expenses and depreciation and amortization
expenses.
Cost of services expenses include:
- Video cost of services. Video cost of services consist primarily of
monthly fees to the National Cable Television Cooperative and other
programming providers, and are generally based on the average number of
subscribers to each program. Programming costs accounted for
approximately 12.5% and 11.9% of our operating expenses for the year
ended December 31, 1998 and the nine months ended September 30, 1999.
Programming costs is our largest single cost and we expect this to
continue. Since this cost is based on numbers of subscribers, it will
increase as we add more subscribers.
- Telephone and Internet access services. Cost of services related to our
telephone and Internet access services include costs of Internet
transport and telephone switching, and interconnection and transport
charges payable to local and long distance carriers.
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Selling, operations and administrative expenses include:
- Sales and marketing costs. Sales and marketing costs include the cost
of sales and marketing personnel and advertising and promotional
expenses.
- Network operations and maintenance expenses. Network operations and
maintenance expenses include payroll and departmental costs incurred for
network design and maintenance monitoring.
- Customer service expenses. Customer service expenses include payroll
and departmental costs incurred for customer service representatives and
management.
- General and administrative expenses. General and administrative
expenses consist of corporate and subsidiary general management and
administrative costs.
Depreciation and amortization expenses include:
- Depreciation and amortization expenses. Depreciation and amortization
expenses include depreciation of our interactive broadband networks and
equipment, and amortization of cost in excess of net assets and other
intangible assets related to acquisitions.
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RESULTS OF OPERATIONS
The following table sets forth financial data as a percentage of operating
revenues for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues............................ 100% 100% 100% 100% 100%
--- --- --- --- ----
Operating expenses:
Cost of services........................... 17 18 28 30 38
Selling, operating and administrative...... 48 54 83 80 73
Depreciation and amortization.............. 17 16 38 29 59
--- --- --- --- ----
Total............................. 82 88 149 139 170
--- --- --- --- ----
Operating income (loss)....................... 18 12 (49) (39) (70)
Other income and expenses..................... (2) (12) (41) (41) (47)
--- --- --- --- ----
Income (loss) before minority interest, income
tax (provision) benefit and cumulative
effect of a change in accounting
principle.................................. 16 0 (90) (80) (117)
Minority interest............................. 0 0 29 37 7
Income tax (provision) benefit................ (8) (6) 12 6 23
Cumulative effect of change in accounting
principle.................................. 0 0 (1) (2) 0
--- --- --- --- ----
Net income (loss)............................. 8 (6) (50) (39) (87)
Subsidiary preferred stock dividends.......... 0 (24) (3) 0 0
--- --- --- --- ----
Net income (loss) attributable to
stockholders............................... 8% (30)% (53)% (39)% (87)%
=== === === === ====
</TABLE>
The following table sets forth certain operating data as of September 30,
1998 and 1999. The information provided in the table reflects revenue-generating
connections as of the dates indicated. Please see the footnotes provided for
information regarding revenue-generating connections.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Connections(1)
Video............................. 18,169 37,716 80,600 78,203 87,609
Telephone
On-net(2)................... 18,607 19,518 24,343 23,296 33,005
Off-net(3).................. 0 0 5,982 5,911 6,568
Internet....................... 0 0 908 632 3,718
------- ------- ------- ------- -------
Total Connections................. 36,776 57,234 111,833 108,042 130,900
======= ======= ======= ======= =======
Marketable Homes Passed(4)........ N/A 124,773 256,271 246,307 301,470
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Connections represent revenue-generating connections. For video and
high-speed Internet, connections represent the number of customers
subscribing to the service. For telephone, connections represent the
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number of lines connected. For example, a telephone customer that has two
lines would be counted as two connections.
(2) On-net refers to lines provided over our broadband networks. It includes
20,526, 21,978, 18,607, 19,518 and 21,369 lines as of September 30, 1998 and
1999 and December 31, 1996, 1997 and 1998, respectively, provided using
traditional copper telephone lines.
(3) Off-net consists of all telephone connections provided within our broadband
network area over telephone lines leased from third parties.
(4) Marketable homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by our cable
television distribution network.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Operating revenues increased 61.1% from $30.3 million for the
nine months ended September 30, 1998 to $48.8 million for the nine months ended
September 30, 1999. Our increased revenues are primarily due to a higher number
of connections during the nine months ended September 30, 1999 compared to the
same period in 1998. The additional connections resulted primarily from:
- the extension of our broadband networks in the Montgomery, Columbus and
Panama City markets;
- the continued growth of broadband services in the Augusta and Charleston
markets; and
- the acquisition of the TTE and Cable Alabama systems in June 1998 and
October 1998, respectively.
Particularly in the cable industry, there is a trend towards consolidation,
exclusivity arrangements and other forms of competition. If the level of
competition continues to increase, due to consolidation, exclusivity
arrangements or otherwise, our ability to attract and retain customers and to
increase revenues could suffer.
Expenses. Our operating expenses, excluding depreciation and
amortization, increased 63.1%, from $33.3 million for the nine months ended
September 30, 1998 to $54.3 million for the nine months ended September 30,
1999. The cost of services component of operating expenses increased 106.7%,
from $9.0 million for the 1998 period to $18.6 million for the 1999 period. Our
selling, operations, and administration expenses increased 47.3%, from $24.3
million for the 1998 period to $35.8 million for the 1999 period. The increase
in our cost of services and other operating expenses is consistent with the
growth in revenues and is a result of the expansion of our operations and the
increase in the number of employees associated with such expansion and growth
into new markets. We expect our cost of services to continue to increase as we
add more revenue generating units. Our selling, operations and administration
expenses will increase as we expand into additional markets. Programming costs,
which are our largest single expense item, have been increasing over the last
several years, and we expect this trend to continue. We may not be able to pass
these higher costs on to customers, which would adversely affect our cash flow
and operating margins.
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Our depreciation and amortization expenses increased from $8.9 million for
the nine months ended September 30, 1998 to $28.7 million for the nine months
ended September 30, 1999. Approximately $9.0 million of the increase in
depreciation and amortization is due to the amortization of the excess of the
purchase price of Cable Alabama over the fair value of net assets acquired.
Approximately $7.8 million of the increase is due to depreciation expense
related to network capital expenditures, with the remainder of the increase
primarily due to depreciation expense related to the purchase of buildings,
computers and office equipment at the corporate and subsidiary locations. We
expect our depreciation and amortization expense to continue to increase as we
make capital expenditures to extend our existing networks and build additional
networks.
Our interest expense increased from $21.5 million for the nine months ended
September 30, 1998 to $24.2 million for the nine months ended September 30,
1999. The increase in interest expense reflects the accrual of the interest
attributable to the senior discount notes issued in October 1997.
Our interest income was $8.4 million for the nine months ended September
30, 1998, compared to $1.3 million for the same period in 1999. The interest
income reflects the interest earned from the investment of certain proceeds
received from the issuance of the senior discount notes in October 1997. The
decrease in interest income is due to the draw down of marketable securities to
fund planned expansion and acquisitions.
Income Tax (Provision) Benefit. We recorded an income tax provision of
$1.7 million for the nine months ended September 30, 1998 compared to an income
tax benefit of $11.0 million for the nine months ended September 30, 1999. The
income tax benefit in 1999 resulted from our utilizing net tax losses under a
tax sharing agreement with ITC Holding. The tax sharing agreement was effective
August 1998 upon the acquisition by ITC Holding of its majority-owned interest
of KNOLOGY Holdings, Inc. Upon the completion of the distribution, we will no
longer participate in the tax sharing agreement. Therefore, we will not receive
any payments from ITC Holding related to income tax benefits for periods
subsequent to the distribution. As a stand alone entity after the distribution,
we will record a full valuation allowance against any income tax benefit until
taxable income is generated, at which time a tax benefit will be realized.
Net Loss. We incurred a net loss of $11.9 million for the nine months
ended September 30, 1998 compared to a net loss of $42.7 million for the nine
months ended September 30, 1999. The increase in net loss is a result of the
expansion of our operations and the increase in the number of employees
associated with such expansion and growth into new markets. We expect net losses
to continue to increase as we proceed with the expansion of our business.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
As explained above, our results for the year ended December 31, 1998
include the results of all of our current subsidiaries. However, our 1997
results do not include the results of KNOLOGY Holdings, which was not
majority-owned by ITC Holding during 1997 and therefore, was accounted for as an
equity method investment in 1997.
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Revenues. Our operating revenues increased $27.5 million, or 156.3%, from
$17.6 million for the year ended December 31, 1997 to $45.1 million for the year
ended December 31, 1998. Excluding operating revenues of $25.8 million of
KNOLOGY Holdings in 1998, our operating revenues increased $1.7 million, or
9.7%, due primarily to the addition of a competitive local telephone and
broadband services operations in the Georgia/Alabama border area.
Expenses. Our operating expenses, excluding depreciation and
amortization, increased $37.5 million, or 297.6%, from $12.6 million for the
year ended December 31, 1997 to 50.1 million for the year ended December 31,
1998. Excluding operating expenses of $37.3 million of KNOLOGY Holdings in 1998,
our operating expenses increased $195,000, or 1.5%.
Our depreciation and amortization expenses increased from $2.8 million for
the year ended December 31, 1997 to $17.1 million for the year ended December
31, 1998, an increase which primarily reflects the inclusion of $12.4 million of
KNOLOGY Holdings' depreciation and amortization for the 1998 period which was
consolidated in our 1998 results.
Our interest expense and interest income increased $9.6 million and $29.0
million, respectively, from 1997 to 1998, primarily due to the inclusion of
KNOLOGY Holdings' results in the 1998 period. The interest expense and interest
income reported in the 1998 period reflects the accrual of the interest
attributable to the senior discount notes issued in October 1997 and the
interest income from the investment of the proceeds of the notes into marketable
securities.
Equity in losses of subsidiary decreased $2.4 million from the year ended
December 31, 1997 compared to the same period in 1998. The decrease represents
the acquisition of the majority of KNOLOGY Holdings stock in 1998 which
acquisition required us to consolidate the operations of KNOLOGY Holdings in
1998.
Other income (expense) changed from $(59,000) for the year ended December
31, 1997 to $783,000 for the year ended December 31, 1998 and is primarily due
to the 1997 period reflecting a gain on the sale of an investment.
Minority Interests. Minority interests in losses of subsidiary increased
from $0 in 1997 to $13.3 million in 1998. Minority interests in 1998 reflects
the minority stockholders' share of the losses and the pre-acquisition losses in
connection with the acquisition of KNOLOGY Holdings in 1998. In accordance with
Accounting Principles Board Opinion No. 16, the reorganization of KNOLOGY
Holdings was recorded at ITC Holding's historical cost for the 85% controlling
interest obtained. The remainder was treated as an acquisition of minority
interest at fair value.
Income Tax (Provision) Benefit. We recorded an income tax benefit of $5.6
million for the year ended December 31, 1998 compared to a provision of $1.0
million for the year ended December 31, 1997. The income tax benefit in 1998
results from our utilizing net tax losses under a tax sharing agreement with ITC
Holding. The provision in 1997 reflects tax expense of all of our subsidiaries.
The change in the amount of $6.6 million results from the consolidation of
KNOLOGY Holdings due to the acquisition of
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the majority interest by ITC Holding in 1998, in which period KNOLOGY Holdings'
taxable losses result in a tax benefit. As a stand alone entity after the
distribution, we will record a full valuation allowance against any income tax
benefit until taxable income is generated, at which time a tax benefit will be
realized.
Preferred Dividends. Preferred dividends in the amount of $4.2 million in
1997 and $1.4 million in 1998 represent profits of Interstate Telephone and
Valley Telephone distributed to ITC Holding Company. The decrease in 1998 as
compared to 1997 relates to the increased capital deployed to launch operations
of Globe Telecommunications and ITC Globe in 1998.
Net Loss Attributable to Common Shareholder. We incurred a net loss of
$5.0 million for the year ended December 31, 1997 compared to a net loss of
$23.8 million for the year ended December 31, 1998. The increase in net loss was
due primarily to the development of new properties.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
As explained above, our results for the years ended December 31, 1997 and
1996 do not include the results of KNOLOGY Holdings, which was not
majority-owned by ITC Holding during the 1997 and 1996 periods.
Revenues. Our operating revenues increased $106,000, or 0.6%, from the
year ended December 31, 1996 compared to the same period in 1997.
Expenses. Our operating expenses, excluding depreciation and
amortization, increased 11.5%, from $11.3 million for the year ended December
31, 1996 to $12.6 million for the year ended December 31, 1997. The cost of
services component of operating expenses increased $130,000, or 3.3%, from $3.0
million for the year ended December 31, 1996 to $3.1 million for the same period
in 1997. Our selling, operations, and administration expenses increased 14.5%,
from $8.3 million for 1996 to $9.5 million for 1997. The increase in selling,
operations and administration expense was primarily due to a credit (reduction
of expense) of approximately $700,000 recorded in 1996 related to a settled
dispute with carriers. Excluding this credit, selling, operations and
administration expense increased approximately 5.6% from 1997 to 1996.
Our depreciation and amortization expenses decreased $240,000, or 8.0%,
from 1996 to 1997 due to certain assets being fully depreciated in 1996.
Our other expenses increased from $380,000 for the year ended December 31,
1996 to $2.0 million for the year ended December 31, 1997. The increase was
primarily due to the reporting of our share of KNOLOGY Holding's loss, accounted
for as equity losses in subsidiaries, based on our minority-owned interest for
the 1996 and 1997 periods. KNOLOGY Holdings increased losses reflect the
development of the company's infrastructure to expand its business.
Preferred Dividends. Preferred dividends in the amount of $0 in 1996 and
$4.2 million in 1997 represent certain profits of the Interstate Telephone,
Valley Telephone,
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Globe Telecommunications and ITC Globe distributed to ITC Holding Company. In
1996 we invested profits into our businesses.
Net Loss. We incurred net income of $1.4 million for the year ended
December 31, 1996 compared to a net loss of $827,000 for the year ended December
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had net working capital of $12.6 million,
compared to $50.0 million and ($1.2) million at December 31, 1998 and 1997,
respectively.
Net cash provided by operations totaled $4.8 million, $3.7 million and
$23.0 million for 1996, 1997 and 1998, respectively, and net cash used by
operations totaled $3.1 million for the nine months ended September 30, 1999.
The net cash flow activity related to operations consists primarily of changes
in operating assets and liabilities and adjustments to net income for non-cash
transactions including:
- depreciation and amortization;
- loss on disposition of assets;
- cumulative effect of an accounting change;
- deferred income taxes;
- deferred investment tax credit;
- equity in net loss of subsidiary; and
- minority interest in subsidiaries' net loss.
Net cash used for investing activities was $0.2 million, $22.2 million and
$34.6 million for the years ended December 31, 1996, 1997 and 1998,
respectively, and net cash provided by investing activities totaled $1.0 million
for the nine months ended September 30, 1999. The net cash flow from investing
activities in 1996 represented $1.0 million of capital expenditures funded in
part by $0.8 million in proceeds from sales of investments. Our investing
activities in 1997 consisted primarily of $1.7 million of capital expenditures,
$14.3 million for the purchase of the Panama City cable system, $4.2 million of
dividends paid by Interstate Telephone and Valley Telephone to ITC Holding and a
$2.1 million increase in construction related payables. In 1998, our investing
activities consisted primarily of $120.2 million of capital expenditures, $67.7
million for the acquisition of the Huntsville, Alabama cable system, $6.2
million for the purchase of equity interests in KNOLOGY Holdings, net of cash
acquired of $6.1 million, $1.4 million of dividends paid by Interstate Telephone
to ITC Holding and $0.8 million for an investment in ClearSource, Inc. These
investing activities are offset by $162.2 million in proceeds from the sale of
short-term investments. Our investing activities for the nine months ended
September 30, 1999 consisted of $64.3 million of capital expenditures
principally funded by $66.2 million in proceeds from the sale of short-term
investments.
Net cash flow from financing activities was cash used of $4.5 million, cash
provided of $18.7 million, cash provided of $16.1 million and cash provided by
$18.1 million for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended
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September 30, 1999, respectively. Net cash used in financing activities in 1996
included $0.9 million payments on debt and short term borrowings and $4.4
million of advances to affiliates offset by $0.9 million of additional infusion
of equity. Cash flow from financing activity in 1997 consisted of $14.3 million
of additional infusion of equity and $4.4 million of reimbursement of advances
previously made to an affiliate. Financing activities in the 1998 period
primarily consisted of $15.6 million of additional infusion of equity and $2.0
million repayment from an affiliate, offset by $1.5 million in expenditures
related to the issuance of debt. These numbers do not include $242.4 million
raised by KNOLOGY Holdings in 1997, as KNOLOGY Holdings was not majority-owned
by ITC Holding during 1997.
FUNDING TO DATE
We have required equity infusions and debt proceeds to finance a
significant portion of our operating, investing and financing activities in the
development of our business. On October 22, 1997, KNOLOGY Holdings received net
proceeds of approximately $242.4 million from the offering of units consisting
of senior discount notes due 2007 and warrants to purchase preferred stock. The
notes were sold at a substantial discount from their principal amount at
maturity and there will not be any payment of interest on the notes prior to
April 15, 2003. The notes will fully accrete to face value of $444.1 million on
October 15, 2002. From and after October 15, 2002, the notes will bear interest,
which will be payable in cash, at a rate of 11 7/8% per annum on April 15 and
October 15 of each year, commencing April 15, 2003. The indenture contains
covenants that affect, and in certain cases significantly limit or prohibit, the
ability of KNOLOGY Holdings to:
- incur indebtedness;
- pay dividends;
- prepay subordinated indebtedness;
- redeem capital stock;
- make investments;
- engage in transactions with stockholders and affiliates;
- create liens;
- sell assets; and
- engage in mergers and consolidations.
If KNOLOGY Holdings fails to comply with these covenants, KNOLOGY Holdings'
obligation to repay the notes may be accelerated. However, these limitations are
subject to a number of important qualifications and exceptions. In particular,
while the indenture restricts KNOLOGY Holdings' ability to incur additional
indebtedness by requiring compliance with specified leverage ratios, it permits
KNOLOGY Holdings 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 to incur
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up to $50 million of additional secured indebtedness. Upon a change of control
of KNOLOGY Holdings, as defined in the indenture, KNOLOGY Holdings would be
required to make an offer to purchase the notes at a purchase price equal to
101% of their accreted value, plus accrued interest. The distribution does not
constitute a change of control under the Indenture.
Each unit in the offering also consisted of a warrant to purchase 0.003734
shares of preferred stock of KNOLOGY Holdings at an exercise price of $0.01 per
share. In December 1999, we completed an exchange in which we received the
KNOLOGY Holdings warrants, issued in connection with the senior discount notes
in 1997 in exchange for warrants to purchase shares of our Series A preferred
stock, which new warrants contain substantially identical terms as the KNOLOGY
Holdings' warrants.
In connection with the units offering, KNOLOGY Holdings completed an equity
private placement, in which KNOLOGY Holdings issued approximately 21,400
additional shares of preferred stock at $1,500 per share to ITC Holding, Century
Telephone Enterprises, Inc., SCANA Communications, Inc., South Atlantic Venture
Fund III, Limited Partnership and AT&T venture funds for aggregate proceeds of
approximately $32.2 million. ITC Holding, Century Telephone, South Atlantic,
AT&T venture funds and SCANA Communications, Inc. purchased approximately $10.0
million, $2.5 million, $5.5 million, $5.0 million and $5.0 million of preferred
stock, respectively, in this private placement. A portion of the proceeds from
this private placement were used to repay approximately $11.0 million in
borrowings from SCANA and an additional $11.0 million of debt incurred by
KNOLOGY Holdings to finance the purchase of its cable television systems in
Montgomery, Alabama and Columbus, Georgia in 1995. ITC Holding subsequently
repurchased all shares of KNOLOGY Holdings' preferred stock owned by Century
Telephone, South Atlantic and SCANA during 1998.
On December 22, 1998, KNOLOGY Holdings entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp. The credit facility allows KNOLOGY Holdings to borrow up
to five times a certain individual subsidiary's annualized consolidated adjusted
cash flow, as defined in the credit facility agreement. The credit facility may
be used for working capital and other purposes, including capital expenditures
and permitted acquisitions. At KNOLOGY Holdings' option, interest will accrue
based on either the prime or federal funds rate plus applicable margin or the
LIBOR rate plus applicable margin. The applicable margin may vary from .50% to
2.50% based on the leverage ratio of KNOLOGY Holdings. The credit facility
contains a number of covenants including, among others, covenants limiting the
ability of KNOLOGY Holdings and its subsidiaries to:
- incur debt;
- create liens;
- pay dividends;
- make distributions or stock repurchases;
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- make certain investments;
- engage in transactions with affiliates;
- sell assets; and
- engage in mergers and acquisitions.
The credit facility also includes covenants requiring compliance with certain
operating and financial ratios on a consolidated basis, including the number of
revenue generating units and average revenue per subscriber. KNOLOGY Holdings is
currently in compliance with these covenants, however, there are no assurances
that KNOLOGY Holdings will remain in compliance through the end of the year.
Should KNOLOGY Holdings not be in compliance with the covenants, KNOLOGY
Holdings would be in default and would require a waiver from the lender. In the
event the lender would not provide a waiver, amounts outstanding against the
facility could be payable to the lender on demand. A change of control of
KNOLOGY Holdings, as defined in the credit facility agreement, would constitute
a default under the covenants. The distribution does not constitute a change of
control of KNOLOGY Holdings under the credit facility agreement.
The maximum amount currently available under the credit facility at
September 30, 1999 was approximately $23 million, assuming compliance with all
of the operating and financial covenants. As of September 30, 1999, $19 million
of the $23 million currently available had been drawn against the credit
facility.
We obtained an aggregate of approximately $39.4 million from ITC Holding
and its subsidiary InterCall during November and December 1999. Approximately
$9.6 million of these advances was advanced to us in November 1999. This loan
was converted into 2,029,724 shares of Series A preferred stock in November
1999. Another $29.7 million loan was made in December 1999. The loan was
converted into options to purchase up to 6,258,036 shares of our common stock
immediately prior to the distribution. The loan bore interest at an annual rate
of 11.875% and had a maturity date of March 31, 2000.
After the distribution we will not be able to rely on ITC Holding for
equity infusions and intercompany loans. However, we believe that the
distribution will provide us with greater ability to raise capital in the
private equity market. Nevertheless, our ability to raise additional equity
financing or conduct stock acquisitions may be limited by the provisions in our
tax separation agreement with ITC Holding, as discussed more fully under the
caption "The Distribution -- Tax Sharing Agreement." Although we believe we can
complete our intended private placement and some additional capital raising or
stock acquisition transactions without violating the tax separation agreement,
we may have to forego some growth opportunities that may occur during the two
years subsequent to the distribution.
FUTURE FUNDING
Our business requires substantial investment to finance capital
expenditures and related expenses, to expand and/or upgrade the interactive
broadband networks, to fund
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subscriber equipment and to maintain the quality of our networks. We currently
expect to spend approximately $94 million for capital expenditures during 1999,
which includes $64.3 million spent in the first nine months of 1999, including
the planned expansion and/or upgrade of the Montgomery, Columbus, Panama City,
Augusta, Charleston and Huntsville networks and approximately $5 million to fund
operating losses in 1999. We currently expect to spend approximately $9 million
to fund operating losses and approximately $131 million for capital expenditures
during 2000. The $131 million includes approximately $70 million related to the
construction of networks in our existing markets. The remainder primarily
relates to the purchase of equipment for customer premises, such as cable boxes,
information systems and the commencement of the construction of networks in
additional markets. Failure to have access to additional funds during 2000 could
require us to delay some of our construction plans, delay preliminary efforts in
new markets and possibly require us to restrict or reduce the level of
operations in some markets.
We presently estimate the cost to complete construction of the networks in
our existing markets to be approximately $170 million, of which approximately
$70 million would be expended during 2000. We currently expect that if
sufficient funds are raised, the construction of our networks in our existing
markets would be substantially completed during 2002.
We presently expect that present cash reserves, cash flow from operations,
funding obtained through the existing KNOLOGY Holdings credit facility and the
private offering discussed below will be sufficient to fund our 2000 capital
expenditures. We will need additional capital to complete construction of our
networks through 2002. We expect to raise this capital through private and
public debt offerings and private and public equity offerings, although there is
no assurance that this financing will be available on terms favorable to us. If
we are not successful in raising additional capital, we may not be able to
complete the construction of our networks throughout our current markets. This
may cause us to violate our franchises agreements, which could adversely affect
us, or may just limit our growth within these markets.
We plan to expand to additional mid-sized cities in the southeastern United
States. We estimate the cost of constructing networks and funding initial
subscriber equipment in additional new cities at approximately $50 to $75
million per city, though our costs could be as much as $85 million to $90
million per city for larger markets. The actual costs of each new market may
vary significantly from this range and will depend on the number of miles of
network to be constructed, the geographic and demographic characteristics of the
city, costs associated with the cable franchise in each city, the number of
subscribers in each city, the mix of services purchased, the cost of subscriber
equipment we pay for or finance and other factors. We will need additional
financing to expand into additional cities, for new business activities or in
the event we decide to make additional acquisitions. We expect to raise this
capital through private and public debt offerings and private and public equity
offerings, although there is no assurance that this financing will be available
on terms favorable to us. If we are not successful in raising additional
capital, we will not be able to expand to additional cities as planned.
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The schedule for our planned expansion will depend upon the availability of
sufficient capital. Definitive decisions on which cities will be chosen for
expansion are not expected to be made until this capital has been raised.
Shortly following the distribution we intend to make a private offering of
shares of Series B preferred stock. This offering is expected to be made to a
small group of institutional investors unaffiliated with us for approximately
$100 million. The proceeds are expected to be used for construction of networks
in our existing markets and to fund start-up costs with respect to possible new
markets. We expect that each share of our Series B preferred stock will have
rights and preferences substantially similar to those of our Series A preferred
stock, including being convertible initially into one share of our common stock.
In the event of any dissolution, liquidation or winding up of our company, the
Series B preferred stock would be entitled to receive payment in full of the
Series B preferred stock liquidation distribution before any distribution or
payment is made to any other class or series of our capital stock, including the
Series A preferred stock. The terms of the Series B preferred stock are
discussed in more detail below under the caption "Description of
Securities -- Series B preferred stock." The terms of this private offering
could change and it is possible that the offering will not be consummated. The
private offering is contingent upon the completion of the distribution described
by this prospectus.
THE YEAR 2000 ISSUE
General
The year 2000 issue is a general term used to describe the various problems
that may result in computers and other machinery as we reach the year 2000.
These problems generally arise from the fact that most of the world's computers
have historically used only two digits to identify the year in a date, often
meaning that the computer will fail to distinguish dates in the 2000's from
dates in the 1900's.
These problems are expected to increase in frequency and severity as the
year 2000 approaches. This issue impacts our owned or licensed computer systems
and equipment used in connection with internal operations.
Third Parties
We also rely directly and indirectly, in the regular course of business, on
the proper operation and compatibility of third party systems. The year 2000
problem could cause these systems to fail, err, or become incompatible with our
systems.
Certain of our suppliers and vendors could have a material affect on our
business if they fail to become year 2000 ready. In these cases, we are relying
on the determination by an outside testing company that these vendors and
suppliers are ready for the year 2000. Also, we have conducted our own testing
of certain major components of the systems provided to us by third parties.
Nonetheless, if we or a significant third party on which we rely fails to become
year 2000 ready, or if the year 2000 problem causes our systems to become
internally incompatible or incompatible with such third party systems, our
business could suffer from material disruptions, including the inability to
process
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transactions, send invoices, accept customer orders or provide customers with
our services. We could also face similar disruptions if the year 2000 problem
causes general widespread problems or an economic crisis. We cannot now estimate
the extent of these potential disruptions.
Our State of Readiness
We established a year 2000 program office to coordinate activity and report
to our executive management and board of directors with regard to the year 2000
issue. Our year 2000 program office developed a plan for us to become year 2000
ready. This plan covered:
- our technology and operating systems;
- billing of our cable, telephone and Internet services;
- customer service;
- financial operations and reporting;
- network monitoring; and
- the systems of our major vendors, third party service providers and other
material service and content providers.
We addressed our year 2000 plan with respect to our internal operations in
six phases:
- an awareness phase, in which we inventoried and evaluated our systems,
components and other significant infrastructure;
- an assessment phase, in which we identified those elements that
reasonably could be expected to be affected by year 2000 problems;
- a remediation phase, in which we remediated or replaced equipment that we
believed would fail to operate properly in the year 2000;
- a testing and validation phase, in which we tested the remediation and
replacement conducted and validated its ability;
- an implementation phase, in which we added our new or updated equipment
to our current systems; and
- a contingency phase, in which we developed contingency plans for our
at-risk business functions.
We have completed all phases of our plan for all of our services and systems.
Certain actions in the remediation phase have been conducted by the third
parties who provide hardware, software, or services that comprise our systems.
We have polled all the third parties who provide material hardware, software, or
services as part of our information technology and operating systems with regard
to each of such third party's year 2000 compliance plan and state of readiness.
We have actively sought responses from all vendors and third parties as to year
2000 compliance, status of plans and
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readiness. All key vendors have responded and most of the third parties have
assured us that their hardware and/or software is currently or will be year 2000
compliant.
Costs
To date, we have incurred approximately $500,000 of costs in connection
with our year 2000 plan, and we do not anticipate spending additional funds. We
expense all costs associated with our Year 2000 plan as we incur them and
anticipate funding the costs of our plan from cash flows. To date, we have not
deferred any specific information technology projects because of the costs of
our plan.
Risks
The failure to correct a material year 2000 problem or to implement a
contingency plan could result in system failures leading to a disruption in, or
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect our business, profitability and operating
results.
Contingency Plans
We have a year 2000 contingency planning committee, which has developed
year 2000 contingency plans for all of our information technology and operating
systems and for each of our locations. This committee identified key business
risks which were used to drive the development of these plans. Additionally, we
use an outside consulting service to assist in our year 2000 readiness, project
coordination and execution of the year 2000 plan.
Contingency planning to maintain and restore service in the event of
natural disasters, power failures and systems-related problems is a routine part
of our operations. We believe that such contingency plans will assist us in
responding to any failure by outside service providers to successfully address
year 2000 issues. In addition, we have developed complete contingency plans that
address our most reasonably likely worst case year 2000 scenarios including
identification of alternate vendors and service providers and manual
alternatives to system operations.
Our contingency plans for the components of our operations that are
provided by third parties and are of greatest concern to us in the event of a
year 2000 problem are:
- Network. To prepare for potential year 2000 problems affecting our
network, we have leased more facilities to provide greater redundancy. We
have also received vendor assurances with regard to our network.
- Billing. We have conducted our own testing of our billing systems. In
addition, we are relying on third-party verification that these systems
are ready for the year 2000.
- Switching. A switch is a device that directs voice and data traffic
over a network. Switching is the process of connecting the calling party
with the called party through one or more switches. We have only one
switch, through which we route all of our telephone data transmissions. A
team of specialists from an
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outside consulting service will be on call to provide backup support in
the event of any year 2000 problems. The switching functions have also
been tested by us and by third-parties for year 2000 readiness.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We manage our
exposure to this market risk through our regular operating and financing
activities. Derivative instruments are not currently used and, if utilized, are
employed as risk management tools and not for trading purposes.
We have no derivative financial instruments outstanding to hedge interest
rate risk. Our only borrowings subject to market conditions are our borrowings
under our credit facility which are based on either a prime or federal funds
rate plus applicable margin or LIBOR plus applicable margin. Any changes in
these rates would affect the rate at which we could borrow funds under our bank
credit facility. A hypothetical 10% increase in interest rates on our variable
rate bank debt for a duration of one year would increase interest expense by an
immaterial amount.
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OUR BUSINESS
GENERAL
OUR STRUCTURE.
We were formed in September 1998. We own 100% of KNOLOGY Holdings,
Interstate Telephone Company, Valley Telephone Company, Globe Telecommunications
and ITC Globe. We acquired these companies in November 1999 from ITC Holding and
other stockholders of KNOLOGY Holdings. This transaction is described in more
detail under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Interstate Telephone and Valley Telephone
Interstate Telephone began as West Point Telephone and Electric Company,
founded in 1896 by J. Smith Lanier. Interstate Telephone has been a provider of
local telephone service in western Georgia and a small part of eastern Alabama
since 1896. In 1961, the Lanier Company bought Valley Telephone from West Point
Manufacturing Co.
Interstate Telephone and Valley Telephone provide local telephone services
throughout the Georgia/Alabama border area known as the valley, which includes
the towns of West Point, Georgia, Lanett, Alabama and Valley, Alabama and
unincorporated portions of counties in both states.
KNOLOGY Holdings
ITC Holding formed KNOLOGY Holdings in 1995, but its percentage ownership
fell below 50% during 1996. ITC Holding acquired additional stock in KNOLOGY
Holdings in 1998, becoming the holder of approximately 85% of KNOLOGY Holdings.
KNOLOGY Holdings, which is now our wholly-owned subsidiary, has been
providing cable television service since 1995, telephone and high-speed Internet
access services since 1997 and broadband carrier services since 1998. KNOLOGY
Holdings owns, operates and manages interactive broadband networks in the five
metropolitan areas of Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida and Charleston, South Carolina; and it plans to expand to
additional mid-sized cities in the southeastern United States. In addition,
KNOLOGY Holdings provides traditional analog and digital cable television
services in Huntsville, Alabama. The Huntsville facilities are being upgraded to
provide local and long distance telephone and high-speed Internet access
services.
KNOLOGY Holdings began providing cable television service by acquiring
cable television systems in Montgomery, Alabama and Columbus, Georgia in 1995
and using those systems as a base for constructing new interactive broadband
networks. Since acquiring the Montgomery and Columbus systems, we have
significantly expanded these networks and upgraded the acquired networks to
offer additional broadband communications services.
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In December 1997, KNOLOGY Holdings acquired a cable television system in
Panama City Beach, Florida. We are currently upgrading this cable system and
extending the network into the Panama City metro area. We expect to complete
this upgrade in 2000.
In early 1998, KNOLOGY Holdings began expanding into Augusta, Georgia and
Charleston, South Carolina by obtaining new franchise agreements with the local
governments and by constructing new interactive broadband networks. We expect to
complete construction of these networks by 2003.
In June 1998, KNOLOGY Holdings acquired TTE Inc., a reseller of local, long
distance and operator services to small and medium-sized business customers
throughout South Carolina.
In October 1998, KNOLOGY Holdings acquired the Cable Alabama cable
television system serving the Huntsville, Alabama area. The existing Cable
Alabama plant is being upgraded to an interactive broadband network which will
be completed by 2001.
Globe Telecommunications
Globe Telecommunications was formed in 1983 to be a deregulated provider of
services for Valley Telephone. Globe Telecommunications has been providing
deregulated services to Interstate Telephone since 1996. Globe
Telecommunications provides local and long distance services to residential and
business customers. Globe Telecommunications also has been providing competitive
local telephone services to residential and business customers located in the
Newman, Georgia area since April 1998 and likely will begin providing these
services to Fairburn and Union City, Georgia in the fourth quarter of 1999.
ITC Globe
ITC Holding Company formed ITC Globe in 1997 to be a provider of local
broadband services in West Point, Georgia and the Alabama/Georgia border area.
ITC Globe, under the trade name "KNOLOGY Connecting The Valley," also provides
analog cable television, digital cable television and high-speed Internet access
to customers within the local telephone territory of Interstate Telephone and
Valley Telephone.
RELATIONSHIPS WITH AFFILIATES.
ITC Holding, a diversified telecommunications company, currently owns 90%
of our stock, which it is distributing to its stockholders. We receive services
from and/or provide services to various companies that may be deemed related
parties, including MindSpring and ITC*DeltaCom. These relationships and
services are described in detail under the caption "Certain Transactions and
Relationships." We believe that the transactions with MindSpring, ITC*DeltaCom
and other companies that may be deemed related parties, are representative of
arms-length transactions and we expect that our existing contracts with these
companies will continue after the distribution.
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One of our principal stockholders, SCANA Communications, is also a
stockholder of ITC Holding. In addition to investing in us, SCANA Communications
loaned us money in the past. We lease pole space from SCANA Corporation, the
parent company of SCANA Communications, which owns and operates public utilities
in South Carolina. See "Certain Transactions and Relationships" for a
description of our relationship with SCANA Communications and SCANA Corporation.
OVERVIEW OF OUR SERVICES.
We offer our customers broadband communications services, including:
- traditional and digital cable television;
- local and long distance telephone; and
- high-speed Internet access service.
Our customers have the choice of receiving these services individually or as
part of a bundle of services. In addition, we sell access to our network and
provide various network-related services to other telecommunications companies,
such as long distance telephone companies and Internet service providers.
We provide all of these services using high-speed broadband networks that
are two-way interactive. Broadband networks are high-capacity, which means they
can handle large volumes of voice, video and data. Two-way interactive networks
give customers the ability to send and receive signals at the same time. Two-way
interactive networks are required for telephone service and provide for higher
speed Internet connections than traditional one-way networks. It is important to
our strategy to provide bundled high-speed communications services that our
networks are broadband and two-way interactive.
For the nine months ended September 30, 1999, video, telephone and
high-speed Internet services and other revenue accounted for 53%, 43%, and 4%,
respectively, of consolidated revenue. Other revenue consisted principally of
revenue from broadband carrier services and video production services.
We own, operate and manage interactive broadband networks in five
metropolitan areas: Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida and Charleston, South Carolina. In addition, we provide
traditional and digital cable television services in Huntsville, Alabama. Our
Huntsville facilities are being upgraded to provide local and long distance
telephone and high-speed Internet access services. We also provide local
telephone services throughout the Georgia/Alabama border area known as the
valley, which includes the towns of West Point, Georgia, Lanett, Alabama and
Valley, Alabama and unincorporated portions of counties in both states. Our
local telephone service in the valley area is provided over a traditional copper
wire network while our cable and Internet services in that area are provided
over our broadband network. We also provide local telephone service in Newnan,
Georgia over a leased broadband network. We plan to expand to additional
mid-sized cities in the southeastern United States.
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Because we deliver multiple services to our customers, we report the total
number of our various revenue generating service connections for local
telephone, cable programming and Internet access, rather than the total number
of customers. As of September, 1999, we had approximately 130,900 revenue
generating service connections, including approximately 102,354 connections to
customers through our high-speed broadband networks and the remainder over
leased facilities or traditional copper telephone lines.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Connections(1)
Video............................................ 78,203 87,609
Telephone.....................................
On-Net(2).................................. 23,296 33,005
Off-Net(3)................................. 5,911 6,568
Internet...................................... 632 3,718
------- -------
Total Connections................................ 108,042 130,900
======= =======
Marketable Homes Passed(4)....................... 246,307 301,470
======= =======
Video Penetration(5)............................. 29.1% 31.8%
======= =======
Premium Units(6)................................. 55,139 60,273
Premium Penetration(7)........................... 70.5% 68.8%
</TABLE>
- ---------------
(1) Connections represent revenue generating connections. For video and
high-speed internet, connections represent the number of customers
subscribing to the service. For telephone, connections represent the number
of lines connected. For example, a telephone customer that has two lines
would be counted as two connections.
(2) On-net refers to line provided over our broadband networks. It includes
20,526 and 21,978 lines as of September 30, 1998 and 1999, respectively
provided using traditional copper wire telephone lines.
(3) Off-net consists of all telephone connections provided within our network
area over telephone lines leased from third parties.
(4) Marketable homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by our cable
television distribution network.
(5) Video penetration represents video connections as a percentage of marketable
home passed.
(6) Premium units represent the total number of subscriptions to premium
channels.
(7) Premium penetration represents premium units as a percentage of video
connections (which represents the number of video customers).
All of our network has the ability to provide broadband communications
services except for our network located in Huntsville, Alabama, which is
currently being upgraded. We expect that the Huntsville upgrade will be complete
in 2001.
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OUR STRATEGY
We have developed the following strategy for the implementation and
operation of business:
- Build and Operate Reliable Interactive Broadband Networks. By
designing, constructing and operating our own high-capacity, interactive
broadband networks, we can provide our residential and business customers
a wide range of high-quality broadband communications services. We
believe that this gives us a competitive advantage over cable, telephone
and wireless systems that do not have the capability to provide a wide
range of communication services.
We also believe that our high-capacity networks, which are substantially
protected by redundant paths, give us a quality and reliability
advantage over other and lower-capacity cable systems that do not have
significant redundant paths. Redundant paths increase reliability by
providing an alternate route for signals to travel if network problems
arise. In addition, we use a specially designed powering system, which
is backed up at various points along our network by a generator and a
backup power source. This allows service to continue in case of a power
outage. We can monitor our network 24 hours per day, seven days per
week, at our network operations center.
- Provide Bundled Offerings. We believe that by bundling video, voice and
data communications services we can distinguish ourselves from our
competition. We believe that the cost savings on a bundle of services and
the advantages of one-stop shopping will be attractive to new customers,
particularly since most of our prospective customers presently buy
services from multiple sources. We also believe that customers will be
less likely to switch should competitors offer lower prices on individual
services because of the cost savings associated with purchasing a bundle
of services from us. The ability to realize an overall profit on a bundle
of services should give us greater pricing flexibility.
- Be First To Market Multiple Broadband Communications Services. We
believe that we are the first providers of a bundled video, voice and
data broadband services package in Montgomery, Columbus, Panama City,
Augusta, Charleston and Huntsville. We intend to be the first to offer a
similar services package in each new market that we enter. We want to
capitalize on our position as a new communications company that brings
competition and choice to cities. We believe that many companies may seek
to provide bundled communications services over the next several years.
We expect that later entrants in a market will have greater difficulty
making a profit. 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. We intend to expand to additional
mid-sized cities in the southeastern United States. Although we have not
definitively decided upon particular cities for expansion, we plan to
target cities:
- that have an average of 70 homes per mile;
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- that generally have populations of at least 100,000; and
- in which we believe we can capture a substantial number of cable
television customers and can be the leading provider of bundled
communications services.
We believe that such cities will support a broadband communications
services business and that most of the large cable companies and other
service providers currently are focusing primarily on larger
metropolitan areas.
- Focus On The Customer. We believe the quality and responsiveness of our
customer service differentiates us from our competitors. Our customer
service representatives in each market handle customer-related functions
24 hours a day. We also monitor our networks 24 hours a day, seven days a
week.
- Broadband Carrier Services Strategy. We use extra, unused capacity on
our networks to develop and offer wholesale services to local and long
distance telephone companies, Internet services providers and other
integrated services providers. Our entry into a local market with a newly
constructed high-capacity network offers other service providers a
reliable and cost competitive alternative to telephone services provided
by the incumbent local phone company. We believe that we have a
competitive advantage due to the high-quality of our networks and the
fact that it passes substantially every home and business in our service
area.
INDUSTRY STRUCTURE AND TECHNOLOGY
General
As a result of the Telecommunications Act of 1996, cable television
companies may provide telephone service and vice versa, local telephone
companies may provide long distance service and vice versa, and all may provide
numerous ancillary services. Municipalities must 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 to a rush by
communications companies and others such as power companies to provide a full
range of voice, video and data communications services to consumers. Although
the process of building broadband networks and expanding to other services has
begun, we believe that most of the large cable companies and other service
providers will initially focus primarily on major metropolitan areas.
Communications Technologies And Services
We have set forth below a brief description of the current communications
industry structure and the technology generally used by each system, including
hurdles that providers face 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. The cable runs
through the air attached to poles or underground 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
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internal wiring running from the cable connection box to one or more boxes into
which users connect television sets and set-top terminals used for special
services, descrambling, pay-per-view and other features. Traditional coaxial
cable networks have numerous amplifiers located along the network to restore the
strength of the signal, which diminishes as it travels. Amplifiers produce
interference or noise which increases as the number of amplifiers increases.
Fiber optic networks do not use amplifiers since their larger lasers send
signals further so they do not need amplifying.
The number of channels or features that a cable system can offer varies
with the capacity of the cable network and the electronic equipment that
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 increase capacity through the use of additional equipment, and customers have
experienced increased interference.
Many cable television systems use one-way noninteractive cable, and
accordingly do not have the ability to provide telephone service, which requires
a two-way interactive cable. Several cable companies, including large cable
companies, offer high-speed data transmission and provide Internet access using
cable modems which are one-way noninteractive. However, such service generally
cannot deliver high-speed performance until the cable has been upgraded to
increase capacity and add two-way interactivity.
Wireless Cable. Wireless cable technology allows the transmission of
television, high-speed computer data, and facsimile transmissions via microwave
frequencies. Wireless cable has been used to serve primarily rural areas where
laying traditional cable is not economically feasible. The wireless cable system
sends signals from a centrally located facility equipped with transmitters,
antennas, satellite dishes and scrambling and descrambling equipment to
subscribers with rooftop antennas and the necessary converters. Because wireless
cable signals use microwaves, they require line-of-sight transmission from the
central source to the subscribers. Obstructions such as large buildings, trees
and uneven terrain can interfere with reception, although signal repeaters that
receive and re-transmit signals to avoid obstructions alleviate these
shortcomings.
Other Satellite Technologies. Satellite television companies provide
satellite transmission of video and audio services directly to the customer's
home. Such satellite transmission requires hardware and software to receive and
decrypt satellite television programming. Satellite broadcasting does not
require ground construction to install, maintain or upgrade services. Rather,
the programming is transmitted from a ground station to the subscriber using a
communications satellite. A subscriber must purchase or lease a satellite dish
to receive signals and a receiver system to process and descramble signals for
television viewing. Echostar and DirecTV provide direct broadcast satellite
services using high-power communications satellites and small dish receivers.
These systems generally offer more channels than cable systems.
Congress recently passed the Intellectual Property and Communications
Omnibus Reform Act of 1999 which expands the statutory copyright license for
satellite carriers to include local signals. Under this new act, satellite
carriers may carry a local television broadcast station in the station's local
market subject to the availability of channel
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capacity and compliance with many of the same signal carriage rules that apply
to cable television systems. For example, satellite carriers that choose to
retransmit a local signal in a television market must carry all of the local
television stations in the market that demand carriage. Satellite carriers may
not carry a local television station without the station's consent. The act
required the FCC to develop other rules relating to signal carriage, such as
rules
- to permit a network affiliate to preserve its right to be the exclusive
network station in a market;
- to permit stations to be the exclusive distributors of syndicated
programming in their markets; and
- to protect the rights of sports teams to control distribution of their
games in the area where the games are played, known as "sports blackout"
rules.
Currently small satellite dishes are not two-way interactive, and therefore
are not suitable for telephone or Internet services. Residential systems use
telephone lines to transmit to the Internet and satellite transmission for
reception from the Internet. This approach still has dial-up delays, but it has
many of the same advantages as Internet access over a broadband network.
However, satellite transmission may cause an echo during voice transmissions due
to the long distance to and from the satellite.
Traditional Telephone. Traditional telephone service is provided by local
telephone systems consisting of a network of switches, transmission facilities
between switches, and connections between customer premises and a local switch.
Switches are devices that direct voice and data traffic. A switch looks at
incoming voice or data to determine its destination and routes the traffic
accordingly. A call can be routed by the local switch 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 of a
long distance carrier to a more distant local switch for ultimate delivery to
the called party. The transmission facilities connecting switches are comprised
primarily of high-capacity fiber optic cables. Customer premises usually consist
of copper wire lines that run through the air or underground to each of the
premises served. They generally carry analog transmissions and have relatively
low transmission capacity, sufficient to carry only one two-way voice
conversation.
Capacity can be expanded by advanced techniques such as integrated services
digital network or ISDN, which permits voice and data transmissions to occur
simultaneously and can support some level of video teleconferencing. However,
local connections, even with integrated services digital network, generally do
not have sufficient capacity for large-scale provision of video services.
Digital subscriber line or DSL uses transmission equipment placed at the
customer premises and at the location where most of the network switches and
equipment are located to increase transmission speeds on copper wire local
connections. Widespread deployment of digital subscriber line technology is
limited by the length and gauge of the copper wire connections plus the use of
extenders.
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Wireless Telephones. Wireless telephone technology, which includes
cellular and a technology commonly called PCS, is based upon the division of a
given market area into a number of smaller geographic areas, or cells. Each cell
has a base station or cell site, which is a physical location equipped with
transmitter-receivers and other equipment that communicate by radio signal with
wireless telephones located within range of the cell. Cells generally have an
operating range from two to 25 miles. Each cell site connects to a switch, which
in turn connects to the local telephone network. The switch directs the voice
and data traffic from and to the wireless telephone customer. When a subscriber
in a particular cell dials a number, the wireless telephone sends the call by
radio signal to the cell site, which then sends it to the switch. The switch
completes the call by connecting it with the landline telephone network or
another wireless telephone unit. Incoming calls are received by the mobile
switch, which instructs the appropriate cell to complete the communications link
by radio signal between the cell site and the wireless telephone. Like local
landline telephone networks, wireless telephony technologies generally do not
have sufficient capacity for large scale provision of video and data services,
although some new higher-capacity technologies may become available in the near
future that support a wider range of 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 cannot handle large volumes of
information, multimedia applications or high-speed data transmissions. This
often results in lengthy delays. Also, Internet service providers 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 may be
disconnected if activity is too limited. High-speed cable modems used over
traditional one-way noninteractive cable networks permit high-speed broadband
reception from the Internet, but require communications from the user to the
Internet to be over telephone lines.
OUR INTERACTIVE BROADBAND NETWORKS
Our interactive broadband networks are:
- high-speed,
- high-capacity,
- two-way interactive, which means that the customers have the ability to
send and receive signals at the same time; and
- hybrid fiber-coaxial networks, which means that the network is made up
of a combination of high-capacity fiber-optic cables and traditional
coaxial cables.
Our hybrid fiber-coaxial network is designed using redundant fiber-optic
cables. Redundant cables increase reliability by providing an alternate route
for signals to travel if network problems arise. By comparison, most traditional
cable television systems do not have significant redundant cables. In addition,
we provide power to our system from locations along the network called hub
sites, each of which is equipped with a generator and battery back-up power
source to allow service to continue in a power outage.
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Our interactive broadband networks can support numerous channels of basic
and premium cable television services, telephone services, Internet access and
other broadband communications services. Our networks have extra capacity, so we
can add new services as content and technology become available.
We offer local telephone service over these networks in much the same way
local phone companies provide service. We provide dial tone service and install
a network interface box outside a customer's home. We may add wiring inside the
premises as well. We can offer multiple lines of telephone service. Our networks
interconnect with those of other local phone companies through a nine-state
interconnection agreement with BellSouth Telecommunications, Inc. We provide
long distance service using leased facilities from other telecommunications
service providers. We have entered into an agreement with Business Telecom under
which:
- we lease a portion of Business Telecom's facilities; and
- Business Telecom provides us with call switching services and operator
and directory assistance.
This agreement with Business Telecom expires in September 2000. We have a
minimum purchase commitment of $50,000 under this agreement which we have always
met or surpassed. We have entered into an agreement with ITC*DeltaCom under
which:
- we lease a portion of ITC*DeltaCom's facilities; and
- ITC*DeltaCom provides us with call switching services and operator and
directory assistance.
This agreement with ITC*DeltaCom expires in May 2000. We do not have a minimum
purchase commitment under this agreement.
We provide high-speed Internet access services using high-speed cable
modems in much the same way customers currently receive Internet services over
modems linked to the local telephone network. The cable modems we presently use
are typically 50 times faster than regular phone dial-up modems. Our customer's
cable line with cable modem connects directly into the Internet. 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 Internet service
provider.
ITC*DeltaCom provides us with the technical Internet services that allow us
to offer Internet access to our customers. ITC*DeltaCom is an affiliate of our
company and of ITC Holding. We believe that the terms of our agreements with
ITC*DeltaCom are comparable to what we could obtain for similar services from an
unaffiliated company.
Since the cable equipment industry is a consolidated industry, there are
relatively few manufacturers of cable equipment. We purchase digital cable
equipment from one supplier. This supplier has informed us that it may decide
not to sell equipment to us in some new markets because of their existing
relationship with a large competitor. We are currently in discussions with this
supplier and are optimistic that this supplier will sell
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equipment for all of our new markets. If we are unable to resolve this issue
with this supplier favorably or are unable to identify an alternate source of
digital cable equipment, our ability to expand into some new markets may be
impaired.
OUR BROADBAND COMMUNICATIONS SERVICES
Cable Television. We offer our customers three types of cable television
services: expanded basic, premium, and digital. Customers generally pay fixed
monthly fees for cable programming and premium television services, which
constitute our principal sources of revenue.
Most customers choose to subscribe to expanded basic cable service. We call
this service expanded basic because it includes many more channels than
traditional basic cable service. Our expanded basic cable service consists of
approximately 65-75 channels of programming, including:
- television signals from local broadcast stations;
- television signals from so-called super stations such as WGN (Chicago);
- numerous satellite-delivered non-broadcast channels such as CNN, MTV,
ESPN, The Discovery Channel and Nickelodeon;
- displays of information featuring news, weather, stock and financial
market reports; and
- public, government and educational access channels.
We offer a variety of premium services for an extra monthly charge. Premium
services include channels with feature motion pictures such as HBO, Showtime and
Cinemax or other special channels. We also provide our customers:
- access to additional channels offering pay-per-view feature movies, live
and taped sports events, concerts and other special features which
involve a charge for each viewing;
- access to home shopping networks; and
- specialty services such as digital audio service.
Programming for our cable television systems comes from over 70 national
and local television networks. Since January 1, 1996, our arrangements with many
of these networks, constituting approximately 60% of our channels, have been
obtained through our association with the National Cable Television Cooperative,
Inc. The National Cable Television Cooperative obtains programming rates from
most major networks, which rates are made available to us as a member of the
cooperative. By obtaining programming rates through the cooperative, we benefit
from volume discounts not otherwise available to us which more than offset the
annual fees we pay to be a member of the cooperative. In addition, the
cooperative handles our contracting and billing arrangements with the networks.
Although we can terminate our membership in the cooperative at any time, we plan
to continue our membership for the foreseeable future.
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We began offering digital video service in November 1998. Digital cable
uses compression technology to significantly increase the number of television
channels. Digital technology converts signals into a digital format and
compresses many such signals into the space normally occupied by one signal. At
the home, a set-top video terminal converts the digital signal back into
channels that can be viewed on a normal television set. We added digital video
as an additional service without reducing the current number of basic channels.
Digital technology also permits us to offer near video-on-demand, which include
movies or other programs that commence in frequent intervals, to customers for a
fee per viewing basis.
Telephone. Our telephone service includes residential and small business
local and long distance telephone services. Our customers pay a fixed monthly
rate for all local calling. Customers may elect to receive call waiting, call
forwarding, voice mail and other value-added services, which generally involve
an additional fixed charge per month per telephone line. We generally price our
services at rates comparable to those of our competitors, although typically our
value-added services are less expensive than those of our competition. We offer
all of our cable television services customers a discount on telephone service.
Our long distance service offers features and prices comparable to those of our
competitors.
Internet Services. Our high-speed data service offers customers
high-speed connections to the Internet using cable modems. The Internet
connection using a cable modem is always active, so our customers do not have to
dial in and wait for access. Since a customer's service is offered over the
existing connection 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. We
charge a fixed monthly fee for connection to the Internet. We offer discounts on
our high-speed Internet service to customers who also purchase our cable
television service or telephone service.
Broadband Carrier Services. We use extra, unused capacity on our networks
to offer wholesale services to other local and long distance telephone
companies, Internet services providers and other integrated services providers.
We call these services our "broadband carrier services." We believe our newly
constructed interactive broadband networks offer other service providers a
reliable and cost competitive alternative to telephone services provided by the
incumbent local telephone company.
We sell access to our network to long distance telephone companies for
interstate and intrastate long distance phone calls to and from our customers.
We sell access to our network to connect local telephone companies to small
business customers. We offer traditional special access and local private line
services through our network by providing high capacity connections to medium
and large commercial users, local telephone companies and other carriers
throughout a metropolitan service area. Special access lines are dedicated lines
that connect customers directly to a long distance carrier. Private lines are
dedicated lines linking a customer location to one or more other customer
locations.
We provide services to Internet service providers which allows them to
expand into areas where our network is located. In August 1998, we entered into
an agreement with
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MindSpring Enterprises, Inc., a large Internet service provider in which ITC
Holding is a large stockholder, which allows MindSpring to offer high-speed
Internet access to its customers in Montgomery, Alabama using our network. We
entered into a similar agreement with A World of Difference, Inc., in August
1999 for the Charleston area.
Future Broadband Communications Services. We believe that our interactive
broadband networks may enable us to provide additional broadband services in the
future, including:
- Interactive energy management services in partnership with power
companies, which allow customers to monitor energy usage and cost online;
- Security services, including closed-circuit television security
monitoring and alarm systems;
- Voice transmission using the Internet, which integrates traditional
telephone functions with Internet-based technology; and
- High-speed, high-capacity transmission of data using advanced transfer
protocols, such as the asynchronous transfer mode method of transmission.
MARKETS AND SUBSCRIBERS
Current Markets
Our interactive broadband networks currently serve:
- Montgomery, Alabama;
- Columbus, Georgia;
- Augusta, Georgia;
- Charleston, South Carolina;
- Panama City, Florida; and
- a rural area on the Georgia/Alabama border known as the valley.
We provide video, telephone and Internet services over a broadband network in
Montgomery, Columbus, Augusta, Charleston and Panama City. In the valley area,
we provide telephone service over a traditional copper wire telephone network
and video and Internet services over a broadband network. We also provide cable
television services in the Huntsville, Alabama area, and we are in the process
of upgrading the Huntsville network to an interactive broadband network to
provide telephone and Internet services.
We believe that our ability to increase and maintain our subscribers has
been due largely to:
- our commitment to customer service;
- the number of channels we offer; and
- our reliability and quality of the picture and sound over our networks.
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New Markets
We plan to expand to additional mid-sized cities in the southeastern United
States. Although we have not definitively decided upon particular cities for
expansion, we plan to target cities:
- that have an average of 70 homes per mile;
- with populations generally of at least 100,000; and
- in which we believe we can attract a significant portion of the cable
television customers and can become the leading provider of bundled
communications services.
NETWORK CONSTRUCTION AND OPERATIONS
Network Construction
With the exception of the Georgia/Alabama border area where we maintain our
own construction crews, we use contractors for the construction of our networks,
including both the laying of underground cable and attaching aerial cable to
utility poles. We serve as the manager of the construction process, directing
and supervising the various construction crews. We have 59 employees dedicated
to monitoring and facilitating the construction of our networks, including a
Vice President of Construction. Our approach to construction reflects our
commitment to customer service. We notify potential customers before commencing
underground construction and restore any damaged property. Based on past
experience, we believe the construction of a new network in a new market will
take approximately three years.
Network Operations and Maintenance
Technicians in each of our service areas schedule and perform installations
and repairs and monitor the performance of our interactive broadband networks.
We operate a network operations center in West Point, Georgia, and we monitor
our networks 24 hours a day, seven days a week. Our technicians perform
maintenance and repair of the network on an ongoing basis. We maintain the
quality of our networks to minimize service interruptions and extend the
networks' operational life.
Franchises
Cable television systems and local telephone systems generally are
constructed and operated under the authority of nonexclusive 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.
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We believe that the conditions in our franchises are fairly typical. Our
franchises generally provide for the payment of fees to the municipality ranging
from 3% to 5% of revenues from telephone and cable television service,
respectively. Our franchises generally have ten to fifteen year terms, and we
expect our franchises to be renewed before or upon expiration by the relevant
franchising authority.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the government agencies. The Cable Communications Policy Act of
1984 provides for an orderly franchise renewal process in which the franchising
authorities may not unreasonably deny renewals. If a renewal is withheld and the
franchising authority takes over operation of the affected cable system or
awards the franchise to another party, the franchising authority must pay the
cable operator the "fair market value" of the system. The Cable Communications
Policy Act of 1984 also established comprehensive renewal procedures requiring
that the renewal application be evaluated on its own merit and not as part of a
comparative process with other proposals. The following table lists our
franchises by location, term and expiration date.
<TABLE>
<CAPTION>
LOCATION TERM EXPIRATION DATE
-------- ---- ---------------
<S> <C> <C>
SOUTH CAROLINA
Charleston............................................... 15 4/28/2013
North Charleston......................................... 15 6/12/2013
Charleston County........................................ 15 12/15/2013
Mount Pleasant........................................... 15 12/15/2013
Hanahan.................................................. 15 12/8/2013
Summerville.............................................. 15 2/10/2014
Lincolnville............................................. 15 12/2/2013
Goose Creek.............................................. 15 11/11/2013
Berkeley County.......................................... 15 7/20/2013
GEORGIA
Augusta/Richmond County.................................. 15 1/20/2013
Columbia County.......................................... 11 11/1/2009
Columbus Renewal......................................... 10 3/16/2009
West Point............................................... 15 1/19/2013
FLORIDA
Panama City.............................................. 18 3/10/2016
Bay County............................................... 8 1/5/2006
Lynn Haven............................................... 18 5/12/2016
City of Callaway......................................... 10 9/28/2009
Cedar Grove.............................................. 15 6/9/2013
</TABLE>
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<TABLE>
<CAPTION>
LOCATION TERM EXPIRATION DATE
-------- ---- ---------------
<S> <C> <C>
ALABAMA
Prattville............................................... 15 7/7/2013
Maxwell AFB.............................................. 4 9/30/2003
Autauga County........................................... 15 10/15/2013
Montgomery............................................... 10 3/6/2005
Huntsville............................................... 2(1) 3/7/2001
Madison.................................................. 8(1) 10/22/2006
Madison County........................................... 11(1) 11/20/2009
Redstone Arsenal......................................... * *
Limestone County......................................... 6 5/7/2005
Chambers County.......................................... 15 12/15/2012
Lanett................................................... 15 1/20/2013
Valley................................................... 15 1/12/2013
</TABLE>
- ---------------
(1) This number represents the number of years left under the franchise when we
acquired the franchise in the 1998 Cable Alabama acquisition.
* We are operating in this market under a letter agreement while our franchise
application is pending.
The Cable Communications Policy Act of 1984 also prohibits franchising
authorities from granting exclusive franchises or unreasonably refusing to award
additional franchises covering an existing cable system's service area. This
simplifies the application process for our obtaining a new franchise. This
process usually takes about 6-9 months. While this makes it easier for us to
enter new markets, it also makes it easier for competitors to enter the markets
in which we currently have franchises.
SWITCHING
Switches are devices located along the network that direct voice and data
traffic. Our switching equipment allows us to provide enhanced custom calling
services including call waiting, call forwarding and three-way-calling.
Residences and businesses are connected to the switches primarily with copper
lines. We believe our network equipment and infrastructure is in good condition.
Much of our network equipment and infrastructure has been replaced within the
past three years.
Interconnection
We rely on local telephone companies and other companies to connect calls
to users who are not our customers. We have access to BellSouth's telephone
network under a nine-state interconnection agreement. The Telecommunications Act
of 1996 established certain requirements and standards for interconnection
arrangements, and our interconnection agreement with BellSouth is based on these
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, as discussed below under the caption
"Our Business -- Legislation and Regulation -- Federal Regulation of
Telecommunications Services."
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The key terms of our interconnection agreement with BellSouth are:
- the right to connect to each others facilities;
- the rates we pay each other for handling and delivery of one another's
telephone traffic; and
- the right to attach network facilities to each other's telephone poles
and rights of way.
This agreement with BellSouth expires in April 2000. Under the
Telecommunications Act of 1996, BellSouth is required to allow us to
interconnect to their network. Pursuant to the Telecommunications Act and the
terms of our existing agreement, we can either:
- automatically renew our existing interconnection agreement by notifying
BellSouth of our intention to renew within the applicable timeframe:
- negotiate the terms of a new agreement with BellSouth;
- choose another interconnection agreement that BellSouth has with another
telephone company and enter into an interconnection agreement on those
same terms and conditions; or
- accept the default pricing and terms and conditions offered by BellSouth.
We do not plan to renew our current interconnection agreement. Because of recent
FCC regulations we expect to be able to enter into an new interconnection
agreement with better rates. We plan to negotiate our own terms with BellSouth.
BellSouth may not agree to favorable terms since BellSouth is our competitor.
However, if we are not able to negotiate favorable terms, we will select another
interconnection agreement that BellSouth has entered into with another telephone
company and enter into an interconnection agreement with BellSouth using those
terms and conditions.
The terms of our interconnection agreement have also been approved by the
Georgia, Alabama, Florida and South Carolina state public utility commissions.
Our new agreement will be subject to approval by the Georgia, Alabama, Florida
and South Carolina state public utility commissions. Approvals of other state
public utility commissions will be required in connection with the provision of
telephone service in other states.
It is generally expected that the Telecommunications Act of 1996 will
continue to undergo considerable interpretation and implementation over the next
several years, which could have a negative impact on our interconnection
agreement with BellSouth. Our ability to compete successfully in the provision
of services will depend on the timing of such implementing regulations and
whether they are favorable to us.
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SALES AND MARKETING
Marketing Strategy
We believe that we are the first provider of a bundled video, voice and
data broadband communications services package in our current markets, and we
intend to be first to market a similar services package in new cities. We
believe that cost savings on a bundle of services and the advantages of one-stop
shopping will be attractive to new customers, particularly since most of our
prospective customers now buy services from multiple sources. We intend to
emphasize our position as a new communications company that brings competition
and choice to cities where we provide service. We also work to attract new cable
television subscribers in areas in which our network has expanded. Our focus
includes 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.
Cable Television. To attract cable television subscribers in new areas,
we mount extensive marketing campaigns prior to initiation of service with
door-to-door solicitations and flyers followed by direct mail and telemarketing.
We also use these solicitation efforts in our existing markets to encourage
people who previously have not chosen any cable service to use our cable service
or to encourage people who use another cable service to switch to our service.
We have a sales staff in each of our markets, including residential and business
sales managers, sales representatives and customer service representatives. We
use our own installation and repair crews and those of outside contractors to
install new service quickly.
Telephone and Internet. For our telephone and Internet marketing, we have
focused on subscribers of our cable television services through direct mail,
door-to-door solicitations, flyers and telemarketing. We offer our cable
television customers discounted rates for telephone service and high-speed
Internet service. We emphasize the cost savings of a bundle of services. We also
provide high-speed Internet access to certain Internet service providers who in
turn resell the service to their customers. We have sales managers for our
telephone and Internet services, and sales representatives focusing on bundled
services.
Customer Service. Customer service is an essential element of our
operations and marketing, and we believe our quality and responsiveness
differentiates us from our competitors. A significant number of our employees
are dedicated to customer service activities, including
- order taking;
- customer activations;
- billing inquiries and collections;
- service upgrades;
- provision of customer premises equipment; and
- administration of our customer satisfaction program.
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In addition, we provide 24-hour customer service, operate customer phone centers
in each of our service areas, and operate a back-up customer phone center in
West Point, Georgia. We monitor our networks 24 hours a day, seven days a week
and strive to resolve problems prior to a customer being aware of any service
interruptions.
COMPETITION
Other Cable Systems
Other cable television operations exist in each of our current markets. Our
competitors include AT&T Cable Services, Comcast Cable Communications, Time
Warner Cable, Mediacom and Charter Communications. We compete with these
competitors on terms of pricing and programming content, including the number of
channels and the availability of local programming. We obtain our programming by
entering into contracts or arrangements with cable programming vendors. A cable
programming vendor may enter into an exclusive arrangement with one of our cable
television competitors. This would create a competitive advantage for the cable
television competitor by restricting our access to programming. Each of AT&T
Cable Services, Comcast Cable Communications and Time Warner Cable have entered
into exclusivity arrangements with the WeB channel, which is the distribution
channel for WB programming, in different markets. We provide programming in each
of these markets as well, and these exclusivity arrangements restrict our access
to programming.
We expect that we will have competition with other cable television
providers in each of our future markets. In addition, Federal law prohibits
cities from granting exclusive cable franchises and from unreasonably refusing
to grant additional, competitive franchises. This makes it easier for
competitors to enter our markets. In addition, an increasing number of cities
are considering the feasibility of owning their own cable systems in a manner
similar to city-provided utility services.
A continuing trend toward business combinations and alliances in the cable
television area and the telecommunications industry as a whole may create
significant new competitors for us. This trend toward business combinations may
be shrinking the number of attractive acquisition targets.
Other Television Providers
Cable television distributors may, in certain markets, compete for
customers with other video programming distributors and other providers of
entertainment, news and information. The competitors in these markets include:
- broadcast television; and
- satellite and wireless cable systems; and
We compete with these competitors on terms of pricing and programming content,
including the number of channels and the availability of local programming. We
often are not the first provider of video programming in our market, and we have
to compete with other companies that have long-standing customer relationships
with the residents in these areas. The Telecommunications Act of 1996 may create
more competition for
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current cable television distributors, as it allows local telephone companies to
provide video services in their local service areas.
Alternative methods of distributing the same or similar video programming
offered by cable television systems exist. Congress and the FCC have encouraged
these alternative methods and technologies in order to offer services in direct
competition with existing cable systems. In addition to broadcast television
stations, we compete with other multichannel program service providers.
We encounter competition from direct broadcast satellites systems that
transmit signals to small dish antennas owned by the end-user. DirecTV and
Echostar offer multichannel programming through high power communications
satellites to a dish antenna with a diameter of only approximately 18 inches.
Although satellite television providers presently serve a relatively small
percentage of pay television subscribers, their share has been growing steadily.
Competition from direct broadcast satellites could become substantial as
developments in technology increase satellite transmitter power and decrease the
cost and size of equipment. The Intellectual Property and Communications Omnibus
Reform Act of 1999 permits satellite carriers to carry local television
broadcast stations, is expected to enhance satellite carriers' ability to
compete with us for subscribers. As a result, competition from these companies
may increase.
Wireless cable represents another type of video distribution service. These
systems deliver programming services over microwave channels to subscribers who
have a special antenna. Wireless cable 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 systems in the United States right now, many markets have
been licensed or tentatively licensed. The FCC has granted the use of certain
frequencies to these services and expanded the channels reserved for educational
purposes. The FCC's actions enable a single entity to develop a wireless cable
system with up to 35 channels and thus could compete more effectively with cable
television.
We also compete with systems that provide multichannel program services
directly to hotel, motel, apartment, condominium and other multiunit complexes
through a satellite master antenna, which is a single satellite dish for an
entire building or complex. These systems are generally free of any regulation
by state and local governmental authorities. Pursuant to the Telecommunications
Act of 1996, these systems called satellite master antenna television systems,
are not commonly owned or managed and do not cross public rights-of-way do not
need a franchise to operate.
The Telecommunications Act of 1996 eliminated many restrictions on local
telephone companies offering video programming, and we may face increased
competition from them. Several major local telephone companies, including
BellSouth, have announced plans to provide video services to homes.
Telephone
In providing local and long distance telephone services, we compete with
the incumbent local phone company in each of our markets. We are not the first
provider of
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telephone services in most of our markets, and we have to convince people in our
markets to switch from other telephone companies to us. BellSouth is the
incumbent local phone company and is a particularly strong competitor in our
current markets and throughout the southeastern United States where we hope to
expand. We also compete with long distance phone companies such as AT&T, MCI
WorldCom and Sprint.
We continue to expect to face intense competition in providing our
telephone and related telecommunications services. The Telecommunications Act of
1996 allows service providers to enter markets that were previously closed to
them. Incumbent local telephone carriers are no longer protected from
significant competition in local service markets. In addition, under certain
circumstances regional Bell operating companies may enter the long distance
market. These provisions blur the distinctions that previously existed between
local and long distance services.
One major impact of the Telecommunications Act of 1996 may be a trend
toward the use and acceptance of bundled service packages. As a result, we will
be competing with:
- incumbent local telephone companies such as BellSouth as well as other
competitive local telephone companies;
- traditional providers of long distance services such as AT&T, MCI
WorldCom and Sprint; and
- other providers of cable television service such as AT&T Cable Services,
Comcast Cable Communications, Time Warner Cable, Mediacom and Charter
Communications, Inc.
Our ability to compete successfully will depend on the attributes of the overall
bundle of services we are able to offer, including our price, features, and
customer service.
We compete with Business Telecom and ITC*DeltaCom in the providing
telephone services to business customers. We purchase services from Business
Telecom and ITC*DeltaCom. Our agreements with Business Telecom and ITC*DeltaCom
are described above under the heading "-- Our Broadband Network."
Wireless telephone service such as cellular and PCS currently is viewed by
consumers as a supplement to, not a replacement for, traditional telephone
service. Wireless service generally is more expensive than traditional local
telephone service and is priced on a usage-sensitive basis. In addition, the
transmission quality of wireless service is not comparable to wireline service.
However, in the future the rate and quality differential between wireless and
traditional telephone service may decrease and lead to more competition between
providers of these two types of services.
Internet Services
Providing Internet access services is a rapidly growing business and
competition is increasing in each of our markets. Some of our competitors have
competitive advantages over us, such as greater experience, resources, marketing
capabilities and stronger name recognition.
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In providing Internet access services, we compete with:
- Internet service providers;
- providers of satellite-based Internet services;
- other long distance telephone companies; and
- cable television companies.
Other technologies also offer high-speed, high capacity connections to the
Internet. We compete with companies offering broadband connections such as
DirecPC, one of the principal providers of satellite-based Internet services in
the United States; long distance telephone companies such as AT&T and MCI
WorldCom; traditional dial-up Internet service providers; and cable modem
services such as Excite@Home, a joint venture among a number of major cable
companies.
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. These companies generally offer Internet services over
telephone lines using computer modems. A few Internet service providers also
offer high-speed integrated services digital network connections to the
Internet.
MindSpring Enterprises, a large Internet service provider that purchases
Internet related services from us, is also a competitor. Our agreement with
MindSpring is described in more detail above under the heading "--Our Broadband
Network."
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 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 and
have an established billing system that permits them easily to add new services.
We expect competition from such companies to be vigorous due to their greater
resources, operating history and name recognition.
Other cable television companies may enter the Internet services market. We
believe that some of the existing cable television providers are beginning to
provide such services in some of their major markets or clusters, including
major metropolitan areas in the southeast. The joint venture, Excite@Home, is
offering high-speed Internet service using cable modems in areas where its
affiliates have high-capacity networks. We believe that high-speed Internet
services ultimately will be offered by other cable providers and companies in
most of our present and future service areas.
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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. Internet services
generally are not subject to regulation. 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 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 has responsibility for adopting rules to implement this.
Among other things, the Cable Communications Policy Act of 1984 affirmed the
right of franchising authorities 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 Cable
Communications Policy Act of 1984 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
The Cable Television Consumer Protection and Competition Act of 1992
permitted a greater degree of regulation of the cable industry with respect to,
among other things:
- rates for cable programming services;
- program access and exclusivity arrangements;
- access to cable channels by unaffiliated programming services;
- terms and conditions for the lease of channel space for commercial use by
parties unaffiliated with the cable operator;
- ownership of cable systems;
- customer service requirements;
- requiring cable companies to carry certain television broadcast stations
or to permit television stations to withhold consent for cable systems to
carry their stations;
- technical standards; and
- cable equipment compatibility.
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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 other types of
multichannel video distribution systems.
The Cable Television Consumer Protection and Competition Act of 1992 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 FCC has
responsibility for adopting rules to implement this Act.
Telecommunications Act Of 1996
On February 8, 1996, the Telecommunications Act of 1996 was enacted. The
Telecommunications Act of 1996 and the FCC rules implementing this Act radically
altered the regulatory structure of telecommunications markets by mandating that
states permit competition for local telephone services. The Telecommunications
Act of 1996 permitted regional Bell operating companies to apply to the FCC for
authority to provide long distance services. The Telecommunications Act of 1996
also included significant changes in the regulation of cable operators. For
example, the FCC's authority to regulate the cable programming service tier
rates of all cable operators expired on March 31, 1999. The legislation also:
- repeals the anti-trafficking provisions of the Cable Television Consumer
Protection and Competition Act of 1992, which required cable systems to
be owned by the same person or company for at least three years before
they could be sold to a third party;
- limits the rights of franchising authorities to require certain
technology or to prohibit or condition the provision of
telecommunications services by the cable operator;
- 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;
- adjusts the favorable pole attachment rates afforded cable operators
under federal law such that they may be increased, beginning in 2001, if
the cable operator also provides telecommunications services over its
network;
- allows cable operators to enter telecommunications markets which
historically have been closed to them; and
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- allows 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. 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. A brief summary of certain federal regulations follows.
Rate Regulation. The Cable Television Consumer Protection and Competition
Act of 1992 authorized rate regulation for certain cable communications services
and equipment in communities where the cable operator is not subject to
effective competition. The Cable Television Consumer Protection and Competition
Act of 1992 requires the FCC to resolve complaints about rates for cable
programming service tier 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 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 Telecommunications Act of 1996
deregulated cable programming service rates as of March 31, 1999. After March
31, 1999, only the basic tier of service, which does not include the expanded
basic tier of service, and equipment used to receive the basic tier of service
remains subject to rate regulation.
The Cable Television Consumer Protection and Competition Act of 1992
requires communities to certify with the FCC before regulating basic cable
rates. The FCC's rate regulations do not apply where a cable operator
demonstrates that it is subject to effective competition. We meet the FCC
definition of effective competition in the areas that we currently serve. To the
extent that any municipality attempts to regulate our basic rates or equipment,
we believe we could demonstrate to the FCC that our systems all face effective
competition and, therefore, are not subject to rate regulation.
Carriage Of Broadcast Television Signals. The Cable Television Consumer
Protection and Competition Act of 1992 established signal carriage requirements.
These requirements allow commercial television broadcast stations that are local
to a cable system to elect every three years whether to require the cable system
to carry the station or whether to require the cable system to negotiate for
consent to carry the station. The third must-carry elections were made in
October 1999. Stations are generally considered local to a cable system where
the system is located in the station's Nielsen designated market area. Cable
systems must obtain retransmission consent for the carriage of all distant
commercial broadcast stations, except for certain superstations, which are
commercial satellite-delivered independent stations such as WGN. We carry some
stations pursuant to retransmission consents and pay fees for such consents or
have agreed to carry additional services pursuant to retransmission consent
agreements.
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Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within a certain limited radius.
Non-commercial stations are not given the option to negotiate for retransmission
consent.
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 our 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 video programming. The FCC also
has adopted standards applicable to cable television systems using frequencies
in certain 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 Cable Television Consumer Protection and Competition
Act of 1992 requires the FCC to update periodically its technical standards.
Pursuant to the Telecommunications Act of 1996, the FCC adopted 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 Telecommunications Act of
1996 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 Cable Communications Policy Act of 1984 affirmed
the right of franchising authorities, which are 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. We hold
cable franchises in all of the franchise areas in
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which we provide service. The Cable Television Consumer Protection and
Competition Act of 1992 encouraged competition with existing cable systems by:
- allowing municipalities to operate their own cable systems without
franchises;
- preventing franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises covering an
existing cable system's service area; and
- prohibiting, with limited exceptions, the common ownership of cable
systems and co-located multichannel multipoint distribution or satellite
master antenna television systems, which prohibition is limited by the
Telecommunications Act of 1996 to cases in which the cable operator is
not subject to effective competition.
The Telecommunications Act of 1996 exempts those telecommunications
services provided by a cable operator or its affiliate from cable franchise
requirements although municipalities retain authority to regulate the manner in
which a cable operator uses the public rights-of-way to provide
telecommunications services. Franchise authorities may not require a cable
operator to provide telecommunications service or facilities, other than
institutional networks, as a condition of franchise grant, renewal, or transfer.
Similarly, franchise authorities may not impose any conditions on the provision
of such service.
Franchise Fees. Although franchising authorities may impose franchise
fees under the Cable Communications Policy Act of 1984, as modified by the
Telecommunications Act of 1996, 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. In some areas, cable services are defined to include
Internet 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 Cable Communications Policy Act of 1984
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 Cable Television Consumer Protection and Competition Act of 1992 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
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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 Cable Communications Policy Act of 1984 permits
local franchising authorities to require cable operators to set aside certain
channels for public, educational and governmental access programming. The Cable
Communications Policy Act of 1984 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 Cable Television
Consumer Protection and Competition Act of 1992 requires leased access rates to
be set according to a FCC-prescribed formula.
Ownership. The Telecommunications Act of 1996 eliminates the Cable
Communications Policy Act of 1984 provisions prohibiting local exchange carriers
from providing video programming directly to customers within their local
exchange telephone service areas, except in rural areas or by specific waiver.
Under the Telecommunications Act of 1996, local exchange carriers may provide
video programming by radio-based systems, common carrier systems, open video
systems, or cable systems. Local telephone companies that elect to provide open
video systems must allow others to use up to two-thirds of their activated
channel capacity. These local telephone companies 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. Local telephone
companies operating as cable systems are subject to all rules governing cable
systems, including franchising requirements.
The Telecommunications Act of 1996 prohibits local telephone companies 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 local telephone companies providing
telephone service in its franchise area. A local telephone companies 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 local telephone companies in
non-urban areas, and such restrictions do not apply to local exchange carriers
that were not providing local telephone service prior to January 1, 1993.
Pole Attachments. The Telecommunications Act of 1996 requires utilities,
defined as all local telephone companies and electric utilities except those
owned by
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municipalities and co-ops, to provide cable operators and telecommunications
carriers with nondiscriminatory access to poles, ducts, conduit and
right-of-way. The right to mandatory access is beneficial to facilities-based
providers such as our company. The Telecommunications Act of 1996 also
establishes principles to govern the pricing of such access. Presently, the
rates charged to cable and telecommunications providers are the same. Starting
in 2001, telecommunications providers will be charged a higher rate than cable
operators for pole attachments. Companies that provide both cable and
telecommunications services over the same facilities, such as us, may be
required to pay the higher telecommunications rate.
Inside Wiring Of Multifamily Dwelling Units. The FCC has adopted rules to
promote competition among multichannel video program distributors in multifamily
dwelling units. The rules provide generally that, in cases where the program
distributor owns the wiring inside a multifamily dwelling unit but has no right
of access to the premises, the multifamily dwelling unit owner may give the
cable operator notice that it intends to permit another program distributor to
provide service there. A program distributor then must elect whether to remove
the inside wiring, sell the inside wiring to the multifamily dwelling unit 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 Cable Communications Policy Act of 1984 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 Cable Communications Policy Act of 1984, it could be
required to pay damages, attorneys' fees and other costs. Under the Cable
Television Consumer Protection and Competition Act of 1992, 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 Telecommunications Act of 1996 repeals most of
the anti-trafficking restrictions imposed by the Cable Television Consumer
Protection and Competition Act of 1992, 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 Cable Television Consumer Protection and Competition Act
of 1992 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
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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.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks, such as HBO, and cable programming networks, such
as USA Network, has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers and BMI, Inc.,
the two major performing rights organizations in the United States. The American
Society of Composers and Publishers and BMI, Inc. 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.
Internet Service Providers. A number of Internet service providers have
requested that the FCC and state and local officials adopt rules requiring cable
operators to provide unaffiliated Internet service providers with direct access
to the operators' broadband facilities on the same terms as the operator makes
those facilities available to affiliated Internet service providers. To date the
FCC has rejected these unbundling proposals, but a number of local franchising
authorities have imposed this type of requirement on cable operators. Litigation
regarding these unbundling requirements is pending. AT&T recently announced that
it would open its systems to competing Internet service providers, including
MindSpring, with which it already has entered into an agreement. At this time it
is uncertain whether these requirements lawfully may be imposed on cable
operators, or how pervasive they ultimately may be if upheld in court.
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 1997, cable television systems were required to pay
regulatory fees of $0.54 per subscriber. In 1998, the fee was $0.44 per
subscriber. In 1999, the fee was $0.48 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 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 were required to 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;
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- 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.
Regulation Of Telecommunications Services
Our telecommunications services are subject to varying degrees of federal,
state and local regulation. Pursuant to the Communications Act of 1934, as
amended by the Telecommunications Act of 1996, the FCC generally exercises
jurisdiction over the facilities of, and the services offered by,
telecommunications carriers that provide interstate or international
communications services. State regulatory authorities retain jurisdiction over
the same facilities to the extent that they are used to provide intrastate
communications services. Various international authorities may also seek to
regulate the provision of certain services.
Federal Regulation of Telecommunications Services
Tariffs And Detariffing. We are classified by the Federal Communications
Commission as a non-dominant carrier with respect to both our domestic
interstate and international long distance carrier services and our competitive
local exchange carrier services. As a non-dominant carrier, our rates presently
are not regulated by the FCC. All telecommunications carriers that provide
domestic interstate and international long distance services must file tariffs
with the FCC prescribing rates, terms and conditions of service. Carriers must
also file so-called informational tariffs with the FCC describing their operator
services. We have filed tariffs with the FCC for our domestic interstate and
international long distance services, interstate access services and interstate
operator services.
Valley Telephone and Interstate Telephone are regulated by the FCC as
dominant, rather than non-dominant carriers. As dominant carriers, Valley
Telephone and Interstate Telephone must file tariffs with the FCC and must
provide the FCC with notice prior to changing their rates, terms or conditions
of interstate services. Valley Telephone concurs in tariffs filed by the
National Exchange Carrier Association, while Interstate Telephone has its own
tariffs on file with the FCC.
Interconnection. The Telecommunications Act of 1996 establishes local
telephone competition as a national policy. This Act preempts laws that prohibit
competition for local telephone services and establishes uniform requirements
and standards for local network interconnection, local network unbundling and
local service resale. The Telecommunications Act of 1996 also requires incumbent
local telephone carriers to enter into mutual compensation arrangements with new
local telephone companies for transport and termination of local calls on each
others' networks. Most state public utility commissions have ruled that traffic
to Internet service providers is covered by this requirement. The FCC recently
decided that calls to Internet service providers could be jurisdictionally
interstate, although the FCC did not preempt these state decisions. The
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Telecommunications Act of 1996's interconnection, unbundling and resale
standards have been developed initially by the FCC and have been, and will
continue to 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 local telephone carriers. Among
other things, the order established pricing principles, for use by the states to
determine rates for unbundled local network elements and to calculate discounts.
In July 1997, the United States Court of Appeals for the Eighth Circuit struck
down the pricing rules established by the FCC. The court ruled that the FCC did
not have jurisdiction under the Telecommunications Act of 1996 to establish
pricing rules to be applied by the states. In January 1999, the Supreme Court
reversed the Eighth Circuit decision, finding that the FCC had jurisdiction to
implement the pricing provisions of the Act. The Eighth Circuit is expected, on
remand, to rule on the merits of the FCC's pricing rules.
The Supreme Court also upheld the FCC's rule requiring local telephone
carriers to provide a platform that includes all of the network elements
required by a competitor to provide a retail telecommunications service.
Competitors using such platforms may be able to provide retail local services
entirely through the use of the local telephone carriers' facilities at lower
discounts than those available for local resale. The availability of such
platforms could benefit our local competitors who, unlike us, do not operate
their own facilities. The pricing of these platforms is still subject to a
pending FCC proceeding.
The Telecommunications Act of 1996 includes an exemption from
interconnection requirements for rural telephone companies. Under this
exemption, a competitor is not entitled to interconnect with a rural telephone
company absent a finding by the appropriate state commission that the request is
not unduly economically burdensome. Both Valley Telephone and Interstate
Telephone are considered rural telephone companies under the Telecommunications
Act of 1996, and the Alabama Public Service Commission has determined that these
companies should be exempt from the interconnection requirements of the
Telecommunications Act of 1996 at least through June 2001.
Number Portability. Another new federal statute requires that all local
telephone service carriers provide customers with the ability to retain, at the
same location, existing telephone numbers without impairment of quality,
reliability or convenience. This number portability will remove one barrier to
entry faced by new competitors, which would otherwise have to persuade customers
to switch local service providers despite having to change telephone numbers.
The FCC ordered permanent number portability to be made available in the 100
largest metropolitan areas by December 31, 1998. Number portability is available
in all of our required markets. While number portability benefits our
competitive local exchange carrier operations, it represents a burden to Valley
Telephone and Interstate Telephone. At this time, we are unable to predict the
impact, if any, of possible number portability delays or complications in our
service territories.
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Universal Service and Access Charge Reform. The FCC has adopted rules
implementing the universal service requirements of the Telecommunications Act of
1996. Pursuant to those rules, all telecommunications providers must contribute
a small percentage of their telecommunications revenues to a newly established
Universal Service Fund. There is an exemption for providers whose contribution
would be less than $10,000 in a particular year. Interstate Telephone and Valley
Telephone presently contribute to the fund, and we expect that KNOLOGY Holdings
will be required to start contributing in 2000. We can not be certain whether we
will be able to either recover the costs of fund contributions from our
customers or to receive offsetting fund disbursements.
The FCC presently is in the process of reducing access charges imposed by
telephone companies for origination and termination of long distance traffic. In
those areas where we use our own or our affiliated cable facilities for our
comprehensive local telephone operations, we are largely unaffected by local
telephone carriers' access charge fluctuations. However, overall decreases in
local telephone carriers' access charges as contemplated by the FCC's access
reform policies would likely put downward pricing pressure on our charges to
domestic interstate and international long distance carriers for comparable
access. Over time, statutory universal service funding obligations, coupled with
the FCC's new access charge regime, could adversely affect us by limiting our
ability to offset our fund contributions through higher charges to domestic
interstate and international long distance carriers for originating and
terminating interstate traffic over our cable facilities.
Regional Bell Operating Company Entry into Long Distance. The
Telecommunications Act of 1996 also establishes standards for regional Bell
operating companies and their affiliates to provide long distance
telecommunications services between a local access and transport area, or LATA,
and points outside that area. Local access and transport areas are geographical
regions in the United States within which a local telephone company may offer
local telephone service. In 1997, BellSouth filed applications with the FCC for
authority to offer in-region, or interLATA services in South Carolina and
Louisiana; in 1998, BellSouth filed a second application with the FCC for
authority to offer such services in Louisiana. In December 1997, the FCC
rejected the South Carolina application. The Louisiana applications were
rejected in February 1998 and October 1998, respectively. Notwithstanding these
decisions, BellSouth likely will file additional applications to offer interLATA
services for other states in its territory, including states in which we provide
these services. Because of its existing base of local telephone service
customers and its extensive telecommunications network, we anticipate that
BellSouth will be a significant competitor in each of the states in which it
obtains in-region, interLATA authority from the FCC.
Additional Requirements. The FCC imposes additional obligations on all
telecommunications carriers, including obligations to:
- interconnect with other carriers and not to install equipment that cannot
be connected with the facilities of other carriers;
- ensure that their services are accessible and usable by persons with
disabilities;
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- provide telecommunications relay service either directly or through
arrangements with other carriers or service providers, which service
enables hearing impaired individuals to communicate by telephone with
hearing individuals through an operator at a relay center;
- comply with verification procedures in connection with changing a
customer's carrier;
- protect the confidentiality of proprietary information obtained from
other carriers, manufacturers and customers;
- pay annual regulatory fees to the FCC; and
- contribute to the Telecommunications Relay Services Fund.
Forbearance. The Telecommunications Act of 1996 permits the FCC to
forbear from requiring telecommunications carriers to comply with certain
regulations. Specifically, the Act permits the FCC to forbear from applying
statutory provisions or regulations if the FCC determines that:
- enforcement is not necessary to protect consumers;
- a carrier's terms are reasonable and nondiscriminatory;
- forbearance is in the public interest; and
- forbearance will promote competition.
The FCC has exempted certain carriers from tariffing and reporting requirements
pursuant to this provision of the Telecommunications Act of 1996. The FCC may
take similar action in the future to reduce or eliminate other requirements.
Such actions could free us from regulatory burdens, but also might increase the
pricing flexibility of our competitors.
Advanced Services and Collocation. Section 706 of the Telecommunications
Act of 1996 requires the FCC to encourage the deployment of advanced
telecommunications capabilities to all Americans through the promotion of local
telecommunications competition. Recently, the FCC adopted rules designed to
improve competitor access to incumbent local telephone carriers collocation
space and to reduce the delays and costs associated with collocation.
Collocation is the placement of equipment by another telephone company alongside
another telephone company's equipment along a network. The FCC has taken future
steps to facilitate competitors' access to lines connecting customer premises to
the operator for purposes of digital subscriber line deployment. Specifically,
the FCC required incumbent local exchange carriers like Bell South, to permit
unaffiliated providers of digital subscriber line services to use a portion of
the lines connecting customer premises to the operator used for basic telephone
service rather that purchasing new lines. Having better collocation arrangements
at incumbent local exchange carriers' main facilities housing telephone network
equipment benefits our competitive local exchange operations. However, the FCC's
advanced services proceeding, inasmuch as it primarily benefits digital
subscriber line providers who compete
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directly with our broadband communications service offerings, may prove on
balance to have an adverse competitive effect on us.
State Regulation of Telecommunications Services
The Telecommunications Act of 1996 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 Telecommunications Act of 1996'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 each have adopted statutory
and regulatory schemes that require us to comply with telecommunications
certification and other regulatory requirements. To date, we are authorized to
provide intrastate local telephone, long distance telephone and operator
services in Alabama, Georgia, Florida and South Carolina. In addition, we have
executed local network interconnection agreements with BellSouth for the
transport and termination of local telephone traffic. These agreements have been
filed with, and approved by, the applicable regulatory authority in each state
in which we conduct our operations. As a condition of providing intrastate
telecommunications services, we are required, among other things:
- to file and maintain intrastate tariffs or price lists describing the
rates, terms and conditions of our services;
- to comply with state regulatory reporting, tax and fee obligations; and
- to comply with, and to submit to, state regulatory jurisdiction over
consumer protection policies, complaints, transfers of control and
certain financing transactions.
Generally, state regulatory authorities can condition, modify, cancel, terminate
or revoke certificates of authority to operate in a state for failure to comply
with state laws or the rules, regulations and policies of the state regulatory
authority. Fines and other penalties may also be imposed for such violations.
Valley Telephone and Interstate Telephone are subject to additional
requirements under state law, including rate regulation and quality of service
requirements. In Alabama, both Valley Telephone and Interstate Telephone are
subject to a price cap form of rate regulation. Under price caps, the companies
have limited ability to raise rates for intrastate telephone services, but the
Alabama Public Service Commission does not regulate the rate of return earned by
the companies.
By order dated April 8, 1998, all local exchange carriers were required to
file intraLATA toll dialing parity plans, which outline how the local telephone
company will provide long distance telephone companies the ability to compete
with the local telephone company for local long distance services. Initially the
plans were to become
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effective on or before February 1999. By order dated June 25, 1998, the Alabama
Public Service Commission suspended certain requirements of Section 251(b) and
(c) of the Telecommunications Act of 1996, including dialing parity, for rural
incumbent local telephone carriers operating in Alabama, including Interstate
Telephone and Valley Telephone. The suspension extends through June 2001. Rural
local telephone carriers subject to the suspension were required to update the
Alabama Public Service Commission regarding their dialing parity plans by
October 1, 1999. Interstate Telephone and Valley Telephone have notified the
Alabama Public Service Commission that they intend to implement dialing parity
on or before the June 1, 2001 deadline; however, the actual implementation date
has not yet been determined.
On May 26, 1999, the Alabama Public Service Commission approved the dialing
parity plan of KNOLOGY of Alabama, Inc., a subsidiary of KNOLOGY Holdings. Under
the plan, KNOLOGY of Alabama will allow long distance carriers the ability to
provide long distance services in all local access areas within Alabama in which
it provides local telephone service using its own facilities. Any carrier
authorized by the Alabama Public Service Commission to carry local long distance
calls may request that KNOLOGY of Alabama allow it to provide long distance
services to its customers in Alabama provided that the carrier:
- has established, or has submitted firm, non-cancelable orders to
establish, direct interconnection of its network with KNOLOGY of Alabama;
- has ordered access services from KNOLOGY of Alabama that will permit the
carrier to receive long distance calls from KNOLOGY of Alabama; and
- has identified the local access and transport areas in which it desires
to receive local long distance calls.
A reasonable time for implementation will be necessary to allow KNOLOGY of
Alabama to make the necessary network, system and billing modifications to
implement the request. As of October 1, 1999, no long distance carrier had
requested the ability to provide long distance services from KNOLOGY of Alabama
in Alabama under its dialing parity plan.
Local Regulation
Occasionally we are required to obtain street use and construction permits
and franchises to install and expand our interactive broadband network using
state, city, county or municipal rights-of-way. Some municipalities where we
have installed or anticipate constructing networks require the payment of
license or franchise fees which are based upon a percentage of gross revenues or
on a per linear foot basis. The Telecommunications Act of 1996 requires
municipalities to manage public rights-of-way in a competitively neutral and
non-discriminatory manner.
EMPLOYEES
At September 30, 1999, we had 690 full-time employees. We consider our
relations with our employees to be good, and we structure our compensation and
benefit plans in
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order to attract and retain high caliber personnel. We will need to recruit
additional employees in order to implement our expansion plan, including general
managers for each new city and additional personnel for installation, sales,
customer service and network construction. We recruit from several major
industries for employees with skills in voice, video and data technologies. We
do not believe we will have problems retaining personnel with the necessary
qualifications.
PROPERTIES
We own or lease property in the following locations:
<TABLE>
<CAPTION>
LOCATION ADDRESS LEASE/OWN PRIMARY USE
- -------- ------- --------- -----------
<S> <C> <C> <C>
West Point, GA........ 1241 O.G. Skinner Drive Own Corporate Admin. Offices
West Point, GA........ 206 West 9th Street Lease Network Operations Center
Montgomery, AL........ 1450 Ann Street Lease Headend & Technical Offices
Columbus, GA.......... 1701 Boxwood Place Lease Admin. Offices & Headend
Panama City, FL....... 13200 P.C.B. Pkwy. Lease Admin. Offices & Headend
Augusta, GA........... 3714 Wheeler Road Own Admin. Offices & Headend
Charleston, SC........ 4506 Dorchester Road Own Admin. Offices and Headend
Huntsville, AL........ 2401 10th Street Own Admin. Offices and Headend
</TABLE>
In addition to these properties, we also hold operating leases for hub
sites along our network in each market. Our principal physical assets consist of
fiber optic and coaxial broadband network and equipment, located either at the
equipment site or along the network. Our distribution equipment along the
network is generally attached to utility poles we own or use under standard pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. Under our pole
attachment agreements, local public utilities and other pole owners rent us
space on utility poles to attach our network cables and equipment. The rate a
pole owner charges us for space varies, but the rate is generally based upon the
amount of space we rent. See "Business-Legislation and Regulation" for a
discussion of the FCC's regulation of pole attachment rates. Our franchises give
us rights of way for our network. The physical components of the networks
require maintenance and periodic upgrading to keep pace with technological
advances. We believe that our properties, taken as a whole, are in good
operating condition and are suitable for our business operations.
LEGAL PROCEEDINGS
In the normal course of business, we are subject to litigation. However, in
our opinion, there is no legal proceeding pending against us which would have a
material adverse effect on our financial position, results of operations, or
liquidity. We are also party to regulatory proceedings affecting the relevant
segments of the communications industry generally.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and
executive officers. These individuals include most of the members of management
of KNOLOGY Holdings who became our management when we became the holding company
for KNOLOGY Holdings and other companies. Our board will be divided into three
classes, with the initial members to serve for the periods indicated. We
anticipate that if the intended private offering of Series B preferred stock is
consummated, the holders of the Series B preferred stock will have the right to
elect two additional directors to our board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rodger L. Johnson.................................. 51 President, Chief Executive Officer
and Director (term on board
expiring 2002)
Robert K. Mills.................................... 36 Chief Financial Officer, Vice
President and Treasurer
Felix L. Boccucci, Jr. ............................ 42 Vice President of Business
Development
Anthony J. Palermo, Jr. ........................... 45 Vice President of Operations
Chad S. Wachter.................................... 33 Vice President, General Counsel and
Secretary
Thomas P. Barrett.................................. 53 Vice President of Information
Technology
Marcus R. Luke, Ph.D. ............................. 44 Chief Technology Officer
James T. Markle.................................... 40 Vice President of Network Operations
Bret T. McCants.................................... 40 Vice President of Network
Construction and Maintenance
Peggy B. Warner.................................... 48 Vice President of Marketing and
Carrier Sales
Campbell B. Lanier, III(1)......................... 49 Chairman of the Board of Directors
(term expiring 2002)
Richard Bodman..................................... 61 Director (term expiring 2000)
Alan A. Burgess(1)................................. 64 Director (term expiring 2001)
Donald W. Burton(2)................................ 55 Director (term expiring 2001)
L. Charles Hilton, Jr.(1).......................... 68 Director (term expiring 2000)
William H. Scott, III(2)........................... 52 Director (term expiring 2001)
Donald W. Weber(2)................................. 63 Director (term expiring 2002)
</TABLE>
- ---------------
(1) Member of the audit committee.
(2) Member of the compensation and stock option committee.
Rodger L. Johnson was named as our President and Chief Executive Officer
and as a director in October 1999. He has served as the President of KNOLOGY
Holdings since May 1999 and as its Chief Executive Officer and a director since
June 1999. Prior to joining KNOLOGY Holdings, Mr. Johnson had served as
President and Chief Executive Officer, as well as a Director, of Communications
Central Inc., a provider of
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coin-operated and inmate telephones, since November 1995. Prior to joining
Communications Central, Mr. Johnson served as the President and Chief Executive
Officer of JKC Holdings, Inc., a consulting company providing advice to the
information processing industry. In that capacity, Mr. Johnson also served as
the Chief Operating Officer of Infomed Systems, Inc., a publicly-held medical
software manufacturer. Mr. Johnson will retain his positions and continue to
serve both JKC Holdings, Inc. and Infomed Systems, Inc. in a more limited
management capacity for the immediately foreseeable future. Before founding JKC
Holdings, Inc., Mr. Johnson served for approximately eight years as the
President and Chief Operating Officer and as the President and Chief Executive
Officer of Brock Control Systems, Inc., a publicly-held sales and marketing
software provider.
Robert K. Mills has served as our Chief Financial Officer, Vice President
and Treasurer since November 1, 1999. He has worked for ITC Holding since
September 1999 as Vice President of Finance and Corporate Development. From 1994
to September 1999, Mr. Mills served as Vice President -- Treasurer and Strategic
Planning of Powertel, Inc., which provides wireless communications services. Mr.
Mills is a certified public accountant.
Felix L. Boccucci, Jr. has served as our Vice President of Business
Development since October 1999. He has served as Vice President of Business
Development of KNOLOGY Holdings since August 1997. He served as our Chief
Financial Officer, Treasurer and Secretary from November 1995 through August
1997. In addition, he currently serves as the Chief Financial Officer for
Interstate and Valley Telephone Companies. 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, a
telecommunications company, which merged with Contel Corporation 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 Assistant Vice
President controller in charge of Contel's Eastern Region Telephone Operations
comprising 13 companies in twelve states.
Anthony J. Palermo, Jr. has served as our Vice President of Operations
since July 1999. Prior to joining KNOLOGY, Mr. Palermo served as a consultant to
Nokia and Optima Technologies from November 1998 through July 1999. From
November 1995 to November 1998, Mr. Palermo was employed at Communications
Central, Inc., where he served as Vice President of Sales, Marketing, and
Operations. Prior to Communications Central, Inc. he spent six years at Brock
Control Systems as Vice President of Operations and Chief Operating Officer. Mr.
Palermo has also spent eleven years in the communications industry with AT&T
Long Lines and RCA-Cylix.
Chad S. Wachter has served as our Vice President, General Counsel and
Secretary since October 1999. He joined KNOLOGY Holdings as its General Counsel
and Secretary in August 1998. From April 1997 to August 1998, Mr. Wachter served
as Assistant General Counsel of Powertel, Inc., an affiliate of ITC that
operates cellular and
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PCS businesses. From May 1990 until April 1997, Mr. Wachter was an associate and
then a partner with Capell, Howard, Knabe & Cobbs, P.A. in Montgomery, Alabama.
Thomas P. Barrett has served as our Vice President of Information
Technology since October 1999. Prior to joining us, from July 1998 to September
1999, Mr. Barrett served as the President of Quintiles Americas. Quintiles
Americas is a division of Quintiles Inc., a pharmaceutical research company.
From January 1993 to June 1998, Mr. Barrett was employed by Perot Systems as an
account manager. He also served as the human resources director for a period of
time while at Perot Systems. From October 1992 to January 1993, Mr. Barrett
worked for General Research Corporation as an account manager for a software
development project. From August 1963 to September 1999, Mr. Barrett served in
the U.S. Army in a number of command and staff positions and achieved the rank
of Brigadier General.
Marcus R. Luke, Ph.D. has served as our Chief Technology Officer since
October 1999. He has served as the Chief Technology Officer of KNOLOGY Holdings
since August 1997. Prior to this he served as the Vice President of Network
Construction of KNOLOGY Holdings from November 1995 until August 1997, and
Director of Engineering of Cybernet Holding, L.L.C., from May 1995 until
November 1995. Prior to joining KNOLOGY Holdings, 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.
James T. Markle joined us in October 1999 as our Vice President of Network
Operations. He has served as Vice President of Network Operations for KNOLOGY
Holdings since March 1999. Prior to joining KNOLOGY Holdings, Mr. Markle was
employed by MindSpring Enterprises, Inc. where he served as the Executive Vice
President of Network Operations from March 1998 and as Vice President of Network
Operations from April 1995. Prior to joining MindSpring, from April 1994 until
April 1995, Mr. Markle served as the Director of Technical Support for Concert
Communications Co., a telecommunications company. From August 1990 to April
1994, Mr. Markle served as Senior Manager of Network Operations for MCI
Communications, a telecommunications company. Mr. Markle served in various
operation positions at SouthernNet/Telecom*USA, including Director of Operations
for a multistate region, from July 1985 until July 1990.
Bret T. McCants has served as our Vice President of Network Services since
October 1999. He has served as the Vice President of Network Services of KNOLOGY
Holdings since April 1997. Prior to joining KNOLOGY Holdings, Mr. McCants was a
co-founder of CSW Communications. From January 1996 to April 1997 he served as
CSW Communications, Director of Operations, and from 1994 to 1996, he
participated in the development and managed the deployment of voice, data and
interactive energy management equipment to homes in Laredo, Texas. Prior to
joining CSW Communications, Mr. McCants served in various capacities with
Central Power and Light Company
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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 held several positions in the Sales, Marketing and Engineering
departments at Central Power and Light Company.
Peggy B. Warner joined us as our Vice President of Marketing and Carrier
Sales in October 1999. She has been the Vice President of Marketing and Carrier
Sales of KNOLOGY Holdings since January 1998. Prior to joining KNOLOGY Holdings,
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, from December 1993 to January 1994,
she was an Executive National Accounts Manager with MCI Telecommunications
Corporation where she developed and managed a nationwide Government Systems
regional sales organization. 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 she held various sales positions with BellSouth prior to 1983.
Campbell B. Lanier, III has been one of our directors and our Chairman of
the Board since our inception. He has served as a director of KNOLOGY Holdings
since November 1995. Mr. Lanier serves as Chairman of the Board and Chief
Executive Officer of ITC Holding and has served as a director of ITC Holding
since the company's inception in 1989. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. Mr. Lanier also is Chairman of the
Board and a director of ITC*DeltaCom, Inc., which provides wholesale and retail
telecommunications services; Powertel, Inc., which provides wireless
communications services; MindSpring Enterprises, Inc., an Internet services
provider; and Vista Eyecare, Inc., a full service optical retailer. Mr. Lanier
has served as a Managing Director of South Atlantic Private Equity Fund, IV,
Limited Partnership since July 1997.
Richard Bodman has been one of our directors since December 1999. He has
been a director of KNOLOGY Holdings since June 1996. Mr. Bodman was elected to
KNOLOGY Holdings' board of directors pursuant to a stockholders' agreement under
which AT&T Venture Fund I, L.P. had the right to elect one director to KNOLOGY
Holdings' board. This stockholders' agreement terminated prior to the
distribution. Mr. Bodman is currently the Managing General Partner of AT&T
Venture Fund I L.P. From August 1990 to May 1996, Mr. Bodman served as Senior
Vice President of Corporate Strategy and Development for AT&T. Mr. Bodman also
is currently a director of the following public companies: Internet Security
Systems, Inc., Tyco International Inc. and Young and Rubicam Inc.
Alan A. Burgess has been one of our directors since December 1999. He has
served as a director of KNOLOGY Holdings since January 1999. From 1967 until his
retirement in 1997, Mr. Burgess was a partner with Andersen Consulting. Over his
thirty-year career he held a number of positions as Managing Partner, including
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Managing Partner of Regulated Industries from 1974 to 1989. In 1989 he assumed
the role of Managing Partner of the Communications Industry Group. In addition,
he served on Andersen Consulting's Global Management council and was a member of
the Partner Income Committee. Mr. Burgess is also the Chief Financial Officer of
Seventh Wave Technologies, Inc.
Donald W. Burton has been one of our directors since December 1999. He has
been a director of KNOLOGY Holdings since January 1996. Since January 1981, he
has served as Managing General Partner of South Atlantic Venture Fund I, II and
III, Limited Partnerships and Chairman of South Atlantic Private Equity Fund IV,
Limited Partnership. Mr. Burton has been the general partner of The Burton
Partnership, Limited Partnership since October 1979. Since January 1981, he has
served as President of South Atlantic Capital Corporation. Mr. Burton also
serves on the board of directors of several ITC companies, including ITC
Holding, ITC*DeltaCom, Inc. and Powertel, Inc. He is a director of the Heritage
Group of Mutual Funds and several private companies. Mr. Burton also serves as a
director of the National Venture Capital Association.
L. Charles Hilton, Jr. has been one of our directors since December 1999.
He has served as a director of KNOLOGY Holdings since KNOLOGY Holdings acquired
the beach cable system in Panama City, Florida in December 1997. 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.
William H. Scott, III has been one of our directors since our inception,
and he has served as a director of KNOLOGY Holdings since November 1995. He has
served as President of ITC Holding since December 1991 and has been a director
of ITC since May 1989. He also is an officer and director of several other ITC
Holding subsidiaries. In addition, Mr. Scott is a director of Powertel Inc.,
ITC*DeltaCom, Inc., MindSpring Enterprises, Inc., Innotrac Corporation, which
provides customized technology-based marketing support services, HeadHunter.NET,
Inc., a company providing online recruiting services to employers, recruiters,
and job-seekers, and nFront, Inc., a provider of full-service Internet banking
solutions for community banks.
Donald W. Weber has been one of our directors since December 1999. He has
served as a director of KNOLOGY Holdings since August 1998. Since 1997, Mr.
Weber has been a consultant and private investor. Since 1995, Mr. Weber served
as President and Chief Executive Officer of ViewStar Entertainment Services,
Inc., a digital satellite services company. From 1987 to 1991, Mr. Weber held
various executive positions, including President and Chief Executive Officer,
and served as a director of Contel Corporation, a telecommunications company.
Currently, Mr. Weber serves as director of
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Powertel, Inc., HeadHunter.NET, Inc., Pegasus Communications Corporation, a
media and communications company and HIE, Inc., a health care software provider.
COMMITTEES OF THE BOARD OF DIRECTORS
Our 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
our financial statements;
- discusses the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants our
interim and year-end operating results;
- considers the adequacy of our internal accounting controls and audit
procedures; and
- reviews the non-audit services to be performed by the independent
accountants.
The members of the audit committee are Messrs. Hilton, Burgess and Lanier.
The compensation and stock option committee reviews and recommends the
compensation arrangements for management and administers our stock option plans.
The members of the compensation and stock option committee are Messrs. Scott,
Weber, and Burton.
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EXECUTIVE COMPENSATION
Our executive officers were appointed in October and November 1999.
However, as most of our executive officers were executive officers of KNOLOGY
Holdings, Inc. immediately prior to our formation, we have set forth below the
compensation received by our executive officers from KNOLOGY Holdings for the
fiscal years ended December 31, 1998, 1997 and 1996. The following table
provides compensation information for our chief executive officer and the most
highly compensated other executive officers whose total annual salary and bonus
exceed $100,000. We will use the term "named executive officers" to refer to
these people later in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-----------------------------
ANNUAL COMPENSATION SECURITIES
-------------------------------- UNDERLYING ALL OTHER
YEAR(1) SALARY BONUS OPTIONS(2) COMPENSATION(3)
------- -------- ------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Rodger L. Johnson........ 1998 -- -- -- --
President &
Chief Executive
Officer(4)
William E. Morrow........ 1998 $134,539 $76,800 420,000 $ 8,014
Former President & 1997 102,462(5) 22,602 180,000 24,526
Chief Executive
Officer
Felix L. Boccucci, Jr.... 1998 98,250 33,385 30,000 --
Vice President of 1997 92,430 9,473 -- 36,159(7)
Business
Development(6) 1996 84,015 46,102 66,068 68,464(8)
Bret T. McCants.......... 1998 $101,494 $29,926 120,000 $ 5,041
Vice President of 1997 58,847(9) 21,177 42,000 35,535
Network Construction
and Maintenance
Marcus R. Luke........... 1998 97,307 31,275 90,000 4,800
Chief Technology
Officer 1997 90,292 6,102 -- 5,111
1996 72,547 7,102 25,620 5,076
</TABLE>
- ---------------
(1) As noted above, all of the named executive officers were initially employed
by KNOLOGY Holdings, Inc. The compensation table reflects the compensation
earned from KNOLOGY Holdings.
(2) All options are exercisable for shares of our common stock and reflect the
4:1 exchange ratio of the exchange of KNOLOGY Holdings capital stock for our
capital stock in November 1999.
(3) Includes car allowances, relocation expenses and premiums on life insurance.
(4) Mr. Johnson has served as the president of KNOLOGY Holdings since May 1999
and as its chief executive officer since June 1999.
(5) Reflects amounts paid to Mr. Morrow based on an annual salary rate of
approximately $120,000.
(6) Mr. Boccucci served as chief financial officer, treasurer and secretary of
KNOLOGY Holdings from November 1995 through August 1997.
(7) Includes grants of ITC Holding capital stock valued at $30,789 at the time
of grant.
(8) Includes grants of ITC Holding capital stock valued at $63,448 at the time
of grant.
(9) Reflects amounts paid to Mr. McCants based on an annual salary rate of
approximately $90,000.
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1995 STOCK OPTION PLAN
We assumed KNOLOGY Holding, Inc.'s stock option plan in November 1999. Each
outstanding option to purchase stock of KNOLOGY Holdings was converted into an
option to purchase four shares of our common stock at the time we assumed the
stock option plan.
Our stock option plan allows us to grant options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended, as well as non-qualifying options to our key employees
and non-employee directors and those of our subsidiaries. The stock option plan
authorizes the issuance of up to 8,000,000 shares of common stock pursuant to
options granted under the plan. The maximum number of shares subject to options
that may be awarded under the plan to any person is 1,800,000 shares. The
compensation and stock option committee of the board of directors administers
the plan and grants options to purchase common stock.
The exercise price for incentive stock options granted under the stock
option plan must be at least 100% of the fair market value of the common stock
on the date of grant and must be at least 110% to an optionee beneficially
owning more than 10% of the outstanding common stock. The exercise price for
non-incentive stock options granted under the plan must be at least the par
value of the common stock. The maximum option term is ten years, or five years
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 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 for shares of common stock for which
options have not been granted.
Upon assumption of the KNOLOGY Holdings plan in November 1999, we had
options to purchase 6,313,476 shares of common stock outstanding pursuant to the
stock option plan.
1999 LONG-TERM INCENTIVE PLAN
Our board and shareholders approved the KNOLOGY, Inc. 1999 long-term
incentive plan in November 1999. The purpose of the plan is to promote our
success by linking the personal interests of employees, officers and directors
to those of our shareholders. Under our plan, we may grant to our employees,
officers and directors, and those of our subsidiaries, incentive or
non-qualified stock options, stock appreciation rights, performance units,
restricted stock, dividend equivalents, other stock-based awards, or any other
right or interest relating to our stock or cash. The plan authorizes the
issuance of up to 8,000,000 shares of common stock pursuant to awards. The
maximum number of shares of common stock with respect to one or more options
and/or stock appreciation rights that may be granted during any one calendar
year to any one person is 1,800,000. The maximum fair market value of any other
types of awards that may be received by one person during any one calendar year
under our plan is $2,000,000.
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The plan is administered by the compensation and stock option committee of
the board of directors, which has the power to designate participants; determine
the type, number, terms and conditions of awards to be granted; establish rules
and regulations to administer the plan; and make all other decisions necessary
to administer the plan. Awards may have any terms specified by the committee
consistent with the plan, except that the terms of any incentive stock option
must meet the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended.
The committee may condition any award under the plan upon the achievement
of performance goals, based on:
- specified target return, or target growth in return, on equity or assets;
- stock price;
- total stockholder return (stock price appreciation plus reinvested
dividends) relative to a defined comparison group or target over a
specific performance period;
- a specified target relative to, or target growth in, revenue, revenue
generating units, homes passed, cost of service, operating cost, capital
expenses, net income or earnings per share; or
- any combination of the above goals.
If an award is made on a performance basis, the committee must establish goals
at the beginning of the period for which such performance goal relates, and the
committee has the right for any reason to reduce (but not increase) the award,
notwithstanding the achievement of a specified goal.
The board of directors or the committee may at any time terminate or amend
our plan without shareholder approval; but it may condition any amendment on the
approval of shareholders if deemed advisable for tax, securities law or other
reasons. No termination or amendment of our plan may adversely affect any
outstanding award without the written consent of the participant. No awards have
yet been granted or approved for grant under our plan.
The following table sets forth the information concerning individual grants
of stock options by KNOLOGY Holdings during the fiscal year ended December 31,
1998 to each of the named executive officers during such periods and reflects
the conversion into our options. No stock appreciation rights have been granted.
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OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES IN
UNDERLYING OPTIONS FISCAL
NAME GRANTED YEAR(2) EXERCISE PRICE GRANT DATE EXPIRATION DATE
---- ------------------ ------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Rodger L. Johnson.... -- -- -- -- --
President & Chief
Executive Officer
William E. Morrow.... 420,000 18.6% $2.50 February 4, 1998 February 4, 2008
Former President
and Chief
Executive Officer
Felix L. Boccucci, 30,000 1.3 2.50 February 4, 1998 February 4, 2008
Jr.................
Vice President of
Business
Development
Bret T. McCants...... 120,000 5.3 2.50 February 4, 1998 February 4, 2008
Vice President of
Network
Construction and
Maintenance
Marcus R. Luke....... 90,000 4.0 2.50 February 4, 1998 February 4, 2008
Chief Technology
Officer
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM(3)
---------------------
NAME 5% 10%
---- -------- ----------
<S> <C> <C>
Rodger L. Johnson.... -- --
President & Chief
Executive Officer
William E. Morrow.... $660,450 $1,673,700
Former President
and Chief
Executive Officer
Felix L. Boccucci, 47,175 119,550
Jr.................
Vice President of
Business
Development
Bret T. McCants...... 188,700 478,200
Vice President of
Network
Construction and
Maintenance
Marcus R. Luke....... 141,525 358,650
Chief Technology
Officer
</TABLE>
- ---------------
(1) All options are exercisable for shares of common stock and are granted under
the stock option plan. All option share numbers reflect the 4:1 exchange
ratio of the exchange of KNOLOGY Holdings capital stock for our capital
stock in November 1999. Such options generally vest over four years unless
such person's employment is terminated, in which case options that have not
vested at that time will terminate.
(2) Based on 2,261,476 options granted during the fiscal year.
(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.
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OPTION GRANTS IN 1999
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING FAIR
OPTIONS EXERCISE MARKET
NAME GRANTED PRICE GRANT DATE EXPIRATION DATE VALUE(2)
---- ---------- -------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Rodger L. Johnson.............. 1,020,000 $2.8325 February 3, 1999 February 3, 2009 $4,845,000
President & Chief Executive 600,000 $2.8325 August 4, 1999 August 4, 2009 $2,850,000
Officer
William E. Morrow.............. 600,000 $2.8325 February 3, 1999 February 3, 2009 $2,850,000
Former President and Chief
Executive Officer
Felix L. Boccucci, Jr. ........ 14,120 $2.8325 February 3, 1999 February 3, 2009 $ 67,070
Vice President of Business 20,000 $2.8325 August 4, 1999 August 4, 2009 $ 66,500
Development
Bret T. McCants................ 14,824 $2.8325 February 3, 1999 February 3, 2009 $ 70,414
Vice President of Network 80,000 $2.8325 August 4, 1999 August 4, 2009 $ 380,000
Construction and
Maintenance
Marcus R. Luke................. 14,120 $2.8325 February 3, 1999 February 3, 2009 $ 67,070
Chief Technology Officer 14,000 $2.8325 August 4, 1999 August 4, 2009 $ 66,500
</TABLE>
- ---------------
(1) All options are exercisable for shares of common stock and are granted under
the stock option plan. All option share numbers reflect the 4:1 exchange
ratio of the exchange of KNOLOGY Holdings capital stock for our capital
stock in November 1999. Such options generally vest over five years unless
such person's employment is terminated, in which case options that have not
vested at that time will terminate.
(2) The $4.75 fair market value was determined by our board based upon the value
implicit in the November 1999 exchange transactions described under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Overview" and the expected price of our stock in the
private placement.
We issued a total of 3,561,444 options to our executive officers and
directors. We issued an additional 483,532 options to 335 of our employees in
1999.
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AGGREGATED OPINIONS/SARS EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END AT FY-END($)(1)
ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE # VALUE REALIZED # UNEXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Rodger Johnson.......................... -- -- 0/0 $ 0/$0
William E. Morrow....................... -- -- 0/150,000 $ 0/$289,500
Felix L. Boccucci....................... -- -- 0/24,017 $ 0/$64,976.61
Brett McCants........................... -- -- 0/45,500 $ 0/$74,865
Marcus R. Luke.......................... -- -- 0/28,905 $ 0/$51,235.65
</TABLE>
- ---------------
(1) The value of the options is based upon a market price of $11.33 per share.
In July 1998, ITC Holding made a tender offer to buy shares of KNOLOGY
Holdings from KNOLOGY Holdings stockholders. In this tender offer, ITC
Holding established the market value of Knology Holdings' common stock to be
$11.33 per share.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
None of the named executive officers exercised stock options during the
fiscal year ended December 31, 1998.
COMPENSATION OF DIRECTORS
Our directors do not receive directors' fees. Directors are reimbursed for
their reasonable out-of- pocket travel expenditures. Our directors are also
eligible to receive grants of stock options under our stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of our compensation and stock option committee are
Messrs. Scott, Weber and Burton. Each of these members serves as a director or
executive officer of ITC Holding. We have engaged in, or have ongoing, several
transactions with ITC Holding or its affiliates, as discussed below under the
caption "Certain Transactions and Relationships."
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CERTAIN TRANSACTIONS AND RELATIONSHIPS
We were formed in 1998 by ITC Holding Company, Inc. As of November 30,
1999, ITC Holding, through a wholly-owned subsidiary named InterCall, Inc.,
owned approximately 43.2 million shares of our Series A preferred stock, which
represented an ownership interest in our company of 90%.
We own 100% of KNOLOGY Holdings, and 100% of certain other companies,
including Interstate Telephone Company, Valley Telephone Company Globe
Telecommunications and ITC Globe. Before we owned them, each of these companies
was owned separately by ITC Holding. ITC Holding determined that KNOLOGY
Holdings and these other companies have parallel growth in the same markets and
that combining their businesses would enhance their ability to take advantage of
the opportunities in these markets. To accomplish this, ITC Holding formed us
and, in November 1999, contributed these companies to us along with certain
other related assets.
KNOLOGY Holdings is our principal subsidiary. ITC Holding formed KNOLOGY
Holdings in 1995. ITC Holdings' percentage ownership in KNOLOGY Holdings fell
below 50% in 1996, but it subsequently reacquired stock in the company, and by
November 1999, it owned 85% of KNOLOGY Holdings which it contributed to us. At
approximately the same time, we offered to exchange our stock for the remaining
stock of KNOLOGY Holdings, as a result of which we now own 100% of KNOLOGY
Holdings. These transactions are described in greater detail below.
ITC Holding is a diversified telecommunications company that owns interests
in many companies that have businesses similar to ours. Because of our
relationship with ITC Holding, we are affiliated with certain of these
companies. Some of them, such as ITC*DeltaCom, Inc. and MindSpring Enterprises,
Inc., provide us with and/or receive from us services and products. We have
described the nature and amount of the business that we do with affiliated
companies in greater detail below.
We have adopted a policy requiring that any material transactions between
us and others affiliated with our officers, directors or principal stockholders
be on terms no less favorable to us than reasonably could have been obtained in
arm's-length transactions with independent third parties.
TRANSACTIONS WITH ITC COMPANIES
Certain of our directors and officers hold or held the following positions
with companies that are affiliated with us:
- Campbell B. Lanier, III, who serves as the Chairman of our Board of
Directors, also serves as Chairman of the Board and Chief Executive
Officer of ITC Holding Company and all of its subsidiaries including
InterCall, and is also a director of companies that were formerly
subsidiaries of ITC Holding, such as ITC*DeltaCom, MindSpring
Enterprises and Powertel.
- William H. Scott, III, one of our directors, serves as President,
Chief Operating Officer and a director of ITC Holding and all of its
subsidiaries
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including InterCall, and is also a director of companies that were
formerly subsidiaries of ITC Holding, such as ITC*DeltaCom,
MindSpring Enterprises and Powertel.
- Donald W. Burton, one of our directors, is a director of ITC Holding,
ITC*DeltaCom and Powertel.
- Donald W. Weber, one of our directors, is a director of Powertel.
- Richard Bodman, one of our directors, is the managing general partner
of AT&T Ventures, which controls the AT&T venture funds that own
approximately 9.3% of our company.
- Felix Boccucci, our Vice President of Business Development, served as
an executive officer of ITC Holding prior to October 1997.
We are affiliated with all of these companies, and we have a business
relationship with some of them, as described in detail below.
As of December 31, 1998, Campbell B. Lanier, III beneficially owned
approximately 23% of the common stock of ITC Holding, and William Scott and
Donald Burton beneficially owned approximately 1% and 8%, respectively, of the
common stock of ITC Holding. Most of our other officers, directors and
stockholders also own stock in ITC Holding and, as such, they will all receive
the same amount of stock on a pro rata basis in the distribution as the rest of
the ITC Holding stockholders.
Certain affiliated companies provide us with various services and/or
receive services provided by us. We feel that our transactions with these
affiliated companies are representative of arms' length transactions.
ITC*DeltaCom provides us with wholesale long-distance and related services
and leases capacity to us on certain of its fiber routes. In 1996, 1997 and
1998, these services were worth $482,194, $589,011 and $1,213,533, respectively.
During those years, our company provided ITC*DeltaCom with local and long
distance telephone, programming and other services worth $525,368, $386,842 and
$639,568, respectively. For the first nine months of 1999, we received services
from and provided services to ITC*DeltaCom worth $1,377,363 and $685,907,
respectively. We received these services from ITC*DeltaCom pursuant to an
agreement which expires in May 2000. After the distribution, ITC*DeltaCom will
continue to provide us and certain of our subsidiaries with telecommunications
services in accordance with one-year contracts that we have entered into in
1999. As of March 15, 1999, Mr. Lanier owned approximately 16% of ITC*DeltaCom.
Messrs. Lanier and Scott serve as executive officers and directors of
ITC*DeltaCom and Mr. Burton serves as a director of ITC*DeltaCom.
We received cellular services in 1996, 1997 and 1998 worth $137,389,
$118,064 and $342,696, respectively, from Powertel, Inc., and we leased fiber
cables to Powertel during this time worth $572,659, $519,956 and $593,221. For
the first nine months of 1999, we received services from and leased cables to
Powertel worth $486,522 and $541,857, respectively. We lease these fiber cables
to Powertel pursuant to a fiber lease agreement
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which expires in April 2000. As of March 12, 1999, ITC Holding owned
approximately 27.5% of Powertel.
We provided services to InterCall, our parent company prior to the
distribution and a wholly-owned subsidiary of ITC Holding, in 1996, 1997 and
1998 worth $449,861, $477,405 and $737,204, respectively. For the first nine
months of 1999, we provided services to InterCall worth $535,110. We provide
these services to InterCall pursuant to an agreement which expires in July 2004.
In 1996, 1997 and 1998, we provided local Internet transport services to
MindSpring Enterprises, Inc., a national Internet access provider, worth
$68,104, $132,524 and $216,049, respectively. For the first nine months of 1999,
we provided services to MindSpring worth $226,885. We provide these services to
MindSpring pursuant to an Internet transport agreement which expires in July
2001. As of December 31, 1998, ITC Holding, through InterCall, owned
approximately 18.8% of MindSpring.
We lease pole space from South Carolina Electric & Gas Co., an affiliate of
SCANA Communications which is one of our stockholders and was a principal
investor in KNOLOGY Holdings in the past, as discussed below. We lease this pole
space pursuant to a one year pole attachment agreement that expires in January
2000. We expect to renew this agreement in January 2000. For the first nine
months of 1999, we paid $808,448 under this agreement.
In 1998, we purchased fiber optic cables from SCANA Communications for a
total purchase price of $306,530.
We lease fiber optic cables from SCANA Communication pursuant to two
operating leases agreement entered into in the fourth quarter of 1998. The terms
of the leases are 15 and 20 years. We expect to pay $87,000 per year to SCANA
under both leases. For the first nine months of 1999, we paid $65,700 under
these agreements.
In November 1999, we entered into a services agreement and a related
support agreement with a wholly-owned subsidiary of ITC Holding named ITC
Service Company under which we agree to provide human resources, information
technology and other services to ITC Service Company and under which ITC Service
Company agrees to lease storage space as needed and provide certain
administrative services to us. We expect to be paid approximately $60,000 per
year for services provided by us, and we expect to pay a substantially smaller
amount for services that ITC Service Company provides to us, under these
agreements. The agreements have no expiration date, but may be terminated on 30
days' notice by either party.
We granted ITC Service Company a right of first refusal and option to lease
fiber along our network in certain locations in Georgia and Alabama pursuant to
an agreement which expires in 2009. ITC Service Company paid us a one-time fee
of $50,000 for this option and right of first refusal. ITC Service Company has
not exercised the option or the right of first refusal.
ITC Holding occasionally provides certain administrative services, such as
legal and tax-planning services, for us. The costs of these services are charged
to us based
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primarily on the salaries and related expenses for certain ITC Holding
executives and an estimate of their time spent on projects for us. For the year
ended December 31, 1998, KNOLOGY Holdings recorded $3,230,000 in selling,
operations, administrative and rent expenses related to these services. We feel
that the methodology used to calculate the amounts charged is reasonable.
Our insurance provider is J. Smith Lanier & Co. Mr. Lanier's brother and
uncle are principal owners of this insurance placement company, both of whom, as
stockholders in ITC Holding, will receive the same pro rata amount of our Series
A preferred stock in the distribution as the other ITC Holding stockholders. In
1996, 1997 and 1998 this company charged us approximately $222,000, $221,000 and
$628,000, respectively, for insurance services.
We leased office space in 1998 and part of 1999 to ITC*DeltaCom, for which
we received $122,000 and $40,000, respectively, in lease payments. We no longer
lease space to ITC*DeltaCom.
We lease space to Powertel pursuant to a 10-year lease which expires in
2005. In 1998, we received $112,200 in lease income under this agreement. For
the first nine months of 1999, we received $84,150 in lease income under this
agreement.
In 1997, our subsidiaries Interstate Telephone and Valley Telephone paid
$4.2 million in dividends to ITC Holding. In 1998, Interstate Telephone paid
$1.4 million in dividends to ITC Holding.
Effective August 1998, upon the acquisition by ITC Holding if its
majority-owned interest of KNOLOGY Holdings, we participated in a tax sharing
agreement with ITC Holding. The tax sharing agreement allows ITC Holding to
include our results in a consolidated federal income tax return. Based upon our
taxable losses being included in the consolidated tax return, we have recorded
income tax benefits for $5.6 million and $11.0 million for the year ended
December 31, 1998 and the nine months ended September 30, 1999, respectively.
In October 1999, a subsidiary of ITC Holding agreed to lend up to $13
million to KNOLOGY Holdings under a line of credit which matured on the earlier
of November 16, 2002 or one day after the commitment under KNOLOGY Holdings'
existing credit facility is reduced to zero. Interest accrued on the loan at a
rate of 11 3/4% per year. This loan was subordinate to the senior secured credit
facility KNOLOGY Holdings has with First Union National Bank and First Union
Capital Markets. In November 1999, we borrowed $9.6 million under this line of
credit. In accordance with the terms of the loan, the ITC Holding subsidiary
immediately converted this loan into shares of our Series A preferred stock at a
price per share of $4.75, at which time the line of credit terminated.
In November 1999, we acquired KNOLOGY Holdings, Interstate Telephone,
Valley Telephone, Globe Telecommunications and ITC Globe from ITC Holding. ITC
Holding contributed to us stock representing approximately 85% of the
outstanding equity of KNOLOGY Holdings, stock representing 100% of each of
Interstate Telephone, Valley Telephone, Globe Telecommunications and ITC Globe,
272,832
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shares of preferred stock of ClearSource, Inc., subscription rights to purchase
an additional 810,501 shares of preferred stock of ClearSource, approximately
$5.6 million in cash to be used for the subscription payments to ClearSource and
a note of KNOLOGY Holdings in the principal amount of up to $13 million.
Concurrently with this November 1999 acquisition, we completed an exchange with
other KNOLOGY Holdings stockholders in which we received KNOLOGY Holdings common
stock and preferred stock in exchange for our common stock and Series A
preferred stock. We now hold 100% of the outstanding capital stock of KNOLOGY
Holdings.
In December 1999, after the contribution and exchange discussed above, a
subsidiary of ITC Holding agreed to lend us $30.4 million under a line of
credit. The proceeds of this loan are to be used for construction of the network
by KNOLOGY Holdings and for working capital. This loan accrued interest at a
rate of 11 3/4% per year and had a maturity date of March 31, 2000. Under the
terms of this loan, the ITC Holding subsidiary converted all of the principal
and interest of the loan into options to purchase shares of our Series A
preferred stock at a price per option of $4.75. Because each option was valued
for purposes of this conversion with the equivalent value of one share of our
Series A preferred stock, ITC Holding is therefore entitled to the proceeds from
the exercise of these options. We will pass these proceeds along to ITC Holding
in the form of a residual note.
The tax separation agreement that we entered into with ITC Holding will
continue after the distribution. The purpose of the tax separation agreement is
to allocate the risk of potential adverse tax consequences stemming from the
distribution. We do not anticipate any adverse tax consequences, but any adverse
tax consequences that do occur could be material. This agreement and the
possible adverse tax consequences are discussed under the caption "The
Distribution -- Material Federal Income Tax Consequences of the
Distribution -- Tax Separation Agreement".
SALES OF CAPITAL STOCK
In December 1995 and January 1996, in connection with its initial
capitalization, KNOLOGY Holdings issued to certain investors, including ITC
Holding, SCANA Communications, Inc. and South Atlantic Venture Fund III, 7,780
shares of its preferred stock at a purchase price of $1,000 per share, 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. and in KNOLOGY of
Columbus, Inc. in exchange for shares of KNOLOGY Holdings preferred stock. SCANA
Communications is a communications subsidiary of SCANA Corporation, a
diversified utility company. South Atlantic represents a series of venture
capital funds. Mr. Burton is managing general partner of South Atlantic Venture
Fund I, II and III and is Chairman of South Atlantic Venture Fund, IV, and Mr.
Lanier is the managing general partner of South Atlantic Private Equity Fund,
IV.
KNOLOGY Holdings was a party to a stockholders' agreement dated December 8,
1995, as amended, with all of its stockholders. No party to the stockholders'
agreement could transfer any of KNOLOGY Holdings' capital stock, rights or
options held by such
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party to third parties without having offered rights of first refusal to
purchase such securities to KNOLOGY Holdings. This agreement terminated prior to
the distribution.
In May 1996, in connection with a private placement of its preferred stock,
KNOLOGY Holdings issued 10 shares of its preferred stock to ITC Holding and
9,302 shares of its preferred stock to new investors at a purchase price of
$1,200 per share, for an aggregate amount of $11,174,440. The new investors
included Century Telephone Enterprises, Inc., a regional communications company
that provides local exchange and cellular telephone services, and certain of the
AT&T venture funds, a series of venture capital funds. In connection with this
private placement, ITC Holding, the AT&T venture funds, KNOLOGY Holdings and
others entered into a stockholders' agreement, which was amended and restated as
of July 28, 1997. Pursuant to the agreement, all parties agreed to take all
action within their respective power as may be required, for as long as Century
Telephone Enterprises, Inc. or AT&T Venture Fund I, L.P. owned more than 5% of
KNOLOGY Holdings' equity securities, to elect one director designated by each
such 5% stockholder. Richard Bodman was elected to KNOLOGY Holdings' board of
directors pursuant to this arrangement. Mr. Bodman's term will expire in 2000.
Century Telephone does not presently have a representative on KNOLOGY Holdings'
board of directors. This stockholders' agreement terminated prior to the
distribution.
In February 1997, KNOLOGY Holdings issued 8,960 shares of preferred stock
to certain of its current stockholders 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 the AT&T venture funds
contributed $4,302,000, $2,096,400, $1,000,800 and $1,416,000, respectively, in
exchange for such preferred stock.
In May 1997, KNOLOGY Holdings signed a letter of intent with SCANA
Communications, whereby SCANA agreed to provide KNOLOGY Holdings with a
revolving credit facility of up to $40.0 million for network construction and
working capital. The companies, however, never established this credit facility.
Beginning in June 1997, KNOLOGY Holdings borrowed an aggregate of $11.0 million
of principal plus accrued interest (approximately $305,300) from SCANA pursuant
to a promissory note. The note accrued interest at the rate of 12% per annum and
was payable upon demand after January 1, 1998. KNOLOGY Holdings repaid the
promissory note in October 1997 with a portion of the proceeds from the offering
and the private placement described below. In October 1999, KNOLOGY Holdings
issued to SCANA warrants to purchase 753 shares of KNOLOGY Holdings preferred
stock in connection with these loans. SCANA exercised these warrants in November
1999. The weighted average exercise price of the SCANA warrant is $1,500 per
share of preferred stock.
In October 1997, KNOLOGY Holdings issued approximately 21,400 shares of its
preferred stock to qualified investors in an 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 Communications, Inc. purchased approximately $10.0 million, $2.5
million, $5.5 million,
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$5.0 million and $5.0 million of preferred stock, respectively, in the equity
private placement.
In October 1997, KNOLOGY Holdings also completed a private offering of
444,100 units, each of which consisted of one 11 7/8% senior discount note and
one warrant to purchase .003734 shares of its preferred stock, at an exercise
price of $.01 per share, for $444.1 million aggregate principal amount at
maturity yielding net proceeds of approximately $242.4 million. SCANA
Communications purchased 71,050 of these units for $39,998,308. The senior
discount notes issued in the offering were subsequently exchanged for
substantially identical exchange notes that had been registered under the
Securities Act of 1933, as amended, in an exchange offer that expired on March
24, 1998.
In December 1997, KNOLOGY Holdings acquired Beach Cable, Inc., a cable
television system in Panama City, Florida. L. Charles Hilton, Jr., who became a
director of our company in December 1999, was the founder and sole stockholder
of Beach Cable. Mr. Hilton received 2,485 shares of KNOLOGY Holdings preferred
stock in the acquisition valued at $1,500 per share. During 1998, 134 of these
shares were returned to KNOLOGY Holdings as part of a purchase price adjustment.
In January 1998, ITC Holding purchased from Century Telephone its preferred
stock of KNOLOGY Holdings. In July 1998, ITC Holding acquired shares of
preferred stock of KNOLOGY Holdings in exchange for $100 in cash and ITC Holding
common stock valued at $1,600 per share for each share of preferred stock of
KNOLOGY Holdings exchanged. ITC Holding purchased 21,551 shares of preferred
stock of KNOLOGY Holdings from several stockholders, including all of the
preferred stock owned by South Atlantic and SCANA Communications in the
exchange.
In November 1999, we completed an exchange with other KNOLOGY Holdings
stockholders, including AT&T venture funds and SCANA Communications, in which we
exchanged our common stock and preferred stock for KNOLOGY Holdings common stock
and preferred stock. Through this exchange offering, we acquired 7,113 shares of
Series A preferred stock of KNOLOGY Holdings from AT&T venture funds for
4,267,800 shares of our Series A preferred stock and 753 shares of our Series A
preferred stock of KNOLOGY Holdings from SCANA Communications for 451,800 shares
of our Series A preferred stock.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of November 30, 1999,
reflecting the November 1999 transaction in which, among other things, ITC
Holding and other stockholders of KNOLOGY Holdings exchanged their KNOLOGY
Holdings stock and certain other assets for stock in our company, and
immediately following the distribution regarding beneficial ownership of our
voting capital stock by:
- each person known by us to beneficially own more than 5% of our
outstanding voting capital stock,
- each of our executive officers,
- each of our directors, and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each of the named individuals is c/o
KNOLOGY, Inc., 1241 O.G. Skinner Drive, West Point, Georgia 31833.
<TABLE>
<CAPTION>
PERCENT OF VOTING
CAPITAL STOCK(2)
AMOUNT AND NATURE OF AMOUNT AND NATURE OF ---------------------------------
NAME AND ADDRESS OF BENEFICIAL BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE AFTER
OWNER BEFORE DISTRIBUTION(1)(4) AFTER DISTRIBUTION(1)(3)(4) DISTRIBUTION(3) DISTRIBUTION(3)
- ------------------------------ ------------------------- --------------------------- --------------- ---------------
<S> <C> <C> <C> <C>
5% Shareholders
ITC Holding Company, Inc...
InterCall, Inc.(5)......... 43,211,531 -- 90% --
AT&T Venture Funds(6)...... 4,267,800(6) 4,267,800(6) 8.9 8.9%
SCANA Communications,
Inc. .................... 451,800 7,220,886 * 15.0
American Water Works
Company, Inc. ........... -- 3,813,402 -- 7.9
South Atlantic Private
Equity Funds(7).......... -- 3,536,632(7) -- 7.4
James O. Hayles(8)......... -- 2,846,641(8) -- 5.9
Carroll Lanier Hodges(9)... -- 3,124,315(9) -- 6.5
Elizabeth L. Lester(10).... -- 3,195,203(10) -- 6.7
Ellen L. Collins(11)....... -- 3,194,575(11) -- 6.7
Executive Officers
Felix L. Boccucci, Jr.(4)... 58,852(4) 81,728(4) * *
Marcus R. Luke(4).......... 39,420(4) 49,878(4) * *
James T. Markle............ -- -- -- --
Bret McCants(4)............ 25,800(4) 26,453(4) * *
Peggy A. Warner............ -- -- -- --
Robert K. Mills............ -- -- -- --
Thomas Patrick Barrett..... -- -- -- --
Rodger L. Johnson.......... -- -- -- --
Anthony J. Palermo......... -- -- -- --
Chad S. Wachter............ -- -- -- --
Directors
Campbell B. Lanier......... 41,181,807(12) 7,825,656(13) 90 16.1
Richard Bodman(6).......... 4,267,800(6) 4,267,800(6) 8.9 8.9
Donald W. Weber............ -- 41,275 -- --
Donald W. Burton(7)........ -- 3,542,630(7) -- 7.4
L. Charles Hilton, Jr. .... -- 376,453 -- *
William H. Scott, III...... 41,181,807(12) 1,373,843(14) 90 2.8
Alan A. Burgess............ -- -- -- --
Rodger L. Johnson.......... -- -- -- --
</TABLE>
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<TABLE>
<CAPTION>
PERCENT OF VOTING
CAPITAL STOCK(2)
AMOUNT AND NATURE OF AMOUNT AND NATURE OF ---------------------------------
NAME AND ADDRESS OF BENEFICIAL BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE AFTER
OWNER BEFORE DISTRIBUTION(1)(4) AFTER DISTRIBUTION(1)(3)(4) DISTRIBUTION(3) DISTRIBUTION(3)
- ------------------------------ ------------------------- --------------------------- --------------- ---------------
<S> <C> <C> <C> <C>
All Named Executive Officers
and Directors as a Group (17
persons)..................... 45,573,679 17,585,716 94.9% 36.6%
</TABLE>
- ---------------
* Less than 1%
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from November 30, 1999. More
than one person may be deemed to be a beneficial owner of the same
securities. All persons shown in the table above have sole voting and
investment power, except as otherwise indicated. Except as otherwise noted,
all voting capital stock listed in the table above consists of our Series A
preferred stock.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not deemed
outstanding in determining the percentage owned by any other person.
(3) The "After Distribution" information reflects the ITC Holding Company
distribution to its shareholders of its 43,211,531 shares of our Series A
preferred stock and the conversion of the $29.7 million loan from ITC
Holding into 6,258,036 options to purchase Series A preferred stock. The
"Before Distribution" information does not reflect the conversion of the
$29.7 million loan into options.
(4) Includes the following shares that the individuals named below have the
right to currently purchase or to purchase within 60 days from November 30,
1999 pursuant to options as follows:
<TABLE>
<CAPTION>
BEFORE AFTER
DISTRIBUTION DISTRIBUTION
------------ ------------
<S> <C> <C>
Felix L. Boccucci, Jr.(a)............................ 52,852(a) 74,422(a)
Marcus R. Luke(a).................................... 25,620(a) 36,078(a)
Bret McCants(a)...................................... 21,000(a) 21,653(a)
Donald W. Weber...................................... -- 41,275
Donald W. Burton..................................... -- 26,024
Campbell B. Lanier................................... -- 529,721
William H. Scott, III................................ -- 645,956
South Atlantic Funds (collectively).................. -- 25,118
Burton Partnership, Limited Partnership.............. -- 906
</TABLE>
(a) includes options to purchase common shares of 52,852, 25,620 and
21,000 for Mr. Boccucci, Mr. Luke and Mr. McCants, respectively.
(5) The address of ITC Holding, Inc. is 1239 O.G. Skinner Drive, West Point,
GA, and the address of InterCall, Inc. is 1211 O.G. Skinner Drive, West
Point, Georgia 31833. InterCall is a wholly-owned subsidiary of ITC
Holding.
(6) The address of each of the AT&T venture funds and of Mr. Bodman is 2
Wisconsin Circle, #610, Chevy Chase, Maryland 20815. Includes 325,800
shares owned by AT&T 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; 2,931,600 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 153,600 shares owned by Special Partners
Fund, L.P., of which Venture Management III, L.L.C. is
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the general partner, of which Mr. Bodman is a manager; and includes 856,800
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.
(7) The address of Mr. Burton and of each entity comprising South Atlantic is
614 West Bay Street, Suite 200, Tampa, Florida 33606. Includes 117,552
shares held of record by The Burton Partnership, Limited Partnership, of
which Mr. Burton is the sole general partner; 1,681,925 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; 870,528 shares held
by South Atlantic Private Equity Fund IV (QP), Limited Partnership, of
which Mr. Burton is a general partner; 591,099 shares held by South
Atlantic Private Equity Fund IV, Limited Partnership, of which Mr. Burton
is a general partner; and 206,266 shares held by South Atlantic Venture
Fund II, Limited Partnership, of which Mr. Burton is the managing partner.
Each of the respective South Atlantic funds has sole voting and investment
power with respect to the shares beneficially owned by such fund. Also
includes 49,236 shares held of record by four Burton Family trusts of which
Mr. Burton is trustee.
(8) Includes 19,620 shares held of record by two family trusts; 1,273,378
shares held of record by The Fredonia 1999 Annuity Trust; and 1,452,503
shares held of record by The 1997 Trust FBO Campbell B. Lanier IV, all
trusts of which Mr. Hayles is trustee. Also includes 50,570 shares held of
record by Mr. Hayles' wife.
(9) Includes 3,900 shares held of record by two members of Mrs. Hodges
immediate family; and 2,081,959 shares held of record by The James Smith
Lanier II Three Year Trust dated August 26, 1999, of which Mrs. Hodges is a
co-trustee.
(10) Includes 54,468 shares held of record jointly by Mrs. Lester and her
husband; 86,476 shares held of record by three members of Mrs. Lester's
immediate family, and 2,081,959 shares held of record by The James Smith
Lanier II Three Year Trust dated August 26, 1999, of which Mrs. Lester is a
co-trustee.
(11) Includes 54,468 shares held of record jointly by Mrs. Collins and her
husband; 72,214 shares held of record by three members of Mrs. Collins
immediate family; and 2,081,959 shares held of record by The James Smith
Lanier II Three Year Trust dated August 26, 1999, of which Mrs. Collins is
a co-trustee.
(12) These are the shares owned by InterCall, Inc., of which Messrs. Lanier and
Scott are directors. Messrs. Lanier and Scott disclaim beneficial ownership
of these shares.
(13) Includes 121,718 shares held of record by the Jane Lowery Zachry Hyatt
Lanier Trust, of which Mr. C. Lanier, III is trustee; 136,150 shares held
of record by The Campbell B. Lanier, Jr. Irrevocable Life Insurance Trust,
of which Mr. C. Lanier, III is trustee; 58,847 shares held of record by the
Lanier Family Foundation, of which Mr. C. Lanier, III is co-trustee; and
392 shares held of record by Mr. C. Lanier, III's wife.
(14) Includes 44,768 shares held of record by The Martha J. Scott, Trustee FBO
Mary Martha Scott U/A 6/26/91 Trust, of which Mr. Scott's wife is trustee;
2,831 shares held of record by two members of Mr. Scott's immediate family;
87,150 shares held of record by The Melissa H. Lanier 1997 GST Trust, of
which Mr. Scott is trustee; and 160,831 shares held of record by The
Campbell B. Lanier, III Charitable Remainder Trust.
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DESCRIPTION OF SECURITIES
The following summary description of our capital stock is subject to the
provisions of our certificate of incorporation and our bylaws, which are
included as exhibits to the Registration Statement of which this prospectus
forms a part, and the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
We currently have 200,000,000 shares of common stock authorized and 2,476
shares of common stock outstanding. We currently have 175,000,000 shares of
preferred stock authorized of which 75,000,000 shares are designated as Series A
preferred stock and 50,000,000 shares are designated as Series B preferred
stock. We have 48,035,531 shares of Series A preferred stock outstanding and no
shares of Series B preferred stock outstanding.
COMMON STOCK
Voting Rights. Each holder of common stock is entitled to attend all
special and annual meetings of the stockholders of our 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 properly considered and acted
upon by the stockholders. Holders of common stock are entitled to one vote per
share and vote as a single class.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, subject to the
provisions of our preferred stock, holders of common stock are entitled to
participate ratably on a per-share basis in all distributions to the holders of
our common stock in any dissolution, liquidation or winding up.
Dividends. Dividends and distributions may be paid on the common stock in
cash, property or securities, and the holders of our common stock will be
entitled to participate in such dividends and distributions ratably on a per
share basis. The rights of holders of our common stock to receive dividends and
distributions are subject to any provisions of any of our preferred stock
outstanding.
Transfer Restrictions. Any holder of shares of common stock that decides
to sell its shares of common stock must first offer those shares to us before it
can offer the shares to a third party. Our board of directors at its discretion
may waive or terminate the transfer restrictions. All transfer restrictions will
terminate upon a qualified underwritten public offering of our common stock,
which is an underwritten public offering
- with a per-share purchase price of at least $6.00;
- resulting in proceeds to us of at least $50 million prior to expenses and
underwriting commissions; and
- in which our common stock is listed for quotation on the Nasdaq National
Market or a national securities exchange.
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Redemption. All outstanding shares of our common stock are subject to
redemption if our board of directors determines such action should be taken to
prevent the loss or secure the reinstatement of a license or franchise held by
us or any of our subsidiaries and used to conduct business.
AUTHORIZED PREFERRED STOCK
Our certificate of incorporation authorizes our 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 our
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 existing series of preferred stock, and could
discourage attempts to obtain control of our company.
SERIES A PREFERRED STOCK
Voting Rights. Except as otherwise required by law, the holders of shares
of Series A preferred stock are entitled to attend all special and annual
meetings of the stockholders of our 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 properly considered and acted upon by the stockholders.
Holders of Series A preferred stock will vote with holders of common stock on an
as-converted basis. In addition, holders of Series A preferred stock and Series
B preferred stock are entitled to a separate class vote on:
- the issuance of any additional Series A preferred stock;
- the creation of any class or series of capital stock with preference to
or on parity with the Series A preferred stock;
- the voluntary dissolution of our company; and
- any amendment to our certificate of incorporation or bylaws that would
materially adversely affect the preferences of the Series A preferred
stock.
Holders of Series A preferred stock and holders of Series B preferred stock,
which is expected to be issued in a private placement in the near future, are
entitled to vote together as a single class or as separate classes on any
merger, consolidation, recapitalization, liquidation, dissolution, winding-up or
sale of all or substantially all of our assets that constitutes a change of
control.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, following any
required prior distributions or payments for any other series of preferred
stock, the holders of shares of our Series A
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preferred stock are entitled to receive, out of our assets legally available for
distribution to stockholders, a liquidation value equal to the greater of:
- the initial per-share purchase price of $4.75, or
- the amount such holder would have received had his Series A preferred
stock been converted into common stock immediately before the liquidation
event.
This distribution must be paid after any distribution with respect to the Series
B preferred stock but prior to any distribution with respect to the common
stock. If the remaining distributable assets are insufficient to pay cash in an
amount equal to the full Series A preferred stock liquidation distribution, then
such assets or the proceeds of such assets will be distributed among the holders
of the Series A preferred stock ratably on a per share basis.
Dividends. The holders of our Series A preferred stock and Series B
preferred stock, prior to and in preference to the holders of our common stock,
will participate on an as-converted basis in all dividends and distributions
payable to the holders of our common stock. As we do not pay guaranteed
dividends to our preferred stockholders, we do not have a restriction on any
repurchase or redemption of shares of our Series A preferred stock while there
is any arrearage in the payment of dividends.
Conversion Into Common Stock. The Series A preferred stock is convertible
at any time at the option of the holder into the number of shares of common
stock determined by multiplying the conversion rate then in effect by the number
of shares of Series A preferred stock held. The conversion rate is the quotient
obtained by dividing the Series A preferred stock issue price by the conversion
price. The Series A preferred stock issue price equals $4.75, subject to
adjustments for any future stock dividends, stock splits or similar transactions
affecting the Series A preferred stock. The conversion price equals the initial
per-share purchase price of $4.75, subject to adjustments for any future stock
dividends, stock splits and similar transactions affecting the common stock, as
well as issuances of common stock and common stock equivalents other than
options and stock issued pursuant to employee benefit plans at less than the
conversion price then in effect. The shares of Series A preferred stock shall
automatically be converted into shares of common stock at the conversion price,
as adjusted for any stock split or reclassification, upon our completion of a
qualified underwritten public offering of common stock. Each share of Series A
preferred stock will be convertible into one share of our common stock
immediately after the distribution.
Transfer Restrictions. Any holder of shares of Series A preferred stock
that decides to sell its shares of Series A preferred stock must first offer
those shares to us before it can offer the shares to a third party. Our board of
directors at its discretion may waive or terminate the transfer restrictions.
All transfer restrictions will terminate upon a qualified underwritten public
offering of our common stock. Additionally, holders of Series A preferred stock
who own more than 5% of our capital stock on an as-converted basis and who are
parties to the stockholders agreement also must offer any shares not purchased
by us to the other greater than 5% stockholders party to the stockholders'
agreement. If any shares remain to be sold to a third party, the other
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greater than 5% stockholders have the right to sell their shares along with the
original selling stockholder on a pro rata basis.
SERIES B PREFERRED STOCK
The Series B preferred stock expected to be issued in the private placement
ultimately will have substantially the same rights, restrictions, preferences
and designations as our Series A preferred stock, other than the differences set
forth below.
Additional Voting Rights. Similar to the rights of the holders of Series
A preferred stock, the holders of Series B preferred stock are entitled to a
separate class vote on:
- the issuance of additional Series B preferred stock; and
- the creation of any class or series of capital stock with preference to
or on parity with the Series B preferred stock.
In addition to the other voting rights granted to holders of shares of
Series A preferred stock, holders of Series B preferred stock will be entitled
to a separate class vote on any redemption or redemptions of common stock or
preferred stock except for
- any redemption or redemptions approved by a director elected by the
holders of the Series B preferred stock; and
- any redemption or redemptions from employees or former employees
representing, in the aggregate, during any twelve-month period in which
such redemption or redemptions occur, not more than 1% of our outstanding
common stock on a fully-diluted basis.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, before any
distribution or payment is made to the holders of any other class or series of
our capital stock, the holders of shares of Series B preferred stock will be
entitled to receive, out of assets legally available for distribution to
stockholders, a liquidation value equal to the greater of:
- the initial per-share purchase price of $4.75, or
- the amount such holder would have received had his Series B preferred
stock been converted into common stock immediately before the liquidation
event.
If the distributable assets would be insufficient to pay cash in an amount
equal to the full Series B preferred stock liquidation distribution, then such
assets or the proceeds of such assets will be distributed among the holders of
Series B preferred stock ratably on a per share basis.
Board Seats. The holders of Series B preferred stock, voting together as
a separate class, have the right to elect two directors to our board of
directors. Additionally, under the stockholders' agreement, certain holders of
our Series B preferred stock have the right to appoint board observers as long
as each such holder maintains at least 25% of its original investment.
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Preemptive Rights. We will enter into a stockholders' agreement with the
holders of Series B preferred stock and holders of shares of Series A preferred
stock who own shares other than as a result of the distribution. Under that
agreement, each party that is a holder of shares of Series B preferred stock or
Series A preferred stock that represent, on an as-converted basis, at least 5%
of our outstanding capital stock will have the right to purchase its pro-rata
share of 75% of any future offerings of our equity securities. This right will
not apply to issuances pursuant to employee benefit plans or issuances for
non-cash consideration.
Registration Rights. Under the stockholders' agreement mentioned above,
shares of common stock issued or issuable upon the conversion of Series A
preferred stock obtained other than as a result of the distribution and which
were not registered in connection with the distribution or Series B preferred
stock will have the benefit of various registration rights. Holders of such
preferred stock will have the right to require us to effect up to two
registrations on Form S-1 and unlimited registrations on Form S-3, each with
respect to at least 25% of our registrable stock, subject to our reasonable
deferral rights. Holders of such preferred stock also will have unlimited rights
to include shares in future registrations of stock by us or our own account or
the account of other selling stockholders. These rights to include shares in
future registrations will be subject to customary rights of KNOLOGY to exclude
the shares to the extent the managing underwriter determines that it would hurt
the distribution to which the registration relates. We will pay all expenses in
connection with these registrations other than underwriter discounts and
commissions. Approximately 21 million shares of Series B preferred stock and
approximately 48 million shares of Series A preferred stock will have the
benefit of these registration rights. A holder's registration rights will
terminate when all registrable securities beneficially owned by such holder
immediately may be sold under Rule 144(k) of the Securities Act of 1933, as
amended, or our common stock is listed on a national securities exchange or
traded on the Nasdaq market system.
OPTIONS
As of December 20, 1999, we had outstanding options to purchase 6,674,176
shares of our common stock. All of these options were granted under our stock
option plan. The weighted average exercise price of these options is $2.70. The
options will vest at different times between the current date and November 2004,
and each option terminates 10 years from the date of its issuance. The options
terminate upon the option holder's termination of employment. Further, the
options are immediately exerciseable upon the sale of KNOLOGY, unless our board
decides such acceleration is not in the best interests of KNOLOGY.
WARRANTS
As of December 3, 1999, we had outstanding 444,100 warrants, each of which
warrant entitles the warrant holder to purchase 2.2404 shares of our Series A
preferred stock at an exercise price of $.01 per share. The exercise price is
subject to adjustment for any division, consolidation or reclassification of the
Series A preferred stock or similar actions by KNOLOGY. The warrants are
exercisable at any time until their
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expiration in October 2007. Any warrants that are not exercised by that date
will expire. Under certain circumstances, as set forth in the warrant agreement,
if we consolidate or merge with, or sell substantially all of our assets to,
another person at a time when our preferred stock or common stock is not
publicly traded, we would be required to make an offer to repurchase the
warrants at their fair market value. The distribution will not require us to
offer to repurchase the warrants under the warrant agreement.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Certain provisions of the Delaware General Corporation Law, our certificate
of incorporation, our bylaws and our stock option plans may have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt. This may be true even in circumstances where
a takeover attempt might result in payment of a premium over market price for
shares held by stockholders.
Following the completion of the distribution, we will become subject to
Section 203 of the Delaware General Corporation Law. Section 203 prohibits,
subject to certain exceptions, a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to stockholders. A person will be deemed an
interested stockholder triggering this protection if the person together with
any affiliates or associates of such person, beneficially owns, directly or
indirectly, 15% or more of our outstanding voting stock. There are three
exceptions to these provisions. First, if our board of directors gives prior
approval to either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder then the restrictions do not
apply. Second, the restrictions will not apply if, upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of our outstanding
voting stock. Finally, the restrictions will not apply if, at the time of or
following the consummation of the transaction in which the stockholder became an
interested stockholder, our board of directors approves the business combination
and stockholders holding at least 66 2/3% of our outstanding voting stock not
owned by the interested stockholder authorize the business combination.
We may issue 50,000,000 shares of undesignated preferred stock. Under
certain circumstances, the issuance of preferred stock could be utilized as a
method of discouraging, delaying or preventing a change in control of our stock.
The provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or preventing a non-negotiated merger or other
business combination involving us. These provisions are intended to encourage
any person interested in acquiring us to negotiate with and obtain the approval
of our board of directors in connection with the transaction. Certain of these
provisions may, however, discourage our future acquisition in a transaction not
approved by our board of directors in which stockholders might receive an
attractive value for their shares or that a substantial number or even a
majority of our stockholders might believe to be in their best interest.
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As a result, stockholders who desire to participate in such a transaction may
not have the opportunity to do so. Such provisions could also discourage bids
for our common stock at a premium, as well as create a depressive effect on the
market price of our common stock.
LEGAL MATTERS
Hogan & Hartson L.L.P., of Washington, D.C., will issue an opinion about
certain legal matters with respect to our common stock. Anthony S. Harrington, a
partner of Hogan & Hartson, currently owns 80,768 shares of common stock of ITC
Holding and will receive 87,986 shares of our Series A preferred stock in the
distribution.
EXPERTS
The consolidated financial statements and schedules of KNOLOGY, Inc. and
subsidiaries as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, and KNOLOGY Holdings, Inc. as of December
31, 1997 and July 31, 1998 and for each of the two years in the period ended
December 31, 1997 and the period ended July 31, 1998 included in this prospectus
and in the registration statement have been audited by Arthur Andersen LLP,
independent accountants, as indicated in their reports with respect thereto, and
are included in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of Cable Alabama Corporation as of August 31, 1998
and September 30, 1997 and for the eleven month period ended August 31, 1998 and
the year ended September 30, 1997 included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and have been so included in reliance upon the report of such
firm given on their authority as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It
includes exhibits and schedules. This prospectus is part of the registration
statement. It does not contain all of the information that is in the
registration statement. The registration statement contains more information
about our company and our capital stock. Statements contained in this prospectus
concerning the provisions of documents filed as exhibits to the registration
statement are necessarily summaries of such documents. Each of these statements
is qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. You may read and copy all or any portion of the registration
statement at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room's
operations. The registration statement is also available to you on the SEC's
Internet site (www.sec.gov). We intend to furnish our stockholders with annual
reports containing financial statements audited by our independent accountants
and quarterly reports containing unaudited financial statements for the first
three quarters of each fiscal year.
129
<PAGE> 133
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
KNOLOGY, INC.
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets -- December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
1996, 1997 and 1998 and the Nine Months Ended September
30, 1999 (unaudited)...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
<TABLE>
<CAPTION>
KNOLOGY HOLDINGS, INC.
<S> <C>
Report of Independent Public Accountants.................... F-28
Consolidated Balance Sheets -- December 31, 1997 and July
31, 1998.................................................. F-29
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and the Period Ended July 31,
1998...................................................... F-30
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
1996, 1997 and the Period Ended July 31, 1998............. F-31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and the Period Ended July 31,
1998...................................................... F-32
Notes to Consolidated Financial Statements.................. F-33
CABLE ALABAMA CORPORATION
Report of Independent Public Accountants.................... F-49
Balance Sheets -- August 31, 1998 and September 30, 1997.... F-50
Statements of Operations and Deficit for the Period Ended
August 31, 1998 and the Year Ended September 30, 1997..... F-51
Statements of Cash Flows for the Period Ended August 31,
1998 and the Year Ended September 30, 1997................ F-52
Notes to Financial Statements............................... F-53
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Financial Information............................. F-56
Unaudited Consolidated Pro Forma Balance Sheet as of
September 30, 1999........................................ F-56
Unaudited Consolidated Pro Forma Statement of Operations for
the Period Ended September 30, 1999....................... F-58
Unaudited Pro Forma Statement of Operations for the Year
Ended December 31, 1998................................... F-59
</TABLE>
F-1
<PAGE> 134
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KNOLOGY, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY,
INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and 1998
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KNOLOGY,
Inc. and subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective August 1998, the
Company acquired a majority ownership interest in KNOLOGY Holdings, Inc. in a
business combination accounted for as a purchase. As a result of this
acquisition, the financial information for 1998 includes the accounts of KNOLOGY
Holdings, Inc. and, therefore, is not comparable to periods prior to the
acquisition.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 30, 1999
F-2
<PAGE> 135
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 626,902 $ 5,158,774 $ 21,199,977
Marketable securities...................................... 0 66,231,397 0
Accounts receivable, net of allowance for doubtful accounts
of $108,528 and $393,766 in 1997 and 1998,
respectively............................................. 3,660,359 8,774,536 9,674,793
Accounts receivable -- affiliates.......................... 0 6,785,691 8,636,849
Prepaid expenses........................................... 54,798 500,022 1,216,793
------------ ------------ ------------
Total current assets................................. 4,342,059 87,450,420 40,728,412
------------ ------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
System and installation equipment.......................... 27,924,111 188,753,702 250,696,942
Test and office equipment.................................. 1,038,956 8,539,784 11,384,537
Automobiles and trucks..................................... 765,114 3,777,458 5,327,864
Production equipment....................................... 0 857,028 924,274
Land....................................................... 300,975 2,750,244 2,750,244
Buildings.................................................. 641,563 10,902,460 13,424,846
Inventory.................................................. 255,225 32,417,006 26,097,032
Leasehold improvements..................................... 407,778 1,145,184 1,335,300
------------ ------------ ------------
31,333,722 249,142,866 311,941,039
Less accumulated depreciation and amortization............. (20,072,876) (37,257,198) (53,285,137)
------------ ------------ ------------
Property, plant, and equipment, net.................. 11,260,846 211,885,668 258,655,902
------------ ------------ ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net........................... 0 69,092,623 58,307,193
Investments................................................ 14,283,627 825,072 1,412,064
Other...................................................... 309,960 593,663 559,677
------------ ------------ ------------
Total assets......................................... $ 30,196,492 $369,847,446 $359,663,248
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.......................... $ 0 $ 25,094 $ 12,174
Accounts payable........................................... 2,804,112 8,877,925 16,050,716
Accounts payable -- affiliates............................. 132,329 248,306 347,203
Accrued liabilities........................................ 1,835,707 23,076,341 6,907,270
Advances from affiliates................................... 0 2,025,604 1,171,252
Unearned revenue........................................... 810,091 3,231,232 3,593,068
------------ ------------ ------------
Total current liabilities............................ 5,582,239 37,484,502 28,081,683
NONCURRENT LIABILITIES:
Notes payable.............................................. 0 109,150 19,116,496
Accrued interest payable................................... 0 21,036,541 35,825,088
Unamortized investment tax credits......................... 513,605 441,989 388,277
Deferred income taxes...................................... 560,473 321,658 321,658
Bonds payable, net of discount............................. 0 255,020,209 266,472,157
------------ ------------ ------------
Total liabilities.................................... 6,656,317 314,414,049 350,205,359
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
MINORITY INTEREST........................................... 0 3,267,653 0
------------ ------------ ------------
WARRANTS (NOTE 3)........................................... 0 2,486,960 2,486,960
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.01 par value per share;
75,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 1997 and 1998 and September
30, 1999................................................. 0 0 0
Series B Preferred stock, $.01 par value per share;
50,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 1997 and 1998 and September
30, 1999................................................. 0 0 0
Common stock, $.01 par value per share; 200,000,000 shares
authorized, 100 shares issued and outstanding at December
31, 1997 and 1998 and September 30, 1999................. 1 1 1
Additional paid-in capital................................. 20,358,995 70,259,878 70,259,878
Retained earnings (accumulated deficit).................... 3,181,179 (20,583,483) (63,265,300)
Unrealized gains (losses).................................. 0 2,388 (23,650)
------------ ------------ ------------
Total stockholders' equity........................... 23,540,175 49,678,784 6,970,929
------------ ------------ ------------
Total liabilities and stockholders' equity........... $ 30,196,492 $369,847,446 $359,663,248
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 136
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Telephone........................................ $17,527,208 $17,633,313 $ 22,318,344 $ 15,970,354 $ 21,236,214
Video............................................ 0 0 22,527,403 14,149,220 25,871,947
Internet services and other...................... 0 0 286,775 165,475 1,716,067
----------- ----------- ------------ ------------ ------------
Total operating revenues................... 17,527,208 17,633,313 45,132,522 30,285,049 48,824,228
----------- ----------- ------------ ------------ ------------
OPERATING EXPENSES:
Cost of services................................. 2,991,412 3,121,108 12,739,540 9,010,401 18,573,719
Selling, operations, and administrative.......... 8,331,795 9,498,461 37,323,345 24,256,479 35,760,116
Depreciation and amortization.................... 3,022,056 2,781,800 17,108,034 8,925,933 28,697,148
----------- ----------- ------------ ------------ ------------
Total operating expenses................... 14,345,263 15,401,369 67,170,919 42,192,813 83,030,983
----------- ----------- ------------ ------------ ------------
OPERATING INCOME (LOSS)............................ 3,181,945 2,231,944 (22,038,397) (11,907,764) (34,206,755)
----------- ----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................................. 0 0 9,639,050 8,366,231 1,251,191
Interest expense................................. (9,933) (12,431) (29,033,088) (21,477,687) (24,073,491)
Affiliate interest income (expense), net......... 193,495 467,815 (34,115) (25,253) (106,248)
Equity losses in subsidiary...................... (1,052,227) (2,444,706) 0 0 0
Other income (expense), net...................... 488,776 (59,184) 782,954 747,511 174,122
----------- ----------- ------------ ------------ ------------
Total other expense........................ (379,889) (2,048,506) (18,645,199) (12,389,198) (22,754,426)
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS, AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. 2,802,056 183,438 (40,683,596) (24,296,962) (56,961,181)
MINORITY INTERESTS................................. 0 0 13,294,079 11,292,126 3,267,653
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... 2,802,056 183,438 (27,389,517) (13,004,836) (53,693,528)
INCOME TAX (PROVISION) BENEFIT..................... (1,371,865) (1,010,779) 5,631,618 1,704,350 11,011,711
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. 1,430,191 (827,341) (21,757,899) (11,300,486) (42,681,817)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (NOTE 2)............................... 0 0 (582,541) (582,541) 0
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS).................................. 1,430,191 (827,341) (22,340,440) (11,883,027) (42,681,817)
SUBSIDIARY PREFERRED STOCK DIVIDENDS............... 0 (4,193,276) (1,424,222) (63,907) 0
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS..................................... $ 1,430,191 $(5,020,617) $(23,764,662) $(11,946,934) $(42,681,817)
=========== =========== ============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON SHAREHOLDERS.............. $ 14,301.91 $(50,206.17) $(237,646.62) $(119,469.34) $(426,818.17)
=========== =========== ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING...................................... 100 100 100 100 100
=========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 137
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS UNREALIZED TOTAL
--------------- --------------- PAID-IN (ACCUMULATED GAINS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) EQUITY
------ ------ ------ ------ ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.......... 0 $0 100 $1 $ 5,175,002 $ 8,168,034 $ 184,854 $ 13,527,891
Comprehensive Loss:
Net income attributable to common
stockholders.................... 0 0 0 0 0 1,430,191 0 1,430,191
Unrealized loss on marketable
securities...................... 0 0 0 0 0 0 (184,854) (184,854)
------------
Comprehensive Income........ 1,245,337
------------
Additional infusion of equity..... 0 0 0 0 874,493 0 0 874,493
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, December 31, 1996.......... 0 0 100 1 6,049,495 9,598,225 0 15,647,721
Comprehensive Loss:
Net loss attributable to common
stockholders.................... 0 0 0 0 0 (5,020,617) 0 (5,020,617)
------------
Comprehensive Loss.......... (5,020,617)
------------
Acquisition of subsidiary stock... 0 0 0 0 14,310,000 0 0 14,310,000
Merger of subsidiary out of
consolidated group.............. 0 0 0 0 (500) (1,396,429) 0 (1,396,929)
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, December 31, 1997.......... 0 0 100 1 20,358,995 3,181,179 0 23,540,175
Comprehensive Loss:
Net loss attributable to common
stockholders.................... 0 0 0 0 0 (23,764,662) 0 (23,764,662)
Unrealized gain on marketable
securities...................... 0 0 0 0 0 0 2,388 2,388
------------
Comprehensive Loss.......... (23,762,274)
------------
Issuance of subsidiary common
stock........................... 0 0 0 0 3,152 0 0 3,152
Acquisition of minority
interests....................... 0 0 0 0 46,864,658 0 0 46,864,658
Additional infusion of equity..... 0 0 0 0 3,033,073 0 0 3,033,073
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, December 31, 1998.......... 0 0 100 1 70,259,878 (20,583,483) 2,388 49,678,784
Comprehensive Loss:
Net loss attributable to common
stockholders.................... 0 0 0 0 0 (42,681,817) 0 (42,681,817)
Unrealized loss on marketable
securities...................... 0 0 0 0 0 0 (26,038) (26,038)
------------
Comprehensive Loss.......... (42,707,855)
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, September 30, 1999
(unaudited)....................... 0 $0 100 $1 $70,259,878 $(63,265,300) $ (23,650) $ 6,970,929
====== == === == =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 138
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 1,430,191 $ (827,341) $ (22,340,440) $(11,883,027) $(42,681,817)
----------- ------------ ------------- ------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 3,022,056 2,781,800 17,108,034 8,925,933 28,697,148
Amortization of bond discount.................... 0 0 13,651,778 9,948,239 11,451,948
Gain (loss) on disposition of assets............. 0 0 71,378 0 (7,809)
Loss on sale of investments...................... (273,725) (13,315) (515,903) (515,903) 0
Cumulative effect of change in accounting
principle...................................... 0 0 582,541 582,541 0
Deferred income taxes............................ 10,231 (764,802) (238,815) 0 0
Amortization of deferred investment tax credit... (71,616) (71,616) (71,616) (53,712) (53,712)
Equity in net loss of subsidiary................. 1,052,227 2,444,706 0 0 0
Minority interest in net loss of subsidiary...... 0 0 (13,294,079) (11,292,126) (3,267,653)
Changes in operating assets and liabilities:
Accounts receivable............................ 487,157 (811,787) (10,292,009) (4,240,850) (2,751,415)
Prepaid expenses............................... (15,772) 5,580 (408,164) (283,697) (716,771)
Accounts payable............................... (2,056,062) 2,111,164 (80,289) (2,457,826) 7,271,688
Accrued liabilities and interest............... 1,373,123 (1,283,101) 37,437,445 20,594,284 (1,380,524)
Unearned revenue............................... 15,155 59,934 1,514,093 301,052 361,836
Other.......................................... (202,235) 48,894 (88,466) (109,869) 7,948
----------- ------------ ------------- ------------ ------------
Total adjustments............................ 3,340,539 4,507,457 45,375,928 21,398,066 39,612,684
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities................................. 4,770,730 3,680,116 23,035,488 9,515,039 (3,069,133)
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (995,320) (1,727,079) (120,227,057) (80,913,266) (64,290,709)
Purchase of investments and acquisitions, net of
cash acquired.................................... 0 (14,310,000) (73,920,617) (73,390,887) 0
Organizational cost expenditures................... 0 0 (251,815) (216,122) (406,535)
Proceeds from sale of investments.................. 797,958 118,711 162,264,322 132,411,488 66,231,397
Dividends from affiliate/return of capital......... 0 (4,193,276) (1,424,222) (63,907) 0
Accounts payable-capital related................... 0 (2,112,296) 0 0 0
Investment in ClearSource, Inc..................... 0 0 (825,072) (825,072) (586,992)
Proceeds from sale of property..................... 0 0 32,075 0 74,632
Other.............................................. 0 0 (234,417) 0 0
----------- ------------ ------------- ------------ ------------
Net cash (used in) provided by investing
activities................................. (197,362) (22,223,940) (34,586,803) (22,997,766) 1,021,793
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short-term
borrowings....................................... (911,326) 0 (11,654) (8,169) (5,574)
Expenditures related to issuance of debt and credit
facility......................................... 0 0 (1,498,817) (286,599) (51,531)
Proceeds from credit facility...................... 0 0 0 0 19,000,000
Proceeds from the issuance of subsidiary common
stock............................................ 0 0 3,152 3,152 0
Additional infusion of equity...................... 874,493 14,310,000 15,564,902 14,632,113 0
(Advances to) repayments from affiliate............ (4,420,343) 4,416,407 2,025,604 836,207 (854,352)
----------- ------------ ------------- ------------ ------------
Net cash (used in) provided by financing
activities................................. (4,457,176) 18,726,407 16,083,187 15,176,704 18,088,543
----------- ------------ ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 116,192 182,583 4,531,872 1,693,977 16,041,203
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 328,127 444,319 626,902 626,902 5,158,774
----------- ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 444,319 $ 626,902 $ 5,158,774 $ 2,320,879 $ 21,199,977
=========== ============ ============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........... $ 9,933 $ 12,431 $ 46,162 $ 12,761 $ 5,471
=========== ============ ============= ============ ============
Cash paid during the period for income taxes....... $ 167,038 $ 1,145,805 $ 1,742,947 $ 0 $ 0
=========== ============ ============= ============ ============
Merger of subsidiary out of consolidated group..... $ 0 $ 108,108 $ 0 $ 0 $ 0
=========== ============ ============= ============ ============
Subsidiary preferred stock dividends............... $ 0 $ 4,193,276 $ 1,424,222 $ 63,907 $ 0
=========== ============ ============= ============ ============
Detail of investments and acquisitions:
Cash acquired.................................... $ 0 $ 0 $ (6,144,581) $ (6,144,581) $ 0
Property, plant, and equipment................... 0 0 30,133,876 30,133,876 0
Intangible assets................................ 0 0 55,009,395 54,479,665 0
Minority interest................................ 0 0 20,912,251 20,912,251 0
Common and/or Preferred Stock received
(issued)....................................... 0 14,310,000 (34,532,324) (34,532,324) 0
Bond discount.................................... 0 0 8,542,000 8,542,000 0
----------- ------------ ------------- ------------ ------------
Net cash paid for acquisitions................... $ 0 $ 14,310,000 $ 73,920,617 $ 73,390,887 $ 0
=========== ============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 139
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
ORGANIZATION
KNOLOGY, Inc. (the "Company"), a wholly owned subsidiary of ITC Holding
Company, Inc. ("ITC Holding") was incorporated under the laws of the State of
Delaware in September 1998. The purpose of incorporating the Company was to
enable ITC Holding to complete a reorganization of certain of its wholly owned
and majority owned subsidiaries on November 23, 1999 (the "Reorganization"), as
follows:
a. ITC Holding contributed all of the outstanding capital stock of
Interstate Telephone, Inc; Valley Telephone, Inc.; Globe Telecom, Inc.; and
ITC Globe, Inc. to the Company (collectively, "Telephone Operations
Group").
b. ITC Holding contributed its 85% interest in KNOLOGY Holdings, Inc.
("KNOLOGY Holdings") to the Company.
c. ITC Holding contributed its 6% interest in ClearSource, Inc.
("ClearSource"); $5.7 million in cash to purchase additional ClearSource
shares, and subscription rights to purchase ClearSource shares to the
Company.
d. Other minority shareholders exchanged the remaining 15% of KNOLOGY
Holdings for shares of stock of the Company.
As a result of the Reorganization, the Telephone Operations Group and
KNOLOGY Holdings and subsidiaries are now wholly owned subsidiaries of the
Company. Following the Reorganization, ITC Holding holds a 90% interest in the
Company. ITC Holding will not own any capital stock of the Company following the
proposed distribution of the Company's shares to ITC Holding's shareholders
(Note 11).
The Reorganization has been accounted for in a manner similar to a pooling
of interest for the Telephone Operations Group. KNOLOGY Holdings and
subsidiaries have been treated as an equity investment in subsidiary in 1996 and
1997 in relation to the Company's 24% and 29% ownership interest, respectively.
KNOLOGY Holdings and subsidiaries have been consolidated with the Company in
1998 in relation to the 85% controlling interest obtained in July 1998 (Note 9)
which was recorded at ITC Holding's historical cost. For the period from August
1998 to December 1998, the 15% of KNOLOGY Holdings that the Company did not own
has been reflected as minority interest and the pro-rata losses attributed to
the minority holders to the extent that their investment was greater than zero
(which it was for the period discussed here) in accordance with Financial
Accounting Standards Board Current Text on Consolidation and Statement of
Financial Accounting Standards No. 94. Because a controlling interest in KNOLOGY
Holdings was acquired in August 1998, the financial statements for the year
ended December 31, 1998 include the accounts of KNOLOGY Holdings for the
F-7
<PAGE> 140
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entire year and the minority interest in losses includes the 58% share of
KNOLOGY Holdings' losses for the period January 1998 to July 1998.
The exchange of the remaining 15% of KNOLOGY Holdings for shares of stock
of the Company was accounted for as an acquisition of a minority interest of a
subsidiary. The stock issued in the exchange was valued at $22.4 million and was
recorded as goodwill since the book value of net assets acquired (which
approximated fair value) was less than zero. The Company had recorded 100% of
KNOLOGY Holdings' losses since KNOLOGY Holdings' equity was less than zero.
NATURE OF BUSINESS
The Telephone Operations Group is wholly owned and provides a full line of
local telephone and related services and broadband services. Certain of the
Telephone Operations Group subsidiaries are subject to regulation, by state
public service commissions of applicable states, for intrastate
telecommunications services. For applicable interstate matters related to
telephone service, certain Telephone Operations Group subsidiaries are subject
to regulation by the Federal Communications Commission.
KNOLOGY Holdings and its subsidiaries own and operate advanced hybrid
fiber-coaxial networks and provide residential and business customers broadband
communications services, including analog and digital cable television, local
and long-distance telephone, high-speed Internet access, and broadband carrier
services to various markets in the southeastern United States.
The Company has experienced operating losses as a result of the expansion
of the advanced broadband communications networks and services into new and
existing markets. 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 as it extends its broadband communications networks in the existing and
new markets in accordance with its business plan. On December 22, 1998, KNOLOGY
Holdings entered into a $50 million four-year senior secured credit facility,
which may be used for working capital and other purposes, including capital
expenditures and permitted acquisitions (Note 3). The Company also plans to
complete a private placement of Series B preferred stock to a small group of
institutional investors to provide additional funds for its expansion plans
(Note 11). While management expects its expansion plans will result in
profitability, there can be no assurance that growth in the Company's revenue or
customer base will continue or that the Company will be able to achieve or
sustain profitability and/or positive cash flow.
F-8
<PAGE> 141
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and its wholly owned and
majority-owned subsidiaries. Investments in which the Company does not exercise
significant control are accounted for using the cost method of accounting.
Investments in which the Company does exercise significant control and owns less
than 50% are accounted for using the equity method. All significant intercompany
balances have been eliminated.
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 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.
UNAUDITED PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
Following the proposed distribution (Note 11), the Company will become a
separate taxable entity. Accordingly, the pro forma income taxes reflect income
taxes as if the Company were a separate taxable entity. In addition, the pro
forma earnings per share reflect the proposed distribution as if it had occurred
at the beginning of each period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA DATA (NOTE 2):
Pro forma income tax (provision)
benefit............................ $(1,371,865) $(1,010,779) $ 2,382,644 $ 1,704,350 $ 0
Pro forma net income (loss)
attributable to common
shareholders....................... $ 1,430,191 $(5,020,617) $(27,013,636) $(11,946,934) $(53,693,528)
=========== =========== ============ ============ ============
Pro forma basic and diluted net
income (loss) attributable to
common shareholders................ $ 14,301.91 $(50,206.17) $(270,136.36) $(119,469.34) $(536,935.28)
=========== =========== ============ ============ ============
</TABLE>
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.
F-9
<PAGE> 142
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of stockholders' equity until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific identification
basis. Securities available for sale at December 31, 1998 are primarily
comprised of commercial paper.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as incurred.
The cost and accumulated depreciation of property and equipment disposed of are
removed from the related accounts, and any gain or loss is included in or
deducted from income. Depreciation and amortization (excluding telephone plant)
are provided over the estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.............................................. 25
System and installation equipment...................... 7-10
Production equipment................................... 7
Test and office equipment.............................. 3-7
Automobiles and trucks................................. 5
Leasehold improvements................................. 5
</TABLE>
Depreciation of telephone plant is provided on a straight-line method,
using class or overall group rates acceptable to regulatory authorities. Such
rates range from 2% to 24%.
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to system and installation
equipment when installed.
Interest is capitalized in connection with the construction of the
Company's broadband networks. The capitalized interest is recorded as part of
the asset to which it relates and is amortized over the asset's estimated useful
life. In 1998, approximately $2,469,000 of interest costs was capitalized.
For the nine months ended September 30, 1998 and 1999, approximately
$1,493,000 and $2,404,000, respectively of interest costs were capitalized
(unaudited).
F-10
<PAGE> 143
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired as well as various other acquired
intangibles and costs associated with the issuance of debt and the consummation
of a credit facility. Intangible assets and the related useful lives and
accumulated amortization at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
1998 (YEARS)
----------- ------------
<S> <C> <C>
Goodwill...................................... $28,325,241 10-40
Subscriber base............................... 34,863,072 3
Debt issuance costs (Note 3).................. 9,382,124 4-10
Noncompete agreement.......................... 1,500,000 3
Other......................................... 102,979 10-15
-----------
74,173,416
Less accumulated amortization................. 5,080,793
-----------
Intangibles, net.............................. $69,092,623
===========
</TABLE>
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires
that all nongovernmental entities expense costs of start-up activities,
including pre-operating, preopening, and organization activities, as the costs
are incurred. Adoption of this statement resulted in a cumulative effect of
accounting change of $582,541.
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established 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 to the Company's consolidated financial statements.
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying amount
of an asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows are
based on many factors, including
F-11
<PAGE> 144
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current operating results, expected market trends, and competitive influences.
If an impairment has occurred, a loss equal to the difference between the
carrying value of the asset and its fair value is recognized. The resulting
reduced carrying amount of the asset is accounted for as its new cost and
depreciated over the asset's remaining useful life. Management believes that the
long-lived assets in the accompanying consolidated balance sheets are
appropriately valued.
INVESTMENTS
Investments and equity ownership in associated companies consisted of the
following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Equity ownership in associated companies:
KNOLOGY Holdings preferred stock, 14,267
shares in 1997........................ $14,184,734 $ 0
Nonmarketable investments, at cost:
ClearSource, Inc. common and preferred
stock, 0 and 333,444 shares in 1997
and 1998, respectively................ 0 825,072
Other nonmarketable investments.......... 98,893 0
----------- -----------
$14,283,627 $ 825,072
=========== ===========
</TABLE>
At December 31, 1998, KNOLOGY Holdings, Inc. owned approximately 11% of
ClearSource, Inc. ("ClearSource"). ClearSource was formed during 1998 to build
and operate advanced broadband networks offering a bundle of communications
services to residential and business customers. The Company's investment in
ClearSource is accounted for under the cost method of accounting.
As of December 31, 1997 and 1998, the Company owned approximately 29% and
85%, respectively, of KNOLOGY Holdings. The Company's ownership interest in
KNOLOGY Holdings was accounted for using the equity method during 1997. The
Company's equity in KNOLOGY Holdings' losses included in the accompanying
statements of operations was $1,052,227 and $2,444,706 for the years ended
December 31, 1996 and 1997, respectively. KNOLOGY Holdings' results of
operations and its cash flows are included in the accompanying financial
statements for the year ended December 31, 1998.
F-12
<PAGE> 145
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the assets, liabilities and equity as of December
31, 1997 and the results of operations for the years ended December 31, 1996 and
1997 of associated companies in which the Company's investments were accounted
for by the equity method.
<TABLE>
<CAPTION>
1997
------------
<S> <C>
ASSETS:
Current assets........................................... $235,670,423
Property and other noncurrent assets..................... 80,527,677
------------
Total assets.................................... $316,198,100
============
LIABILITIES AND EQUITY:
Current liabilities...................................... $ 8,840,263
Noncurrent liabilities................................... 253,232,923
Warrants................................................. 2,486,960
Equity................................................... 51,637,954
------------
Total liabilities and equity.................... $316,198,100
============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues............................... $ 5,334,183 $10,355,068
Operating loss................................... (2,703,273) (5,511,386)
Net loss................................ (3,125,428) (9,091,533)
</TABLE>
REVENUE RECOGNITION
The Company's revenues are recognized when services are provided,
regardless of the period in which they are billed. Fees billed in advance are
included in the accompanying balance sheets as unearned revenue and are deferred
until the month the service is provided.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Approximately
$1,000, $9,000, and $587,000 of advertising expense are recorded in the
Company's statements of operations for the years ended December 31, 1996, 1997,
and 1998, respectively.
Approximately $405,000 and $1,144,000 of advertising expense are recorded
in the Company's statements of operations for the nine months ended September
30, 1998 and 1999, respectively (unaudited).
F-13
<PAGE> 146
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSTALLATION FEES
The Company recognizes installation revenue when the customer is initially
billed for the connection of services as the installation direct costs exceed
installation revenue on a per customer basis.
SOURCES OF SUPPLIES
The Company purchases customer premise equipment and plant materials from
outside vendors. Although numerous suppliers market and sell customer premise
equipment and plant materials, the Company currently purchases each customer
premise component from a single vendor and has several suppliers for plant
materials. If the suppliers are unable to meet the Company's needs as it
continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Company's network could result, which would
adversely affect operating results.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The potential for material credit loss
is mitigated by the large number of customers with relatively small receivable
balances. The carrying amount of the Company's receivables approximates their
fair values.
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).
For the years ended December 31, 1997 and 1998, the Telephone Operations
Groups was included in the consolidated tax returns of the Company's parent
company, ITC Holding. Effective August 1998, KNOLOGY Holdings was included in
the consolidated federal income tax return of ITC Holding. The Company and its
subsidiaries file separate state income tax returns. Under a tax sharing
arrangement, the Company recorded an income tax benefit of $5,631,618 and an
affiliate receivable in the amount of $6,785,691 at December 31, 1998 for the
utilization of net operating losses included in the consolidated tax return of
ITC Holding. For the period from January 1, 1998 to July 31, 1998, KNOLOGY
Holdings filed a separate federal income tax return.
F-14
<PAGE> 147
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment tax credits related to telephone plant have been deferred and
are being amortized as a reduction of federal income tax expense over the
estimated useful lives of the assets giving rise to the credits.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company has chosen to disclose comprehensive income,
which consists of net income and unrealized appreciation, in the statements of
stockholders' equity. Prior years have been restated to conform to the SFAS No.
130 requirements.
NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." That
statement requires the disclosure of basic net income (loss) per share and
diluted net income (loss) per share. Basic net income (loss) per share is
computed by dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per share gives effect to all potentially dilutive securities. The
Company did not have any potentially dilutive securities during the periods
presented.
3. LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Senior Discount Notes, with a face value of
$444,100,000, bearing interest at 11.875% beginning
October 15, 2002, payable semiannually beginning
April 15, 2003 with principal and any unpaid interest
due October 15, 2007................................... $255,020,209
Capitalized lease obligation, at a rate of 10%, payable
in quarterly installments of $6,304 through December
2006, secured....................................... 134,244
------------
255,154,453
Less current maturities................................ 25,094
------------
$255,129,359
============
</TABLE>
F-15
<PAGE> 148
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are maturities of long-term debt for each of the next five years
as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................... $ 25,094
2000........................................... 13,438
2001........................................... 14,833
2002........................................... 16,374
2003........................................... 18,074
Thereafter..................................... 444,146,431
------------
Total.............................. $444,234,244
============
</TABLE>
The fair values of long-term debt, including current maturities, at
December 31, 1998 are estimated to be approximately $280,804,000, based on a
valuation technique that considers cash flows discounted at current rates.
On December 22, 1998, KNOLOGY Holdings entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp., which may be used for working capital and other purposes,
including capital expenditures and permitted acquisitions. At KNOLOGY Holdings'
option, interest will accrue based on either the Alternate Base Rate plus
applicable margin or the LIBOR rate plus applicable margin. Obligations under
the credit facility will be secured by substantially all tangible and intangible
assets of KNOLOGY Holdings and its current and future subsidiaries. The credit
facility includes a number of covenants, including, among others, covenants
limiting the ability of KNOLOGY Holdings 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 credit facility also includes covenants requiring compliance
with certain operating and financial ratios on a consolidated basis. The credit
facility allows KNOLOGY Holdings to borrow up to five times certain individual
subsidiary's "consolidated adjusted cash flow" as defined in the credit
facility. In connection with the initiation of the revolving credit facility,
KNOLOGY Holdings incurred approximately $1,256,000 in related costs which are
being amortized on a straight-line basis over the five year term.
In the fourth quarter of 1997, KNOLOGY Holdings issued units consisting of
senior discount notes due 2007 and warrants to purchase Preferred Stock for
gross proceeds of approximately $250 million. The notes were offered at a
substantial discount from face value, with no interest payable for the first
five years. Approximately $2.5 million of the gross proceeds has been allocated
to the warrants. Each warrant allows the holder to purchase .003734 shares of
KNOLOGY Holdings' preferred stock. KNOLOGY Holdings incurred approximately $7.9
million in costs to issue the senior discount notes. These costs are being
amortized at an effective rate over the life of the notes. The indenture
relating to the notes contains certain covenants that, among other
F-16
<PAGE> 149
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
things, limit the ability of KNOLOGY Holdings to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, make
investments, engage in transactions with stockholders and affiliates, create
liens, sell assets, and engage in mergers and consolidations. The proceeds from
the offering of the units have been, and will be, used to repay certain
indebtedness of KNOLOGY Holdings, to fund expansion of KNOLOGY Holdings'
business, and for additional working capital and general corporate purposes.
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for
varying periods. Leases that expire are generally expected to be renewed or
replaced by other leases.
Future minimum rental payments required under the operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $293,493
2000............................................... 198,888
2001............................................... 166,181
2002............................................... 155,199
2003 and thereafter................................ 125,575
--------
Total minimum lease payments........... $939,336
========
</TABLE>
Total rental expense for all operating leases was approximately $0, $0 and
$435,000 for the years ended December 31, 1996, 1997, and 1998, respectively.
Total rental expense for all operating leases was approximately $260,000
and $407,000 for the nine months ended September 30, 1998 and 1999 (unaudited).
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into contracts with various entities to provide
programming to be aired by KNOLOGY Holdings. The Company pays a monthly fee as
cost for the programming services, generally based on the number of average
subscribers to the program, although some fees are adjusted based on the total
number of subscribers to the system and/or the system penetration percentage.
Certain contracts have minimum monthly fees. The Company estimates that it will
pay approximately $6.5 million in programming fees under these contracts during
1999.
F-17
<PAGE> 150
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Company which would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
6. INCOME TAXES
The (provision) benefit for income taxes from continuing operations
consisted of the following for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Current........................ $(1,361,634) $(1,775,581) $ 5,392,803
Deferred....................... 347,527 1,596,002 10,662,185
Increase in valuation
allowance................... (357,758) (831,200) (10,423,370)
----------- ----------- ------------
Income tax provision
(benefit)................... $(1,371,865) $(1,010,779) $ 5,631,618
=========== =========== ============
</TABLE>
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, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........ $ 0 $ 8,923,583
Equity in losses of subsidiaries........ 1,188,958 1,188,958
Deferred charges........................ 170,704 0
Deferred bond interest.................. 0 12,919,184
Deferred revenues....................... 426,910 190,918
Other................................... 85,978 1,841,404
Valuation allowance..................... (1,188,958) (15,777,328)
----------- ------------
Total deferred tax assets...... 683,592 9,286,719
Deferred tax liabilities:
Depreciation and amortization........... 1,244,065 9,608,377
----------- ------------
Net deferred income taxes.................. $ 560,473 $ 321,658
=========== ============
</TABLE>
At December 31, 1997 the Company had deferred tax assets related to equity
losses of subsidiaries. Management has recorded a 100% valuation allowance in
1997 against these deferred tax assets, as the Company has determined it is more
likely than not that the deferred tax assets will not be realized. The Company
has available, at December 31, 1998, unused net operating loss carryforwards of
approximately $23,657,000, expiring in
F-18
<PAGE> 151
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
various years from 2005 to 2013, unless utilized. Management has recorded a
total valuation allowance of $15,777,328 in 1998 on these operating loss
carryforwards, the majority of which contain limitations on utilization, and the
equity losses of subsidiaries.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended December 31, 1996, 1997,
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax (provision) benefit at statutory
rate............................................ (34)% (34)% 34%
State income taxes, net of federal benefit...... (4) (4) 4
Other........................................... 2 (60) 1
Increase in valuation allowance................. (13) (453) (25)
--- ---- ---
(49)% (551)% 14%
=== ==== ===
</TABLE>
7. EQUITY INTERESTS
CAPITAL TRANSACTIONS
The Company has authorized 200,000,000 shares of $.01 par value common
stock, 75,000,000 shares of $.01 par value Series A convertible preferred stock,
and 50,000,000 shares of $.01 par value Series B convertible preferred stock.
KNOLOGY HOLDINGS' STOCK OPTION PLAN
Under KNOLOGY Holdings' 1995 stock option plan (the "Stock Option Plan"),
as adopted in December 1995 and amended in February 1998, 700,000 shares of
KNOLOGY Holdings' common stock are reserved and authorized for issuance upon the
exercise of the options. All employees of KNOLOGY Holdings are eligible to
receive options under the Stock Option Plan. The Stock Option Plan is
administered by the compensation and stock option committee of the board of
directors. Options granted under the Stock Option Plan are intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended. All options were granted at an exercise price equal to the
estimated fair value of the common stock at the dates of grant as determined by
the board of directors based on equity transactions and other analyses. The
options expire ten years from the date of grant.
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
F-19
<PAGE> 152
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting methodology
required by APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company accounts for KNOLOGY Holdings' 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 KNOLOGY Holdings' common stock
to employees of KNOLOGY Holdings using the Black-Scholes option pricing model
and the following weighted average assumptions in 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate.......... 6.31% 6.43% 5.42%
Expected dividend yield.......... 0% 0% 0%
Expected lives................... Seven years Seven years Seven years
Expected volatility.............. 30% 30% 30%
</TABLE>
The weighted average fair value of options granted was $8.00, $8.44, and
$10.21 for 1996, 1997, and 1998, respectively. The total value of options for
KNOLOGY Holdings' stock granted to employees of KNOLOGY Holdings during 1996,
1997, and 1998 was computed as approximately $154,000, $304,000, and $1,832,000,
respectively, which would be amortized on a pro forma basis over the five-year
vesting period of the options. If the Company had accounted for these plans in
accordance with SFAS No. 123, the Company's net income (loss) for the periods
presented would be as follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
----------- ------------
<S> <C> <C>
Net income (loss) attributable to common
stockholders for the years ended
December 31:
1996.................................... $ 1,430,191 $ 1,399,702
1997.................................... (5,020,617) (5,117,946)
1998.................................... (23,764,662) (24,054,385)
Earnings (loss) per share attributable to
common stockholders for the years ended
December 31:
1996.................................... 14,301.91 13,997.02
1997.................................... (50,206.17) (51,179.46)
1998.................................... 237,646.62 (240,543.85)
</TABLE>
F-20
<PAGE> 153
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of KNOLOGY Holdings' stock option plan at December
31, 1998 is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
SHARES SHARE
------- ---------
<S> <C> <C>
Outstanding at December 31, 1996:................... 52,797 8.00
Granted.......................................... 126,384 8.44
Forfeited........................................ (15,939) 8.00
-------
Outstanding at December 31, 1997:................... 163,242 8.34
Granted.......................................... 565,376 10.18
Forfeited........................................ (36,056) 9.52
Exercised........................................ (394) 8.00
-------
Outstanding at December 31, 1998.................... 692,168
=======
Exercisable shares as of December 31:
1996............................................. 0 $ 0.00
=======
1997............................................. 6,606 8.00
=======
1998............................................. 30,006 8.00
=======
</TABLE>
TELEPHONE OPERATIONS GROUP STOCK OPTION PLAN
The Company's parent, ITC Holding, sponsors a stock option plan which
provides for the granting of stock options to substantially all employees of the
Telephone Operations Group. Options are generally granted at a price
(established by ITC Holding's board of directors based on equity transactions
and other analyses) equal to at least 100% of the fair market value of ITC
Holding's common stock on the option grant date. Options granted generally
become exercisable 40% after two years and 20% per annum for the next three
years and remain exercisable for ten years after the option grant date.
F-21
<PAGE> 154
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
ITC Holding accounts 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 ITC Holding's common stock granted to
employees of the Telephone Operations Group using the Black-Scholes option
pricing model prescribed by SFAS No. 123 and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate....................... 6.3% 6.0% 5.3%
Expected dividend yield....................... 0% 0% 0%
Expected lives................................ Ten years Ten years Ten years
Expected volatility........................... 50% 60% 50%
</TABLE>
The weighted average fair value of options granted was $4.91, $4.54, and
$9.58 for 1996, 1997, and 1998, respectively. The total value of options for ITC
Holding's stock granted to employees of the Telephone Operations Group during
1996, 1997, and 1998 was computed as approximately $407,000, $2,427,000, and
$382,000, respectively, which would be amortized on a pro forma basis over the
five-year vesting period of the options. If the Company had accounted for these
plans in accordance with SFAS No. 123, the Company's net income (loss) for the
periods presented would be as follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net income (loss) attributable to common
shareholders for the years ended December 31:
1996........................................... $ 1,430,191 1,216,808
1997........................................... (5,020,617) (7,015,805)
1998........................................... (23,764,662) (24,134,245)
Earnings (loss) per share attributable to common
stockholders for the years ended December 31:
1996........................................... $ 14,301.91 $ 12,168.08
1997........................................... (50,206.17) (70,158.05)
1998........................................... (237,646.62) (241,342.45)
</TABLE>
F-22
<PAGE> 155
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Telephone Operations Group's portion of ITC
Holding's stock option plan at December 31, 1998 is presented in the following
table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
SHARES SHARE
-------- ------------
<S> <C> <C>
Outstanding at December 31, 1996:..................... 479,756 $ 0.15-$3.36
Granted............................................ 188,732 $ 3.36-$7.75
Forfeited.......................................... (33,800) $ 0.49-$7.75
Exercised.......................................... (31,000) $ 0.28-$2.73
--------
Outstanding at December 31, 1997:..................... 603,688 $ 0.15-$7.75
Granted............................................ 86,968 $8.38-$12.50
Forfeited.......................................... (93,172) $1.26-$12.50
Exercised.......................................... (149,372) $ 0.28-$3.36
--------
Outstanding at December 31, 1998...................... 448,112 $0.15-$12.50
========
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
EXERCISABLE AT WEIGHTED REMAINING
EXERCISE PRICE DECEMBER 31, AVERAGE CONTRACTUAL
RANGE 1998 PRICE LIFE(YEARS)
-------------- -------------- -------- -----------
<S> <C> <C> <C>
$ 1.58-$2.21 145,154 1.70 5.45
$ 2.73-$4.01 21,472 2.73 7.20
</TABLE>
TELEPHONE OPERATIONS GROUP SAVINGS PLAN
The Telephone Operations Group has a savings plan (the "Savings Plan") that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Under the Savings Plan, participating employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual
contribution limit. Annually, the Telephone Operations Group determines whether
to make a discretionary matching contribution equal to a percentage, determined
by the Telephone Operations Group, of the employee's deferred compensation
contribution. Employer contributions to the Savings Plan of approximately
$118,000, $96,000, and $125,000 were made for the years ended December 31, 1996,
1997, and 1998, respectively.
F-23
<PAGE> 156
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS
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. For the years ended December 31, 1996, 1997,
and 1998, the Company recorded approximately $1,547,000, $3,459,000, and
$3,230,000, respectively, in selling, operations, and administrative expenses
related to these services. In the opinion of management, amounts charged to the
Company are consistent with costs that would be incurred from third party
providers.
Certain of ITC Holding's affiliates provide the Company with various
services and/or receive services provided by the Company. These entities include
InterCall, Inc., which provides conference calling services. In addition, we
receive services from ITC*DeltaCom, Inc., an affiliate of ITC Holding which
provides wholesale long-distance and related services and 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., which is a
national provider of Internet access. In management's opinion, the Company's
transactions with these affiliated entities are representative of arm's-length
transactions.
For the years ended December 31, 1996, 1997, and 1998, the Company received
services from these affiliated entities in the amounts of approximately
$620,000, $707,000, and $1,570,000, respectively, which are reflected in cost of
services and selling, operations, and administrative expenses in the Company's
statements of operations.
The Company also provides switching, programming, and other services for
various affiliated companies on a contracted or time and materials basis. Total
amounts paid by the affiliated companies for these services approximated
$1,616,000, $1,517,000, and $2,186,000, respectively, for the years ended
December 31, 1996, 1997, and 1998 and are reflected in operating revenues in the
Company's statements of operations.
During 1998, the Company leased office space to ITC*DeltaCom, Inc. and
Powertel, Inc. Approximately $234,000 of lease income related to these
transactions is recorded as other income in the Company's statement of
operations for the year ended December 31, 1998.
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 $222,000, $221,000, and $628,000 for the
years ended December 31, 1996, 1997, and 1998, respectively.
F-24
<PAGE> 157
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. BUSINESS ACQUISITIONS
KNOLOGY HOLDINGS ACQUISITIONS
In January 1998, the Company acquired an additional 6,747 shares of KNOLOGY
Holdings preferred stock, representing an approximate 13% ownership interest in
KNOLOGY Holdings, in exchange for cash of $10,177,234. The acquisition of the
additional interest was accounted for as a step acquisition. The fair value of
net assets acquired totaled $6,775,879, resulting in goodwill of $3,401,355.
Effective July 1998, the Company acquired an additional 42,565 shares,
representing approximately 43% of KNOLOGY Holdings' outstanding stock.
The Company recorded its acquisition of this additional ownership interest
under the purchase method of accounting as a step acquisition. Accordingly, the
Company recorded the pro rata share of net assets acquired at fair value. The
Company determined that the book value of the pro rata share of assets and trade
liabilities acquired approximated fair value. The fair value of KNOLOGY
Holdings' senior discount notes (Note 4) was determined to be less than book
value at the date of acquisition based on quoted market prices. As a result, a
debt discount of approximately $8,542,000 was recorded to adjust the book value
of the pro rata share of senior notes acquired to fair value (Note 4).
The total value paid by the Company was $36,687,424, including cash of
$2,155,100, common and preferred stock valued at $34,532,324. The fair value of
net assets acquired totaled $22,678,372, resulting in goodwill of $14,009,052.
Prior to the acquisition, the Company owned more stock than any other single
KNOLOGY Holdings stockholder, owning approximately 42% of the outstanding stock.
As a result of the acquisition, the Company owns approximately 85% of the
outstanding stock of KNOLOGY Holdings at December 31, 1998.
The goodwill and debt discount created upon the acquisition of KNOLOGY
Holdings is amortized over 10 years on a straight line basis and the term of the
senior notes on the effective interest method, respectively.
CABLE ALABAMA ACQUISITION
On October 30, 1998, KNOLOGY Holdings acquired substantially all of the
assets of Cable Alabama Corporation ("Cable Alabama") for approximately
$60,733,000 in cash and also purchased for $5,000,000 in cash certain real
property located in Huntsville, Alabama. Cable Alabama owned and operated a
cable television system serving the Huntsville, Alabama area. KNOLOGY Holdings
plans to upgrade the existing Cable Alabama plant is being upgraded to provide
local and long-distance telephone service and high-speed Internet access
services. The acquisition has been accounted for under the purchase method of
accounting.
F-25
<PAGE> 158
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TTE, INC. ACQUISITION
On June 1, 1998, KNOLOGY Holdings acquired TTE, Inc., a non-facilities
based reseller of local, long distance and operator services to small and
medium-sized business customers throughout South Carolina, for a purchase price
of $1.3 million. The acquisition has been accounted for under the purchase
method of accounting.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The assets of TTE, Inc. and Cable Alabama have been included in the
Company's consolidated financial statements effective June 1, 1998 and September
1, 1998, respectively. The following unaudited pro forma results of operations
for the year ended December 31, 1998 assume that the acquisitions occurred on
January 1, 1998. The unaudited pro forma information is presented for
informational purposes only and may not be indicative of the actual results of
operations had the acquisitions occurred on the assumed date, nor is the
information necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Operating revenues.......................................... $ 55,359,204
Loss before extraordinary items............................. (37,454,927)
Net loss attributable to common stockholders................ (33,830,072)
Net loss per share attributable to common stockholders
(a)....................................................... (338,300.72)
</TABLE>
- ---------------
(a) Loss per share is computed using 100 as the number of shares outstanding in
1998.
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements. Management has identified the
reportable segments based on broadband services offered.
While management of the Company monitors the revenue generated from each of
the various broadband services, operations are managed and financial performance
is evaluated based upon the delivery of a multiple of the services to customers
over a single network. As a result of multiple services being provided over a
single network, there are many shared expenses and shared assets related to
providing the various broadband services to customers. Management believes that
any allocation of the shared expenses or assets to the broadband services would
be arbitrary and impractical.
F-26
<PAGE> 159
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company owns and operates advanced hybrid fiber-coaxial networks and
provides residential and business customers broadband communications services,
including video analog and digital cable television and local and long-distance
telephone. Internet services include high-speed Internet access via cable
modems, local transport services, such as local Internet transport, special
access, local private line, and local exchange transport services.
<TABLE>
<CAPTION>
INTERNET SERVICES
VIDEO TELEPHONE AND OTHER
----------- ----------- -----------------
<S> <C> <C> <C>
1996
Operating revenues................... $ 0 $17,527,208 $ 0
Cost of services..................... 0 2,991,412 0
----------- ----------- --------
Gross margin......................... $ 0 $14,535,796 $ 0
=========== =========== ========
1997
Operating revenues................... $ 0 $17,633,313 $ 0
Cost of services..................... 0 3,121,108 0
----------- ----------- --------
Gross margin......................... $ 0 $14,512,205 $ 0
=========== =========== ========
1998
Operating revenues................... $22,527,403 $22,318,344 $286,775
Cost of services..................... 8,750,858 3,890,799 97,883
----------- ----------- --------
Gross margin......................... $13,776,545 $18,427,545 $188,892
=========== =========== ========
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
DISTRIBUTION AND PRIVATE PLACEMENT
The Company is in the process of registering with the Securities and
Exchange Commission shares of its common stock in order to complete a
distribution of its Series A convertible preferred stock to the stockholders of
ITC Holding. Shortly following this distribution, the Company intends to
complete a private placement of its Series B preferred stock to a small group of
institutional investors for approximately $100 million. There can be no
assurance that this offering will be completed.
F-27
<PAGE> 160
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 as of December 31, 1997
and July 31, 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997 and the period ended July 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KNOLOGY
Holdings, Inc. and subsidiaries as of December 31, 1997 and July 31, 1998 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1997 and the period ended July 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 15, 1999
F-28
<PAGE> 161
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,144,581 $ 5,483,929
Marketable securities..................................... 227,880,923 181,290,428
Accounts receivable -- trade, net of allowance of $108,529
and $270,854 at December 31, 1997 and July 31, 1998,
respectively............................................ 1,607,859 3,035,380
Accounts receivable - affiliates.......................... 0 21,000
Prepaid expenses.......................................... 37,060 297,101
------------ ------------
Total current assets................................ 235,670,423 190,127,838
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
System and installation equipment......................... 56,909,159 93,481,398
Test and office equipment................................. 1,628,485 3,658,597
Automobiles and trucks.................................... 837,490 2,035,893
Production equipment...................................... 297,286 440,954
Land...................................................... 0 300,975
Buildings................................................. 1,936,035 4,575,330
Inventory................................................. 5,806,320 18,507,889
Leasehold improvements.................................... 324,270 489,787
------------ ------------
67,739,045 123,490,823
Less accumulated depreciation and amortization............ (5,171,309) (11,424,440)
------------ ------------
Property, plant, and equipment, net................. 62,567,736 112,066,383
------------ ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net (Note 2)................. 17,896,146 18,014,255
Investments............................................... 0 825,072
Other..................................................... 63,795 63,795
------------ ------------
Total assets........................................ $316,198,100 $321,097,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 25,094 $ 25,094
Accounts payable.......................................... 5,817,733 4,429,417
Accounts payable--affiliate............................... 452,346 0
Accrued liabilities....................................... 1,638,042 8,854,827
Unearned revenue.......................................... 907,048 1,362,263
------------ ------------
Total current liabilities........................... 8,840,263 14,671,601
NONCURRENT LIABILITIES:
Notes payable (Note 3).................................... 120,804 115,426
Accrued interest payable.................................. 3,201,688 13,353,765
Bonds payable, net of discount of $194,189,569 and
$186,621,207 at December 31, 1997 and July 31, 1998,
respectively............................................ 249,910,431 257,478,793
------------ ------------
Total liabilities................................... 262,073,186 285,619,585
------------ ------------
COMMITMENTS AND CONTINGENCIES
WARRANTS (NOTE 3)........................................... 2,486,960 2,486,960
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value per share;
50,000 and 100,000 shares authorized, 49,985 and 49,851
shares issued and outstanding at December 31, 1997 and
July 31, 1998, respectively (Note 7).................... 500 499
Common stock, $.01 par value per share; 200,000 and
16,000,000 shares authorized, 0 and 394 shares issued
and outstanding at December 31, 1997 and July 31, 1998,
respectively (Note 7)................................... 0 4
Additional paid-in capital................................ 65,060,712 64,864,366
Accumulated deficit....................................... (13,402,495) (31,858,376)
Unrealized losses on marketable securities (Note 2)....... (20,763) (15,695)
------------ ------------
Total stockholders' equity.......................... 51,637,954 32,990,798
------------ ------------
Total liabilities and stockholders' equity.......... $316,198,100 $321,097,343
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE> 162
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
------------------------- ENDED JULY 31,
1996 1997 1998
----------- ----------- --------------
<S> <C> <C> <C>
OPERATING REVENUES..................................... $ 5,334,183 $10,355,068 $ 11,150,159
OPERATING EXPENSES:
Cost of services..................................... 2,513,693 4,758,730 4,932,239
Selling, operations, and administrative.............. 3,883,738 7,392,540 10,548,058
Depreciation and amortization........................ 1,640,025 3,715,184 4,335,794
----------- ----------- ------------
Total operating expenses..................... 8,037,456 15,866,454 19,816,091
----------- ----------- ------------
OPERATING LOSS......................................... (2,703,273) (5,511,386) (8,665,932)
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income...................................... 46,221 2,774,909 7,054,380
Interest expense..................................... (1,055,498) (6,226,023) (16,449,898)
Affiliate interest income, net....................... 273,799 0 0
Other (expense) income, net.......................... (60,000) (129,033) 188,110
----------- ----------- ------------
Total other expense.......................... (795,478) (3,580,147) (9,207,408)
----------- ----------- ------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............... (3,498,751) (9,091,533) (17,873,340)
INCOME TAX BENEFIT..................................... 373,323 0 0
----------- ----------- ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................... (3,125,428) (9,091,533) (17,873,340)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE 2).......................... 0 0 (582,541)
----------- ----------- ------------
NET LOSS............................................... $(3,125,428) $(9,091,533) $(18,455,881)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER SHARE................... $ (1.53) $ (2.10) $ (2.46)
=========== =========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 2,043,900 4,325,250 7,497,696
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-30
<PAGE> 163
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL (LOSS) GAIN ON TOTAL
--------------- --------------- PAID-IN ACCUMULATED MARKETABLE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES EQUITY
------ ------ ------ ------ ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995...... 7,520 $ 75 0 $ 0 $ 7,454,615 $ (1,185,534) $ 0 $ 6,269,156
Comprehensive Loss
Net loss...................... 0 0 0 0 0 (3,125,428) 0 (3,125,428)
------------
Comprehensive Loss............ (3,125,428)
------------
Issuance of preferred stock,
net of related offering
expenses of $379,701........ 9,572 96 0 0 11,054,603 0 0 11,054,699
------ ---- --- ------ ----------- ------------ -------- ------------
BALANCE, December 31, 1996...... 17,092 171 0 0 18,509,218 (4,310,962) 0 14,198,427
Comprehensive Loss:
Net loss...................... 0 0 0 0 0 (9,091,533) 0 (9,091,533)
Unrealized loss on marketable
securities.................. 0 0 0 0 0 0 (20,763) (20,763)
------------
Comprehensive Loss............ (9,112,296)
------------
Issuance of preferred stock,
net of related offering
expenses of $99,677......... 30,408 304 0 0 42,824,019 0 0 42,824,323
Purchase of Beach Cable
(Note 9).................... 2,485 25 0 0 3,727,475 0 0 3,727,500
------ ---- --- ------ ----------- ------------ -------- ------------
BALANCE, December 31, 1997...... 49,985 500 0 0 65,060,712 (13,402,495) (20,763) 51,637,954
Comprehensive Loss:
Net loss...................... 0 0 0 0 0 (18,455,881) 0 (18,455,881)
Unrealized gain on marketable
securities.................. 0 0 0 0 0 0 5,068 5,068
------------
Comprehensive Income........ (18,450,813)
------------
Issuance of common stock under
stock options............... 0 0 394 4 3,148 0 0 3,152
Beach Cable purchase price
adjustment.................. (134) (1) 0 0 (199,494) 0 0 (199,495)
------ ---- --- ------ ----------- ------------ -------- ------------
BALANCE, July 31, 1998.......... 49,851 $499 394 $ 4 $64,864,366 $(31,858,376) $(15,695) $ 32,990,798
====== ==== === ====== =========== ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-31
<PAGE> 164
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
------------------------------ ENDED JULY 31,
1996 1997 1998
------------ --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,125,428) $ (9,091,533) $(18,455,881)
------------ --------------- ------------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 1,640,025 3,715,184 4,335,794
Amortization of bond discount........................... 0 2,386,856 7,568,362
Gain on disposition of assets........................... 21,370 23,464 0
Cumulative effect of change in accounting principle..... 0 0 582,541
Deferred income taxes................................... (373,323) 0 0
Changes in operating assets and liabilities:
Accounts receivable................................... (512,337) (721,396) (1,448,521)
Prepaid expenses...................................... (180,950) 244,199 (260,041)
Accounts payable...................................... (39,648) 4,302,245 (1,840,662)
Accrued liabilities and interest...................... 293,394 163,317 17,368,862
Unearned revenue...................................... 278,757 243,007 455,215
Other................................................. 133 1,345 5,068
------------ --------------- ------------
Total adjustments................................... 1,127,421 10,358,221 26,766,618
------------ --------------- ------------
Net cash (used in) provided by operating
activities........................................ (1,998,007) 1,266,688 8,310,737
------------ --------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements.................. (14,416,135) (39,625,408) (50,089,645)
Acquisitions, net......................................... 0 0 (1,014,288)
Organizational cost expenditures.......................... (20,133) (470,923) (248,433)
Purchase of investments................................... (5,000) (227,956,301) 0
Proceeds from sale of investments......................... 0 0 46,590,495
Accounts payable -- capital related....................... 0 0 (3,214,982)
Investment in ClearSource, Inc............................ 0 0 (825,072)
Proceeds from sale of property............................ 0 69,152 0
Other..................................................... 0 0 315,906
------------ --------------- ------------
Net cash used in investing activities............... (14,441,268) (267,983,480) (8,486,019)
------------ --------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short term borrowings...... (160,900) (29,903,385) (5,378)
Expenditures related to issuance of debt and credit
facility................................................ 0 0 (283,649)
Proceeds from the issuance of common stock................ 0 0 3,152
Proceeds from the issuance of debt and short-term
borrowings, net of discount and issue costs on bonds.... 1,258,238 257,370,383 0
Proceeds from the issuance of preferred stock, net of
related offering expenses............................... 10,868,699 42,824,323 (199,495)
Repayments from affiliates................................ 4,255,836 0 0
Proceeds from the issuance of warrants.................... 0 2,486,960 0
------------ --------------- ------------
Net cash provided by (used in) financing
activities........................................ 16,221,873 272,778,281 (485,370)
------------ --------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (217,402) 6,061,489 (660,652)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 300,494 83,092 6,144,581
------------ --------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 83,092 $ 6,144,581 $ 5,483,929
============ =============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 1,016,039 $ 1,543,125 $ 3,672
============ =============== ============
Cash paid during the period for income taxes.............. $ 0 $ 0 $ 0
============ =============== ============
Details of acquisitions:
Property, plant, and equipment.......................... $ 0 $ 4,756,005 $ 0
Intangible Assets....................................... 0 2,796,139 1,014,288
Liabilities Assumed..................................... 0 (3,824,644) 0
Preferred stock issued.................................. 0 (3,727,500) 0
------------ --------------- ------------
Net cash paid for acquisitions.......................... $ 0 $ 0 $ 1,014,288
============ =============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-32
<PAGE> 165
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND JULY 31, 1998
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
KNOLOGY Holdings, Inc. was incorporated in Delaware in November 1995 under
the name CyberNet Holding, Inc. In April 1997, the Company formally changed its
name to KNOLOGY Holdings, Inc.
NATURE OF BUSINESS
KNOLOGY Holdings, Inc. and its subsidiaries (the "Company") own and operate
advanced hybrid fiber-coaxial networks and provide residential and business
customers broadband communications services, including analog and digital cable
television, local and long-distance telephone, high-speed Internet access, and
broadband carrier services to various markets in the southeastern United States.
The Company has experienced operating losses as a result of the expansion
of the advanced broadband communications networks and services into new and
existing markets. 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 as it extends its broadband communications networks in the existing and
new markets in accordance with its business plan. While management expects its
expansion plans will result in profitability, there can be no assurance that
growth in the Company's revenue or customer base will continue or that the
Company will be able to achieve or sustain profitability and/or positive cash
flow.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and all subsidiaries. All
significant intercompany balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year presentation.
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 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.
F-33
<PAGE> 166
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of stockholders' equity until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific identification
basis. Securities available for sale at July 31, 1998 are primarily comprised of
commercial paper.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as incurred.
The cost and accumulated depreciation of property and equipment disposed of are
removed from the related accounts, and any gain or loss is included in or
deducted from income. Depreciation and amortization are provided over the
estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 25
System and installation equipment........................... 7-10
Production equipment........................................ 7
Test and office equipment................................... 3-7
Automobiles and trucks...................................... 5
Leasehold improvements...................................... 5
</TABLE>
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to system and installation
equipment when installed.
Interest is capitalized in connection with the construction of the
Company's broadband networks. The capitalized interest is recorded as part of
the asset to which it relates and is amortized over the asset's estimated useful
life. For the year ended December 31, 1997 and the period ended July 31, 1998,
$676,160 and $1,954,976 of interest cost was capitalized, respectively. No
interest was capitalized prior to 1997.
F-34
<PAGE> 167
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE AND OTHER ASSETS
Intangible and other assets include the excess of the purchase price of
acquisitions over the fair value of net assets acquired as well as various other
acquired intangibles and costs associated with the issuance of debt and the
consummation of a credit facility. Intangible and other assets and the related
useful lives and accumulated amortization at December 31, 1997 and July 31, 1998
are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
DECEMBER 31, JULY 31, PERIOD
1997 1998 (YEARS)
------------ ----------- ------------
<S> <C> <C> <C>
Goodwill.......................... $ 9,875,262 $10,889,550 40
Debt issuance costs............... 7,883,307 8,166,956 4-10
Other............................. 955,048 350,540 10-15
----------- -----------
18,713,617 19,407,046
Less accumulated amortization..... 817,471 1,347,285
----------- -----------
Intangibles and other assets,
net............................ $17,896,146 $18,059,761
=========== ===========
</TABLE>
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires
that all nongovernmental entities expense costs of start-up activities,
including pre-operating, preopening, and organization activities, as the costs
are incurred. Adoption of this statement resulted in a cumulative effect of
accounting change of $582,541 or $.08 per basic and diluted share.
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established 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 to the Company's consolidated financial statements.
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying amount
of an asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows are
based on many factors, including current operating results, expected market
trends, and competitive influences. If an
F-35
<PAGE> 168
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment has occurred, a loss equal to the difference between the carrying
value of the asset and its fair value is recognized. The resulting reduced
carrying amount of the asset is accounted for as its new cost and depreciated
over the asset's remaining useful life. Management believes that the long-lived
assets in the accompanying consolidated balance sheets are appropriately valued.
INVESTMENTS
At July 31, 1998, investments represent the Company's 11% ownership in
ClearSource, Inc. ClearSource, Inc. was formed during 1998 to build and operate
advanced broadband networks offering a bundle of communications services to
residential and business customers. The Company's investment in ClearSource,
Inc. is accounted for under the cost method of accounting.
REVENUE RECOGNITION
Subscriber revenues are recognized in the month of service. Subscriber fees
billed in advance are included in the accompanying balance sheets as unearned
revenue and are deferred until the month the service is provided.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Approximately
$165,000, $158,000, and $237,160 of advertising expense are recorded in the
Company's statements of operations for the years ended December 31, 1996 and
1997 and the period ended July 31, 1998, respectively.
SOURCES OF SUPPLIES
The Company purchases customer premise equipment and plant materials from
outside vendors. Although numerous suppliers market and sell customer premise
equipment and plant materials, the Company currently purchases each customer
premise component from a single vendor and has several suppliers for plant
materials. If the suppliers are unable to meet the Company's needs as it
continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Company's network could result, which would
adversely affect operating results.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The potential for material credit loss
is mitigated by the large number of customers with relatively small receivable
balances. The carrying amount of the Company's receivables approximates their
fair values.
F-36
<PAGE> 169
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
Effective August 1998, the Company will be included in the consolidated
federal income tax return of its parent company, ITC Holding Company, Inc. ("ITC
Holding") (Note 7). The Company and its subsidiaries file separate state income
tax returns.
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." That
statement requires the disclosure of basic net loss per share and diluted net
loss per share. Basic net loss per share is computed by dividing net loss
available to common shareholders by the weighted-average number of common shares
outstanding during the period. As the Company has no significant common stock
outstanding, the convertible preferred stock is assumed to be converted for
purposes of this calculation. Diluted net loss per share gives effect to all
potentially dilutive securities. The Company's potentially dilutive securities
are not included in the computation of diluted net loss per share as their
effect is antidilutive.
3. LONG-TERM DEBT
Long-term debt at December 31, 1997 and July 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Senior Discount Notes, with a face value
of $444,100,000, bearing interest at
11.875% beginning October 15, 2002,
payable semiannually beginning April 15,
2003 with principal and any unpaid
interest due October 15, 2007............. $249,910,431 $257,478,793
Capitalized lease obligation, at a rate of
10%, payable in quarterly installments
of $6,304 through December 2006,
secured................................ 145,898 140,520
------------ ------------
250,056,329 257,619,313
Less current maturities................... 25,094 25,094
------------ ------------
$250,031,235 $257,594,219
============ ============
</TABLE>
F-37
<PAGE> 170
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are maturities of long-term debt for each of the next five years
as of July 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999........................................... $ 25,094
2000........................................... 13,438
2001........................................... 14,833
2002........................................... 16,374
2003........................................... 18,074
Thereafter..................................... 444,159,353
------------
Total.............................. $444,234,246
============
</TABLE>
The fair values of long-term debt, including current maturities, at
December 31, 1997 and July 31, 1998 are estimated to be approximately
$253,781,000 and $270,833,000 respectively, based on a valuation technique that
considers cash flows discounted at current rates.
In the fourth quarter of 1997, the Company issued units consisting of
senior discount notes due 2007 and warrants to purchase Preferred Stock for
gross proceeds of approximately $250 million. The notes were offered at a
substantial discount from face value, with no interest payable for the first
five years. Approximately $2.5 million of the gross proceeds has been allocated
to the warrants. Each warrant allows the holder to purchase .003734 shares of
the Company's preferred stock. The Company incurred approximately $7.9 million
in costs to issue the senior discount notes. These costs are being amortized at
an effective rate over the life of the notes. The indenture relating to the
notes contains certain covenants that, among other things, limit the 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 offering of the units have
been, and will be, used to repay certain indebtedness of the Company, to fund
expansion of the Company's business, and for additional working capital and
general corporate purposes.
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. In connection with the SCANA notes discussed above, SCANA and the
Company are negotiating warrants to purchase approximately 753 shares of the
Company's preferred stock. In October 1999, the Company executed the agreement
to issue warrants to purchase Preferred Stock of the Company. The Company will
record the fair value of
F-38
<PAGE> 171
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the warrants as interest expense in the fourth quarter of 1999. On October 24,
1997, the Company repaid all of these borrowings.
On May 13, 1997, the Company obtained a $3 million bridge loan facility
from First National Bank of West Point (the "Bridge Facility") to provide
additional liquidity until long-term financing could be arranged. Interest
accrued at the prime rate (as announced by SunTrust Bank, Atlanta) plus .5% per
annum on all outstanding principal amounts, plus accrued but unpaid interest. As
amended on September 18, 1997, the Bridge Facility was payable on demand, with a
final maturity date of December 15, 1997. On December 15, 1997, the Company
repaid all of these borrowings.
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for
varying periods. Leases that expire are generally expected to be renewed or
replaced by other leases.
Future minimum rental payments required under the operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
July 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999............................................... $208,342
2000............................................... 166,274
2001............................................... 124,565
2002............................................... 113,583
2003 and thereafter................................ 153,150
--------
Total minimum lease payments........... $765,914
========
</TABLE>
Total rental expense for all operating leases was approximately $70,000,
$75,000 and $97,000, for the years ended December 31, 1996 and 1997 and the
period ended July 31, 1998, 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 cost
for the programming services, generally based on the number of average
subscribers to the program, although some fees are adjusted based on the total
number of subscribers to the system and/or the system penetration percentage.
Certain contracts have minimum monthly fees. The Company estimates that it will
pay approximately $6.5 million in programming fees under these contracts during
1999.
F-39
<PAGE> 172
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Company which would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities at December 31, 1996 and 1997
and July 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $3,875 $7,221 $ 6,987
Deferred bond interest................... 0 0 8,792
Other.................................... 92 279 280
Valuation allowance...................... (2,475) (4,165) (10,270)
------ ------ --------
Total deferred tax assets....... 1,492 3,335 5,789
Deferred tax liabilities:
Depreciation and amortization............ (1,492) (3,335) (5,789)
------ ------ --------
Net deferred income taxes................... $ 0 $ 0 $ 0
====== ====== ========
</TABLE>
Effective August 1998, the Company will be included in the consolidated
federal income tax return of its parent company, ITC Holding (Note 7). The
Company and its subsidiaries file separate state income tax returns.
The Company has available, at December 31, 1996 and 1997 and July 31, 1998,
unused net operating loss carryforwards of approximately $10,273,00,
$19,144,000, and $18,523,000, respectively, expiring in various years from 2005
to 2013, unless utilized. Management has recorded a valuation allowance of
approximately $2,475,000, $4,165,000, and $10,270,000 for the years ended
December 31, 1996 and 1997 and the period ended July 31, 1998, respectively, on
these net operating loss carryforwards, the majority of which contain
limitations on utilization.
F-40
<PAGE> 173
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax benefit computed at statutory tax rates
to the income tax benefit for the years ended December 31, 1996 and 1997 and the
period ended July 31, 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at statutory rate........................ 34% 34% 34%
State income taxes, net of federal benefit.................. 2 4 5
Prior year actualization.................................... 6 (3) (4)
Goodwill.................................................... 1 (1) (1)
Deferred tax valuation allowance............................ (32) (34) (34)
--- --- ---
11% 0% 0%
=== === ===
</TABLE>
7. EQUITY INTERESTS
CAPITAL TRANSACTIONS
The Company has authorized 16,000,000 shares of $.01 par value common stock
and 100,000 shares of $.01 par value convertible preferred stock at December 31,
1998. In February 1998, the Company completed a 150-for-1 stock split of the
Company's common stock, par value $.01 per share, which was effected in the form
of a stock dividend of new shares of common stock. In connection with the stock
split, the Company increased the number of shares of authorized common stock
from 200,000 to 16,000,000 and changed the conversion ratio between the common
stock and the preferred stock from 1-to-1 to a ratio of 150-to-1.
In June 1998, ITC Holding made an offer to acquire outstanding shares of
the Company in exchange for $100 in cash and ITC Holding Common Stock valued at
$1,600 for each share of the Company's Preferred Stock exchanged (the
"Exchange"). The Exchange was completed effective July 31, 1998. Prior to the
exchange, ITC Holding (through its wholly owned subsidiaries) owned
approximately 42% of the outstanding stock of the Company, representing the
largest stockholder of the Company. As a result of the exchange, ITC Holding
owns approximately 85% of the outstanding stock of the Company.
In May 1998, the Company issued 394 shares of common stock, valued at $8
per share, to an employee under the Company's 1995 stock option plan. In
February 1997, the Company offered and accepted 8,960 shares of preferred stock
for subscription at $1,200 per share. Additionally, in October 1997, the Company
offered and accepted 21,448 shares of preferred stock for subscription at $1,500
per share. In December 1997, in conjunction with the acquisition of KNOLOGY of
Panama City, Inc., the Company issued 2,485 shares of preferred stock valued at
$1,500 per share. During 1998, 134 shares of preferred stock issued in
connection with the acquisition were returned to the Company as part of a
purchase price adjustment. The amount of the consideration paid
F-41
<PAGE> 174
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in excess of the par value, net of expenses incurred in connection with each
issuance, is included in additional paid-in capital on the accompanying balance
sheets. Each share of convertible preferred stock is automatically convertible
into common stock on a 150-for-1 basis at the earlier of either the effective
date of a public offering of common stock by the Company or on December 8, 2005.
In the event of liquidation of the Company, whether voluntary or involuntary,
the holders of convertible preferred stock are entitled to receive preferential
distributions of $1,000, $1,200, or $1,500 per share (depending on when the
stock was issued) before any distributions to common stockholders. The holders
of the preferred stock are not entitled to any other preferences, including
dividends.
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 offered rights of first refusal to purchase such securities to
the Company. The Stockholders' Agreement will irrevocably terminate upon the
consummation of an initial public offering.
STOCK OPTION PLAN
Under the Company's 1995 stock option plan (the "Stock Option Plan"), as
adopted in December 1995 and amended in February 1998, 700,000 shares (after
giving effect to the 150-for-1 common stock split) of common stock are reserved
and authorized for issuance upon the exercise of the options. All employees of
the Company are eligible to receive options under the Stock Option Plan. The
Stock Option Plan is administered by the compensation and stock option committee
of the board of directors. Options granted under the Stock Option Plan are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended. All options were granted at an
exercise price equal to the estimated fair value of the common stock at the
dates of grant as determined by the board of directors based on equity
transactions and other analyses. The options expire ten years from the date of
grant.
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
F-42
<PAGE> 175
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting methodology
required by APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company accounts 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 Black-Scholes option pricing model and the following
weighted average assumptions in 1996, 1997, and the period ended July 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate.......... 6.31% 6.43% 5.42%
Expected dividend yield.......... 0% 0% 0%
Expected lives................... Seven years Seven years Seven years
Expected volatility.............. 30% 30% 30%
</TABLE>
The weighted average fair value of options granted was $8, $8.44, and
$10.00 for the years ended December 31, 1996 and 1997 and the period ended July
31, 1998, respectively. The total value of options for the Company's stock
granted to employees of the Company for the years ended December 31, 1996 and
1997 and the period ended July 31, 1998 was computed as approximately $154,000,
$304,000, and $1,125,000, respectively, which would be amortized on a pro forma
basis over the five-year vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's net
loss for the periods presented would be as follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net loss for the year ended December 31,
1996...................................... $ (3,125,428) $ (3,155,917)
Net loss for the year ended December 31,
1997................................... (9,091,533) (9,188,862)
Net loss for the period ended July 31,
1998................................... (18,455,881) (18,579,005)
Basic and diluted net loss per share for
the year ended December 31, 1996....... $ (1.53) $ (1.54)
Basic and diluted net loss per share for
the year ended December 31, 1997....... (2.10) (2.12)
Basic and diluted net loss per share for
the period ended July 31, 1998:........ (2.46) (2.47)
</TABLE>
F-43
<PAGE> 176
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plan at July 31, 1998
is presented in the following table (after giving effect to the 150-for-1 common
stock split):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996:......... 52,797 8.00
Granted................................ 126,384 8.44
Forfeited.............................. (15,939) 8.00
-------
Outstanding at December 31, 1997:......... 163,242 8.34
Granted................................ 348,980 10.00
Forfeited.............................. (21,032) 8.32
Exercised.............................. (394) 8.00
-------
Outstanding at July 31, 1998.............. 490,796
=======
Exercisable shares as of:
December 31, 1996...................... 0 $0.00
=======
December 31, 1997...................... 6,606 8.00
=======
July 31, 1998.......................... 17,428 8.00
=======
</TABLE>
8. RELATED-PARTY TRANSACTIONS
ITC Holding 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. For the years ended December 31, 1996 and 1997 and the
period ended July 31, 1998, the Company recorded approximately $24,000, $31,000,
and $92,000, respectively, in selling, operations, and administrative expenses
related to these services. In the opinion of management, amounts charged to the
Company are consistent with costs that would be incurred from third party
providers. Additionally, during 1997, ITC Holding paid several invoices related
to the construction of the Company's building. At December 31, 1997, there is
approximately $419,000 related to these payments included in accounts
payable -- affiliate in the Company's balance sheet.
Certain of ITC Holding affiliates provide the Company with various services
and/or receive services provided by the Company. These entities include
Interstate Telephone Company, which provides switching and billing telephone
services; and InterCall, Inc., which provides conference calling services. In
addition, we receive services from ITC*DeltaCom, Inc., an affiliate of ITC
Holding which provides wholesale long-distance and related services and 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
F-44
<PAGE> 177
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Enterprises, Inc., which is a national provider of Internet access. In
management's opinion, the Company's transactions with these affiliated entities
are representative of arm's-length transactions.
For the years ended December 31, 1996 and 1997 and the period ended July
31, 1998, the Company received services from these affiliated entities in the
amounts of $48,000, $247,000, and $757,000, respectively, which are reflected in
cost of services and selling, operations, and administrative expenses in the
Company's statements of operations. In addition, in 1996 and 1997, the Company
received services from these affiliated entities in the amount of $11,000 and
$13,000, respectively, which is reflected in field and technical expenses in the
Company's statement of operations. At December 31, 1997, amounts payable for
these services of $33,000 are recorded in the Company's balance sheet as
accounts payable -- affiliate.
During 1998, the Company leased office space to ITC*DeltaCom, Inc. and
Powertel, Inc. Approximately $137,000 of lease income related to these
transactions is recorded as other income in the Company's statement of
operations for the year ended July 31, 1998.
In December 1996 and 1997, the Company invested $5,000 and $55,000,
respectively, in an airplane co-owned by ITC Holding and several of its
subsidiaries and other affiliated entities.
Relatives of the stockholders of ITC are stockholders and employees of the
Company's insurance provider. The costs charged to the Company for insurance
services were approximately $36,000, $134,000, and $140,000 or the years ended
December 31, 1996, 1997, and the period ended July 31, 1997, respectively.
The chief executive officer of an affiliate served from July 15, 1996 to
February 20, 1997 as president and chief executive officer of the Company. He
served in his capacity as chief executive officer and president of the Company
at the request of the Company and ITC Holding and received no compensation from
the Company for the year ended December 31, 1996. The value of his services
provided through February 20, 1997 is estimated to total approximately $20,000.
9. BUSINESS ACQUISITIONS
On June 1, 1998, the Company acquired TTE, Inc., a non-facilities based
reseller of local, long distance and operator services to small and medium-sized
business customers throughout South Carolina, for a purchase price of $1.3
million. The acquisition has been accounted for under the purchase method of
accounting.
On December 5, 1997, the Company consummated the acquisition of Beach
Cable, Inc., a Florida corporation that owned and operated a cable television
system in Panama City Beach, Florida ("Beach Cable"). The acquisition was
effected pursuant to an Agreement and Plan of Merger dated December 5, 1997 (the
"Merger Agreement") by
F-45
<PAGE> 178
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and among the Company, KNOLOGY of Panama City, Inc., Beach Cable, and L. Charles
Hilton, Jr., the sole stockholder of Beach Cable, under which KNOLOGY of Panama
City, Inc., a Delaware corporation and a wholly owned subsidiary of the Company,
merged (the "Merger") with and into Beach Cable. Beach Cable, the surviving
corporation in the Merger, was renamed KNOLOGY of Panama City, Inc. as of the
effective time of the Merger (the "Effective Time") and became a wholly owned
subsidiary of the Company. At the Effective Time, all of the issued and
outstanding shares of Common Stock, no par value, of KNOLOGY of Panama City were
converted into 2,485 shares of preferred stock, par value $.01 per share, of the
Company valued at approximately $3.7 million. Immediately following the Merger,
the Company also contributed cash of approximately $3.9 million to KNOLOGY of
Panama City to repay an existing note and related accrued interest to Hilton,
Inc., a holding company owned by L. Charles Hilton, Jr. The Merger has been
accounted for under the purchase method of accounting.
As a result of the acquisition of KNOLOGY of Panama City, Inc.,
approximately one month's operations of KNOLOGY of Panama City are included in
the accompanying statement of operations for the year ended December 31, 1997.
The following unaudited pro forma results of operations for the years ended
December 31, 1997 and 1998 assumes that the TTE, Inc. and Beach Cable, Inc.
acquisitions occurred on January 1, 1997. The pro forma information is presented
for informational purposes only and may not be indicative of the actual results
of operations had the acquisitions occurred on the assumed date, nor is the
information necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Operating revenues................................ $ 14,264,686 $ 12,493,550
Loss before extraordinary items................... (10,074,430) (17,909,739)
Net loss.......................................... (10,074,430) (18,492,280)
Net loss per share(a)............................. (2.33) (2.47)
</TABLE>
- ---------------
(a) Net loss per share is computed using 4,325,250 and 7,497,696 as the number
of shares outstanding at December 31, 1997 and July 31, 1998, respectively.
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
about segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements.
The Company owns and operates advanced hybrid fiber-coaxial networks and
provides residential and business customers broadband communications services,
including video analog and digital cable television and local and long-distance
telephone.
F-46
<PAGE> 179
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Internet services include high-speed Internet access via cable modems, local
transport services, such as local Internet transport, special access, local
private line, and local exchange transport services. Management has identified
the reportable segments based on broadband services offered.
While management of the Company monitors the revenue generated from each of
the various broadband services, operations are managed and financial performance
is evaluated based upon the delivery of a multiple of the services to customers
over a single network. As a result of multiple services being provided over a
single network, there are many shared expenses and shared assets related to
providing the various broadband services to customers. Management believes that
any allocation of the shared expenses or assets to the broadband services would
be arbitrary and impractical.
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
SEVEN
MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------ JULY 31,
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Video............................ $5,334,183 $10,319,495 $ 9,991,798
Telephone........................ 0 16,490 1,077,674
Internet services................ 0 19,083 80,687
---------- ----------- -----------
Consolidated revenues............ $5,334,183 $10,355,068 $11,150,159
========== =========== ===========
</TABLE>
11. SUBSEQUENT EVENTS
CREDIT FACILITY
On December 22, 1998, the Company entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp., which may 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 or the LIBOR rate plus applicable margin. Obligations under
the credit facility will be secured by substantially all tangible and intangible
assets of the Company and its current and future subsidiaries. The credit
facility includes 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 credit facility also includes covenants requiring compliance
with certain operating and financial ratios on a consolidated basis. The credit
facility allows the Company to borrow up to five times certain individual
subsidiaries' consolidated adjusted cash flow as defined in the credit facility.
In connection with the initiation of the revolving credit facility, the Company
F-47
<PAGE> 180
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred $1,255,681 in related costs which are being amortized on a
straight-line basis over the five year term.
ACQUISITIONS
On October 30, 1998, the Company acquired substantially all of the assets
of Cable Alabama Corporation ("Cable Alabama") for approximately $60,733,000 in
cash and also purchased for $5,000,000 in cash, certain real property located in
Huntsville, Alabama (the "Acquisition"). Cable Alabama owned and operated a
cable television system serving the Huntsville, Alabama area. KNOLOGY plans to
upgrade the existing Cable Alabama plant into a high-speed fiber-coaxial network
that is two-way interactive to provide additional broadband communications
services, such as local and long-distance service, digital television and
high-speed Internet access. The acquisition has been accounted for under the
purchase method of accounting.
The assets acquired are held by KNOLOGY of Huntsville, Inc. and have been
included in the Company's consolidated financial statements effective September
1, 1998. The unaudited pro forma results of operations for the years ended
December 31, 1997 and 1998 assumes the acquisition occurred on January 1, 1997.
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>
1997 1998
------------ ------------
<S> <C> <C>
Operating revenues................................ $ 22,379,066 $ 18,914,289
Loss before extraordinary item.................... (23,659,283) (26,648,764)
Net loss.......................................... (23,659,283) (27,231,305)
Net loss per share(a)............................. (5.47) (3.63)
</TABLE>
- ---------------
(a) Loss per share is computed using 4,325,250 and 7,497,696 as the number of
shares outstanding at December 31, 1997 and July 31, 1998, respectively.
F-48
<PAGE> 181
INDEPENDENT AUDITORS' REPORT
Stockholders
CableAmerica Corporation
Phoenix, Arizona
We have audited the accompanying balance sheets of Cable Alabama
Corporation (the "Company") a wholly-owned subsidiary of CableAmerica
Corporation as of August 31, 1998 and September 30, 1997, and the related
statements of operations and deficit and of cash flows for the eleven-month
period ended August 31, 1998 and the year ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at August 31, 1998 and September
30, 1997, and the results of its operations and its cash flows for the
eleven-month period ended August 31, 1998 and the year ended September 30, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records maintained by the Company and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Company
had been operated as an unaffiliated company (see Notes 1 and 5 to the financial
statements regarding expenses allocated from CableAmerica Corporation).
As discussed in Note 6 to the financial statements, on October 30, 1998,
the Company sold substantially all of its assets.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 7, 1998
F-49
<PAGE> 182
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
BALANCE SHEETS
AUGUST 31, 1998 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Note 6)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,640 $ 19,753
Subscriber accounts receivable -- less allowance for
doubtful accounts of $68,000 and $101,000.............. 930,026 889,105
Prepaid expenses and other assets......................... 336,126 400,037
Deferred income taxes (Note 4)............................ 2,174,000 2,340,000
------------ ------------
Total current assets.............................. 3,448,792 3,648,895
------------ ------------
CABLE TELEVISION SYSTEMS AND EQUIPMENT:
Reception and distribution facilities..................... 34,926,769 31,699,513
Land, building and improvements........................... 81,178 68,809
Vehicles, equipment and fixtures.......................... 1,321,356 1,261,170
Construction in progress.................................. 116,557 336,673
------------ ------------
Total............................................. 36,445,860 33,366,165
Less accumulated depreciation and amortization............ (22,689,797) (20,352,138)
------------ ------------
Cable television systems and equipment -- net..... 13,756,063 13,014,027
------------ ------------
TOTAL............................................. $ 17,204,855 $ 16,662,922
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (Note 6)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 868,237 $ 2,389,229
Accrued payroll........................................... 88,544 103,001
Accrued property tax...................................... 125,740 96,807
Other accrued expenses.................................... 237,939 260,961
------------ ------------
Total current liabilities......................... 1,320,460 2,849,998
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 6)
STOCKHOLDERS' EQUITY (Note 2):
Common stock, $100 par value -- authorized, 1,500 shares;
issued and outstanding, 1,500 shares................... 150,000 150,000
Additional paid-in capital................................ 20,664,426 18,886,572
Deficit................................................... (4,930,031) (5,223,648)
------------ ------------
Total stockholders' equity........................ 15,884,395 13,812,924
------------ ------------
TOTAL............................................. $ 17,204,855 $ 16,662,922
============ ============
</TABLE>
See notes to financial statements.
F-50
<PAGE> 183
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
STATEMENTS OF OPERATIONS AND DEFICIT
ELEVEN-MONTH PERIOD ENDED AUGUST 31, 1998 AND
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Basic services............................................ $ 7,791,166 $ 7,540,638
Pay services.............................................. 2,096,561 2,298,352
Other services............................................ 2,153,775 2,185,008
----------- -----------
Total revenues.................................... 12,041,502 12,023,998
----------- -----------
COSTS AND EXPENSES:
Programming............................................... 4,285,888 4,103,038
Selling, general and administrative....................... 3,421,791 3,477,576
Depreciation and amortization............................. 2,415,754 2,543,540
Allocated corporate expenses (Note 5)..................... 1,458,452 1,669,996
----------- -----------
Total costs and expenses.......................... 11,581,885 11,794,150
----------- -----------
INCOME BEFORE INCOME TAX PROVISION.......................... 459,617 229,848
INCOME TAX PROVISION (Note 4)............................... 166,000 80,000
----------- -----------
NET INCOME.................................................. 293,617 149,848
DEFICIT, BEGINNING OF PERIOD................................ (5,223,648) (5,373,496)
----------- -----------
DEFICIT, END OF PERIOD...................................... $(4,930,031) $(5,223,648)
=========== ===========
</TABLE>
See notes to financial statements.
F-51
<PAGE> 184
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
STATEMENTS OF CASH FLOWS
ELEVEN-MONTH PERIOD ENDED AUGUST 31, 1998 AND
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 293,617 $ 149,848
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,415,754 2,543,540
Deferred income taxes.................................. 166,000 80,000
Changes in operating assets and liabilities:
Subscriber accounts receivable....................... (40,921) (226,021)
Prepaid expenses and other assets.................... 63,910 (17,876)
Accounts payable..................................... (1,520,992) 1,170,861
Accrued expenses and other liabilities............... (8,546) 24,906
----------- -----------
Net cash provided by operating activities......... 1,368,822 3,725,258
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES -- Purchase or
construction of cable television systems and equipment.... (3,157,789) (5,323,569)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -- Contributions to
capital by parent company................................. 1,777,854 1,613,437
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (11,113) 15,126
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 19,753 4,627
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 8,640 $ 19,753
=========== ===========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 185
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
NOTES TO FINANCIAL STATEMENTS
ELEVEN-MONTH PERIOD ENDED AUGUST 31, 1998 AND
YEAR ENDED SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation -- Cable Alabama Corporation (the "Company") is a
wholly-owned subsidiary of CableAmerica Corporation ("CAC"). The accompanying
financial statements have been prepared from the separate records maintained by
the Company and may not necessarily be indicative of the conditions that would
have existed or the results of operations if the Company had been operated as an
unaffiliated company (see Note 5 regarding expenses allocated from CAC). The
Company provides cable television services to various communities within
Alabama.
Significant accounting policies are summarized below:
a. Cable Television Systems and Equipment -- Cable television systems and
equipment are stated at cost and are depreciated using the straight-line method
over the estimated useful lives as follows:
<TABLE>
<S> <C>
Reception and distribution facilities............ 10 years
Equipment and fixtures........................... 5-10 years
Vehicles......................................... 3-5 years
Buildings and improvements....................... 10-30 years
</TABLE>
Direct costs associated with the construction of new cable television
plant, the expansion of existing cable television plant, and the
rebuilding of cable television plant are capitalized. Interest
allocated from CAC is capitalized on construction-in-progress. Interest
costs of approximately $10,000 and $26,000 were capitalized in 1998 and
1997, respectively.
b. Cash and cash equivalents include cash on hand and in banks.
c. Income Taxes -- The Company is included in the consolidated income tax
return of CAC. CAC's policy is to allocate income tax expense or benefit to
subsidiaries as if they filed separate returns. The Company follows Statement of
Financial Accounting Standards ("SFAS") No. 109 Accounting for Income Taxes.
SFAS No. 109 requires an asset and liability approach for financial accounting
and reporting for income tax purposes. This statement recognizes (a) the amount
of taxes payable or refundable for the current year, and (b) deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the financial statements or tax returns.
d. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and
F-53
<PAGE> 186
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
2. STOCKHOLDERS' EQUITY
CAC has a $42,500,000 revolving line of credit agreement with two
commercial banks. At August 31, 1998 and September 30, 1997, CAC had borrowings
under the lines of credit of $42,500,000 and $37,800,000, respectively.
Borrowings are collateralized by all of the common stock of each of the
wholly-owned subsidiary companies of CAC, including the Company. The lines of
credit were paid off and terminated on October 30, 1998 (Note 6).
3. LEASES
Operating Leases -- The Company has operating leases for various offices
and warehouses under terms ranging from one to ten years. Rental expense
amounted to $163,000 and $184,000 for the eleven-month period ended August 31,
1998 and the year ended September 30, 1997, respectively, which was paid to the
shareholders of CAC, as lessors of such leases.
In connection with the sale of assets subsequent to year-end, described in
Note 6, all of the Company's lease agreements were assumed by the purchaser.
4. INCOME TAXES
A reconciliation of the difference between the provision for income taxes
and income taxes at the statutory United States federal income tax rate for the
eleven-month period ended August 31, 1998 and the year ended September 30, 1997
is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Income tax provision at statutory United States
federal income tax rate.......................... $156,000 $ 73,000
State taxes and other............................ 10,000 7,000
-------- --------
Income tax provision............................. $166,000 $ 80,000
======== ========
</TABLE>
The components of the Company's deferred income tax asset are as follows:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 30,
1998 1997
---------- -------------
<S> <C> <C>
Federal net operating loss carryforwards...... $2,793,000 $2,863,000
State net operating loss carryforwards........ 468,000 474,000
Difference in book and tax carrying basis of
property and equipment..................... (1,626,000) (1,548,000)
Tax credits................................... 484,000 484,000
Other......................................... 55,000 67,000
---------- ----------
Net deferred tax asset........................ $2,174,000 $2,340,000
========== ==========
</TABLE>
F-54
<PAGE> 187
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approximately $9.1 million of estimated Alabama state net
operating loss carryforwards available to offset state taxable income. These
carryforwards expire through 2012.
Additionally, the Company has been allocated the following carryforwards
available as offsets to Federal taxable income or as credits against regular
federal income taxes:
<TABLE>
<CAPTION>
NET OPERATING LOSSES ALTERNATIVE MINIMUM TAX CREDITS
EXPIRING FROM 2005 TO 2012 AND INVESTMENT TAX CREDITS
- -------------------------- -------------------------------
<S> <C>
$8,100,000 $484,000
------------- -----------
</TABLE>
5. ALLOCATED CORPORATE EXPENSES
CAC provides substantially all administration, finance and accounting
services for the Company. CAC allocates corporate expenses, including interest
(based on total assets) and other expenses (based on the number of basic
subscribers) to its subsidiaries. The total expenses allocated to the Company
for 1998 and 1997 were approximately $1,458,000 and $1,670,000, respectively.
6. SUBSEQUENT EVENT
On October 30, 1998, the Company sold substantially all of its assets.
Proceeds of the sale were approximately $60,000,000.
F-55
<PAGE> 188
PRO FORMA FINANCIAL INFORMATION
The pro forma balance sheet as of September 30, 1999 gives effect to the
Reorganization and related activities, the exercise of the SCANA warrants, the
portion of the private placement under firm commitment, and the ITC Holding
loans that have been or will be converted to equity as if they had occurred on
September 30, 1999. Pro forma statements of operations for the nine months ended
September 30, 1999 and the year ended December 31, 1998 are presented below to
give effect to the Reorganization as if it had occurred on January 1, 1998. The
pro forma statement of operations for the year ended December 31, 1998 also
gives effect to the acquisition of Cable Alabama as if it had occurred on
January 1, 1998.
The unaudited pro forma consolidated financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
pro forma transactions occurred at the beginning of the periods presented, nor
is it indicative of future financial position or results of operations.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
KNOLOGY, INC. ADJUSTMENTS KNOLOGY, INC.
------------- ----------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................... $ 21,199,977 $ 1,129,500(a) $ 97,359,343
30,000,000(b)
39,366,860(c)
5,663,006(e)
Accounts receivable, net...................... 9,674,793 -- 9,674,793
Accounts receivable, affiliates............... 8,636,849 (8,636,849)(g) --
Prepaid expenses.............................. 1,216,793 -- 1,216,793
------------ ----------- ------------
Total current assets.................. 40,728,412 67,522,517 108,250,929
------------ ----------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET.............. 258,655,902 -- 258,655,902
------------ ----------- ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net.............. 58,307,193 22,418,100(d) 80,725,293
Investments................................... 1,412,064 1,836,992(e) 3,249,056
Other......................................... 559,677 -- 559,677
------------ ----------- ------------
Total assets.......................... $359,663,248 $91,777,609 $451,440,857
============ =========== ============
CURRENT LIABILITIES:
Current portion of long-term debt............. $ 12,174 $ -- $ 12,714
Accounts payable.............................. 16,050,716 -- 16,050,716
Accounts payable -- affiliates................ 347,203 -- 347,203
Accrued liabilities........................... 6,907,270 -- 6,907,270
Advances from affiliates...................... 1,171,252 -- 1,171,252
Unearned revenue.............................. 3,593,068 -- 3,593,068
------------ ----------- ------------
Total current liabilities............. 28,081,683 -- 28,081,683
</TABLE>
F-56
<PAGE> 189
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
KNOLOGY, INC. ADJUSTMENTS KNOLOGY, INC.
------------- ----------- -------------
<S> <C> <C> <C>
NONCURRENT LIABILITIES:
Notes payable................................. 19,116,496 -- 19,116,496
Accrued interest payable...................... 35,825,088 -- 35,825,088
Unamortized investment tax credits............ 388,277 -- 388,277
Deferred income taxes......................... 321,658 (321,658)(g) --
Bonds payable, net of discount................ 266,472,157 -- 266,472,157
------------ ----------- ------------
Total liabilities..................... 350,205,359 (321,658) 349,883,701
WARRANTS........................................ 2,486,960 2,239,105 (d) 4,726,065
------------ ----------- ------------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock...................... -- 4,518 (a) 480,355
20,297 (c)
22,807 (e)
432,733 (f)
Series B Preferred Stock...................... -- 63,158 (b) 63,158
Common stock.................................. 1 24 (f) 25
Additional paid in capital.................... 70,259,878 22,418,100 (d) 168,686,862
1,920,150 (a)
29,936,842 (b)
39,346,563 (c)
(2,239,105)(d)
7,477,191 (e)
(432,757)(f)
Accumulated Deficit........................... (63,265,300) (795,168)(a) (72,375,659)
(8,315,191)(g)
Unrealized losses............................. (23,650) -- (23,650)
------------ ----------- ------------
Total stockholders' equity............ 6,970,929 89,860,162 96,831,091
------------ ----------- ------------
Total liabilities and stockholders'
equity.............................. $359,663,248 $91,777,609 $451,440,857
============ =========== ============
</TABLE>
- ---------------
(a) Reflects the exercise of the SCANA warrants and the related net cash
proceeds of $1.1 million and the recording of the fair value of the
warrants as determined by the Black-Scholes model of $0.8 million and the
related charge to retained earnings.
(b) Reflects $30 million of firm commitments in the private placement of Series
B preferred stock.
(c) Reflects $39.4 million of loans from ITC Holding converted into 2,029,724
shares of Series A preferred stock and options to purchase 6,391,329 shares
of Series A preferred stock. The option amount is reflected in additional
paid-in capital as no options have been exercised.
(d) Reflects the acquisition of minority interest of KNOLOGY Holdings recorded
at the fair market value of consideration surrendered of $22.4 million and
the exchange of our warrants for KNOLOGY Holdings warrants and the
cancellation of the KNOLOGY Holdings warrants.
(e) Reflects the contribution of ITC Holding's approximate 6% interest in
ClearSource, cash of $5.7 million and subscription rights to purchase
ClearSource shares, in exchange for 2,280,702 shares of Series A preferred
stock recorded at the historical cost of $1.8 million for the ClearSource
shares contributed and $5.7 million for the cash contributed.
(f) Reflects the recording of the distribution.
(g) Reflects the elimination of deferred income taxes and the related affiliate
receivable which resulted from KNOLOGY Holdings participation in the tax
sharing arrangement with ITC Holding. As KNOLOGY will prepare its income
tax return on a separate company basis, it will provide a full valuation
allowance against any income tax benefit.
F-57
<PAGE> 190
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
KNOLOGY, PRO FORMA KNOLOGY,
INC. ADJUSTMENTS INC.
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE.......................................... $ 48,824,228 $ -- $ 48,824,228
OPERATING EXPENSES
Cost of services............................... 18,573,719 -- 18,573,719
Selling, operations and administrative......... 35,760,116 -- 35,760,116
Depreciation and amortization.................. 28,697,148 1,681,358 (a) 30,378,506
------------ ------------- ------------
Total Operating Expenses............... 83,030,983 1,681,358 84,712,341
OTHER INCOME (EXPENSE)
Interest income................................ 1,251,191 -- 1,251,191
Interest expense............................... (24,073,491) -- (24,073,191)
Affiliate interest expense..................... (106,248) -- (106,248)
Other income................................... 174,122 -- 174,122
------------ ------------- ------------
(22,754,426) -- (22,754,426)
------------ ------------- ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST... (56,961,181) (1,681,358) (58,642,539)
MINORITY INTEREST................................ 3,267,653 (3,267,653)(a) --
------------ ------------- ------------
LOSS BEFORE INCOME TAXES......................... (53,693,528) (4,949,011) (58,642,539)
INCOME TAX BENEFIT............................... 11,011,711 (11,011,711)(b) --
------------ ------------- ------------
PRO FORMA LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS................................... $(42,681,817) $ (15,960,722) $(58,642,539)
============ ============= ============
BASIC AND DILUTED LOSS PER SHARE................. $(426,818.17) $ (1.08)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES -- BASIC
AND DILUTED.................................... 100 54,353,796(c)
============ ============
</TABLE>
- ---------------
(a) Reflects the elimination of the minority interest and additional
amortization expense associated with the increase in intangible assets
which resulted from the acquisition of minority interests at fair market
value in conjunction with the Exchange. The intangible assets of $22.4
million will be amortized over ten years.
(b) Reflects the elimination of income tax benefit due to the operating losses
of the consolidated entity. After the distribution, KNOLOGY Holdings will
no longer participate in a tax sharing agreement with ITC Holding and thus
record a full valuation allowance against the income tax benefit.
(c) As the Company has no significant common stock outstanding, Series A and
Series B convertible preferred stock is assumed to be converted for
purposes of this calculation. Diluted net loss per share gives effect to
all potentially dilutive securities. The Company's potentially dilutive
securities are not included in the computation of diluted net loss per
share as their effect is antidilutive.
F-58
<PAGE> 191
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL (A) PRO FORMA PRO FORMA
KNOLOGY, INC. CABLE ALABAMA ADJUSTMENTS KNOLOGY, INC.
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................ $ 45,132,522 $8,873,291 $ -- $ 54,005,813
OPERATING EXPENSES
Cost of services................. 12,739,540 3,181,970 -- 15,921,510
Selling, operations and
administrative................ 37,323,345 2,463,277 (122,756)(b) 39,663,866
Depreciation and amortization.... 17,108,034 1,764,472 8,846,500 (c) 29,960,816
2,241,810 (f)
Allocated corporate expenses..... -- 996,601 -- 996,601
------------ ---------- ------------- ------------
Total Operating
Expenses............... 67,170,919 8,406,320 10,965,554 86,542,793
OTHER INCOME (EXPENSE)
Interest income.................. 9,639,050 -- (2,383,333)(e) 7,255,717
Interest expense................. (29,033,088) -- -- (29,033,088)
Affiliate interest expense....... (34,115) -- -- (34,115)
Other income..................... 782,954 -- -- 782,954
------------ ---------- ------------- ------------
(18,645,199) -- (2,383,333) (21,028,552)
------------ ---------- ------------- ------------
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS, AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE........................ (40,683,596) 466,971 (13,348,887) (53,565,512)
MINORITY INTEREST.................. 13,294,079 -- (8,968,717)(d) --
(4,325,362)(f)
------------ ---------- ------------- ------------
LOSS BEFORE INCOME TAXES CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................ (27,389,517) 466,971 (26,642,966) (53,565,512)
INCOME TAX BENEFIT................. 5,631,618 (173,000) (5,458,618)(g) --
------------ ---------- ------------- ------------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE... (21,757,899) 293,971 (32,101,584) (53,565,512)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE............. (582,541) -- -- (582,541)
------------ ---------- ------------- ------------
NET LOSS........................... (22,340,440) 293,971 (32,101,584) (54,148,053)
PREFERRED STOCK DIVIDENDS.......... (1,424,222) -- 1,424,222 (h) --
------------ ---------- ------------- ------------
PRO FORMA INCOME (LOSS)
ATTRIBUTABLE TO COMMON
SHAREHOLDERS:.................... $(23,764,662) $ 293,971 $ (30,677,362) $(54,148,053)
============ ========== ============= ============
BASIC AND DILUTED LOSS PER
SHARE:........................... $(237,646.62) $ (1.00)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES -- BASIC AND DILUTED...... 100 54,353,796(i)
============ ============
</TABLE>
F-59
<PAGE> 192
- ---------------
(a) The effective date of the Cable Alabama acquisition was September 1, 1998.
These historical amounts related to Cable Alabama include the unaudited
results of operations for the period January 1, 1998 to August 31, 1998.
(b) Reflects the reduction of rent expense related to the purchase of real
property in connection with the Cable Alabama transaction.
(c) Reflects additional depreciation and amortization expense associated with
the increase in the basis of the acquired assets to fair market value at the
date of acquisition and the allocation of the purchase price to the acquired
subscriber base and non-compete agreement. Amounts allocated to subscriber
base, non-compete agreement, plant and building are amortized over three,
three, ten and twenty-five years, respectively. The purchase price
allocation arising from the acquisition of Cable Alabama is as follows:
<TABLE>
<CAPTION>
<S> <C>
Property, plant and equipment............................... $30,117,306
Customer list............................................... 34,115,706
Noncompete agreement........................................ 1,500,000
-----------
65,733,012
===========
</TABLE>
(d) Represents the increase in losses applicable to the Company based on an 85%
ownership interest in KNOLOGY Holdings for the year ended December 31, 1998.
(e) Reflects the elimination of interest income resulting from lower cash and
investments due to cash paid for acquisition.
(f) Reflects the elimination of the minority interest and additional
amortization expense associated with the increase in intangible assets which
resulted from the acquisition of minority interests at fair market value in
conjunction with the Exchange. The intangible assets of $22.4 million will
be amortized over ten years.
(g) Reflects the elimination of income tax benefit due to the operating losses
of the consolidated entity. After the distribution, KNOLOGY Holdings will no
longer participate in a tax sharing agreement with ITC Holding and thus
record a full valuation allowance against the income tax benefit.
(h) Reflects the elimination of earnings, distributed to ITC Holding related to
any excess earnings that would be allocated to business development of
KNOLOGY.
(i) As the Company has no significant common stock outstanding, Series A and
Series B convertible preferred stock is assumed to be converted for purposes
of this calculation. Diluted net loss per share gives effect to all
potentially dilutive securities. The Company's potentially dilutive
securities are not included in the computation of diluted net loss per share
as their effect is antidilutive.
F-60
<PAGE> 193
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated.
<TABLE>
<CAPTION>
<S> <C>
Blue Sky Fees and Expenses................................. $ 5,000
Accounting Fees and Expenses............................... 200,000
Legal Fees and Expenses.................................... 200,000
Printing and Engraving Expenses............................ 195,000
--------
Total.......................................... 600,000
</TABLE> --------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware corporation law, 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 in non derivative lawsuits, 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 Delaware
Corporation Law provides, however, that such person must have acted in good
faith and in a manner such person reasonably believed to be in (or not) 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 Delaware corporation law 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.
Our Certificate of Incorporation and our Bylaws contain provisions that further
provide for the indemnification of our directors and officers to the fullest
extent permitted by the Delaware Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We were formed in September 1998 as a wholly-owned subsidiary of ITC
Holding.
KNOLOGY, INC.
In November 1999 we completed an exchange of our securities for the
outstanding KNOLOGY Holdings' securities. We issued 2,476 shares of our common
stock, 30,363,000 shares of our Series A preferred stock and warrants to
purchase 994,961 shares of our Series A preferred stock to holders of KNOLOGY
Holdings'
II-1
<PAGE> 194
outstanding common stock, preferred stock and warrants. As part of the exchange,
we issued an additional 13,362,105 to InterCall in exchange for the stock of
Interstate Telephone Company, Inc., Valley Telephone Company, Inc., Globe
Telecommunications, Inc. and ITC Globe, Inc. In connection with the exchange we
assumed KNOLOGY Holdings' existing stock option plan under the terms of that
plan without any action by the holders of options outstanding thereunder. As a
result of the assumption of the plan options to purchase 6,674,176 shares of our
common stock became outstanding.
InterCall received 25,539,000 shares of our Series A preferred stock in the
exchange, the AT&T Venture Funds collectively received 4,267,800 shares of our
Series A preferred stock in the exchange and SCANA received 451,800 shares of
our Series A preferred stock in the exchange.
In December 1999 InterCall acquired options to purchase 6,258,036 shares of
KNOLOGY Series A preferred stock by converting a $29.7 million balance
outstanding under a loan agreement.
The issuances of securities described above were made in reliance on
exemptions from registration provided by Section 4(2) or Regulation D of the
Securities Act as transactions by an issuer not involving any public offering.
The persons and entities exchanging securities with us in the transactions
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access to information about our
company, through their relationships with us or through information about us
made available to them.
Commencing in November 1999 we are serving as a holding company of KNOLOGY
Holdings, Inc., Interstate Telephone Company, Inc., Valley Telephone Company,
Inc., Globe Telecommunications, Inc. and ITC Globe, Inc. In the last three
years, prior to our ownership of such companies, our subsidiaries offered and
sold the following equity securities that were not registered under the
Securities Act:
KNOLOGY HOLDINGS, INC.
In December 1995 and January 1996, in connection with its initial
capitalization, KNOLOGY Holdings issued to certain of its stockholders 7,780
shares of its preferred stock for a purchase price of $1,000 per share, for an
aggregate amount of $7,780,000. ITC Holding Company, Inc. contributed $4,000,000
plus all of its direct and indirect interests in Cybernet Holding, L.L.C. and in
KNOLOGY of Columbus, Inc. in exchange for the preferred stock.
In April 1996, in connection with a private placement of its preferred
stock, KNOLOGY Holdings issued to certain of its current stockholders 9,312
shares of preferred stock for a purchase price of $1,200 per share, for an
aggregate amount of $11,174,400.
II-2
<PAGE> 195
In February 1997, KNOLOGY Holdings issued 8,960 shares of its preferred
stock to certain of its current stockholders for a purchase price of $1,200 per
share, for an aggregate amount of $10,752,000.
In October 1997, KNOLOGY Holdings issued approximately 21,400 shares of its
preferred stock to qualified investors in a equity private placement for a
purchase price of $1,500 per share, for an aggregate amount of approximately
$32.2 million. ITC Holding, Century Telephone Enterprises, Inc., South Atlantic,
the AT&T venture funds and SCANA Communications, Inc. purchased approximately
$10.0 million, $2.5 million, $5.5 million, $5.0 million and $5.0 million of our
preferred stock, respectively, in the equity private placement. ITC Holding
subsequently repurchased all shares of KNOLOGY Holdings' preferred stock owned
by Century Telephone, South Atlantic and SCANA Communications in 1998.
On October 22, 1997, KNOLOGY Holdings issued 444,100 units, each of which
consists of one senior discount note and one warrant to purchase .003734 shares
of its preferred stock, for net proceeds of approximately $242.4 million. The
warrants may be exercised at a price of $.01 per share, subject to adjustment,
at any time beginning one year after the date of issuance and prior to the close
of business on the tenth anniversary of such grant. Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities, Inc. and First Union Capital Markets Corp.
served as KNOLOGY Holdings' placement agents in the transaction. SCANA
Communications purchased 71,050 of the units for an aggregate purchase price of
$39,998,308.
In December 1997, KNOLOGY Holdings acquired Beach Cable, Inc., a cable
television system in Panama City, Florida. L. Charles Hilton, Jr., who became a
director of our company in November 1999, was the founder and sole stockholder
of Beach Cable. Mr. Hilton received 2,485 shares of KNOLOGY Holdings preferred
stock in the acquisition valued at $1,500 per share. During 1998, 134 of these
shares were returned to KNOLOGY Holdings as part of a purchase price adjustment.
Pursuant to its 1995 stock option plan, KNOLOGY Holdings granted options to
purchase its common stock to its key employees and non-employee directors and
those of its subsidiaries. As of October 30, 1999, KNOLOGY Holdings had issued
outstanding options to purchase 1,771,578 shares of its common stock pursuant to
the plan at exercise prices ranging from $8.00 to $11.33 per share.
In May 1998, KNOLOGY Holdings issued 394 shares of its common stock, at an
exercise price of $8 per share, to an employee who exercised options granted
under its 1995 stock option plan.
Each issuance of securities described above was made in reliance on an
exemption from registration provided by Section 4(2) or Regulation D of the
Securities Act as a transaction by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for distribution in connection with such transactions and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access to information about KNOLOGY Holdings, Inc.,
through
II-3
<PAGE> 196
their relationships with KNOLOGY Holdings or through information about KNOLOGY
Holdings made available to them.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
2.1(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
2.2(2) -- Purchase Agreement between Cable Alabama Corporation and
KNOLOGY of Huntsville, Inc., dated as of October 19, 1998.
3.1(5) -- Certificate of Incorporation of KNOLOGY, Inc.
3.2(5) -- Bylaws of KNOLOGY, Inc.
4.1(5) -- Specimen Certificate for Shares of Common Stock, par value
$0.01, of KNOLOGY, Inc.
4.2(5) -- Specimen Certificate for Shares of Series A Preferred Stock,
par value $0.01, of KNOLOGY, Inc.
4.4(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.
4.5(1) -- Registration Rights Agreement, dated October 22, 1997,
between KNOLOGY Holdings, Inc., the Placement Agents and
SCANA Communications, Inc.
4.6 -- Form of Senior Discount Note (contained in Indenture filed
as Exhibit 4.5)
4.7 -- Form of Exchange Note (contained in Indenture filed as
Exhibit 4.5)
5.1(5) -- Form of Opinion of Hogan & Hartson, L.L.P.
8.1(4) -- Form of Opinion of Hogan & Hartson, L.L.P. regarding certain
tax matters.
10.1(1) -- Unit Purchase Agreement, dated as of October 16, 1997
between KNOLOGY Holdings, Inc. and SCANA Communications,
Inc.
10.4(1) -- Lease Agreement dated April 15, 1996 by and between D.L.
Jordan and American Cable Company, Inc.
10.5(1) -- Pole Attachment Agreement dated January 1, 1998 by and
between Gulf Power Company and Beach Cable, Inc.
10.6(1) -- Telecommunications Facility Lease and Capacity Agreement,
dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc.
</TABLE>
II-4
<PAGE> 197
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.7(1) -- 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.
10.8(1)* -- License Agreement dated September 29, 1995 by and between
Montgomery Cablevision and Entertainment, Inc. and American
Communications Services of Montgomery, Inc.
10.9(1)* -- License Agreement dated January 17, 1996 by and between
American Cable, Inc. and American Communication Services of
Columbus, Inc.
10.10(1)* -- Addendum to License Agreement dated April 21, 1997 by and
between American Cable, Inc. and American Communication
Services of Columbus, Inc.
10.11(1) -- Lease Agreement, dated December 5, 1997 by and between The
Hilton Company and KNOLOGY of Panama City, Inc.
10.12(1)* -- Billing and Collection Services Agreement dated April 2,
1997 by and between Interstate Telephone Company and
Cybernet Holding, Inc.
10.13(1) -- Certificate of Membership with National Cable Television
Cooperative, dated January 29, 1996, of Cybernet Holding,
Inc.
10.18(2) -- Ordinance No. 99-16 effective March 16, 1999 between
Columbus consolidated Government and KNOLOGY of Columbus,
Inc.
10.19(1) -- Ordinance No. 16-90 (Montgomery, Alabama) dated March 6,
1990.
10.20(1) -- Ordinance No. 50-76 (Montgomery, Alabama)
10.21(1) -- Ordinance No. 9-90 (Montgomery, Alabama) dated January 16,
1990.
10.22(1) -- Resolution No. 58-95 (Montgomery, Alabama) dated April 6,
1995.
10.23(1) -- Resolution No. 92-7 (Panama City Beach, Florida) dated July
23, 1992.
10.24(1) -- License (Bay County, Florida) dated January 5, 1993.
10.25(1) -- Resolution No. 97-22 (Panama City Beach, Florida) dated
December 3, 1997.
10.26(1) -- Resolution No. 2075 (Bay County, Florida) dated November 18,
1997.
10.27(3) -- Ordinance No. 5999 (Augusta, Georgia) dated January 20,
1998.
10.28(3) -- Ordinance No. 1723 (Panama City, Florida) dated March 10,
1998.
10.30(2) -- Ordinance No. 98054 (Mount Pleasant, South Carolina) dated
March 9, 1999.
10.31(2) -- Franchise Agreement (Charleston County, South Carolina)
dated December 15, 1998.
10.32(2) -- Ordinance No. 1998-47 (North Charleston, South Carolina)
dated May 28, 1998.
10.33(2) -- Ordinance No. 1998-77 (Charleston, South Carolina) dated
April 28, 1998.
10.34(2) -- Ordinance No. 98-5 (Columbia County, Georgia) dated August
18, 1998.
</TABLE>
II-5
<PAGE> 198
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.35(2)* -- Switching Agreement dated May 1, 1998 between Interstate
Telephone Company and KNOLOGY Holdings, Inc.
10.36(2) -- Network Access Agreement dated July 1, 1998 between SCANA
Communications, Inc., f/k/a MPX Systems, Inc. and KNOLOGY
Holdings, Inc.
10.37(2) -- Internet Access Contract dated September 1, 1998 between
ITCDelta DeltaCom, Inc. and KNOLOGY Holdings, Inc.
10.38(2) -- Collocation Agreement for Multiple Sites dated on or about
June 1998 between Interstate FiberNet, Inc. and KNOLOGY
Holdings, Inc.
10.39(2)* -- Lease Agreement dated October 12, 1998 between Southern
Company Services, Inc. and KNOLOGY Holdings, Inc.
10.40(2) -- Facilities Transfer Agreement dated February 11, 1998
between South Carolina Electric and Gas Company and KNOLOGY
Holdings, Inc., d/b/a KNOLOGY of Charleston.
10.41(2) -- License Agreement dated March 3, 1998 between BellSouth
Telecommunications, Inc. and KNOLOGY Holdings, Inc.
10.44(2) -- Pole Attachment Agreement dated February 18, 1998 between
KNOLOGY Holdings, Inc. and Georgia Power Company
10.46(2) -- Assignment Agreement dated March 4, 1998 between Gulf Power
Company and KNOLOGY of Panama City, Inc.
10.47(2) -- Adoption Agreements dated March 1, 1999 between KNOLOGY
Holdings, Inc. and BellSouth Telecommunications, Inc.
10.48(2)* -- Lease Switching Agreement between South Carolina Net for TTE
Inc. and KNOLOGY Holdings, Inc.
10.50(2)* -- Carrier Services Agreement dated September 30, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
10.51(2)* -- Reseller Services Agreement dated September 9, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
10.52(2)* -- Private Line Services Agreement dated September 10, 1998
between BTI Communications Corporation and KNOLOGY Holdings,
Inc.
10.53(2) -- Credit Facility Agreement between First Union National Bank,
First Union Capital Markets Corp. and KNOLOGY Holdings, Inc.
dated December 22, 1998.
10.54(2) -- Ordinance No. 284 (Cedar Grove, Florida) dated June 9, 1998.
10.55(2) -- License Agreement dated January 5, 1993 between County
Commissioners of Bay County Florida and Beach Cable, Inc.
10.56(2) -- Ordinance No. 647 (Lynn Haven, Florida) dated May 12, 1998
between KNOLOGY of Panama City, Inc. and the City of Lynn
Haven.
</TABLE>
II-6
<PAGE> 199
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.57(2) -- Ordinance No. 1723 (Panama City, Florida) dated March 10,
1998 between KNOLOGY of Panama City, Inc. and the City of
Panama City.
10.58(2) -- Resolution No. 97-22 (Panama City Beach, Florida) dated
December 3, 1997 between Panama City Beach, Florida and
KNOLOGY Holdings, Inc.
10.59(6) -- Form of Tax Separation Agreement between ITC Holding and
KNOLOGY, Inc.
10.60(5) -- Right of First Refusal and Option Agreement, dated November
19, 1999 by and between KNOLOGY of Columbus, Inc. and ITC
Service Company, Inc.
10.61(5) -- Services Agreement dated November 2, 1999 between KNOLOGY,
Inc. and ITC Service Company, Inc.
10.62(5) -- Support Agreement, dated November 2, 1999 between Interstate
Telephone Company, Inc. and ITC Service Company, Inc.
10.63(6) -- 1995 KNOLOGY Holdings, Inc. Stock Option Plan, assumed by
KNOLOGY, Inc. as of November 23, 1999.
10.64(6) -- KNOLOGY, Inc. Long Term Incentive Plan.
10.65(5) -- Warrant Agreement, dated as of December 3, 1999, between
KNOLOGY, Inc. and United States Trust Company of New York
(including form of Warrant Certificate).
10.66(5) -- Warrant Registration Rights Agreement, dated as of December
3, 1999, between KNOLOGY, Inc. and United States Trust
Company of New York.
10.67(5) -- Section 351 Agreement by and among KNOLOGY, Inc., InterCall,
Inc., Valley Telephone Company and Globe Telecommunications,
Inc., dated November 1, 1999.
10.68(5) -- Amendment to Section 351 Agreement by and among KNOLOGY,
Inc., InterCall, Inc., Valley Telephone Company and Globe
Telecommunications, Inc., dated November 22, 1999.
10.69(5) -- Form of Stockholder Letter of Transmittal relating to the
exchange of KNOLOGY, Inc. capital stock for KNOLOGY
Holdings, Inc. capital stock.
10.70(5) -- Form of Warrant Holder Letter of Transmittal relating to the
exchange of KNOLOGY, Inc. warrants for KNOLOGY Holdings,
Inc. warrants.
10.71(5) -- Form of KNOLOGY, Inc. Spin-Off Plan.
10.72(5) -- Loan Agreement between InterCall, Inc. and KNOLOGY, Inc.
dated December 22, 1999
10.73(5) -- Line of Credit Note from KNOLOGY, Inc. to InterCall, Inc.
dated December 22, 1999
</TABLE>
II-7
<PAGE> 200
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.74(5) -- Form of Residual Note from KNOLOGY, Inc. to ITC Holding
Company, Inc.
10.75(5) -- Form of Letter to ITC Holding Company, Inc. option holders
from ITC Holding Company, Inc.
12.1(5) -- Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
21.1(5) -- Subsidiaries of KNOLOGY, Inc.
23.1(5) -- Consent of Arthur Andersen LLP.
23.2(5) -- Consent of Deloitte & Touche LLP.
24.1(5) -- Power of Attorney.
27.1(6) -- Financial Data Schedule for year ended 1997 (for SEC use
only).
27.2(6) -- Financial Data Schedule for year ended 1998 (for SEC use
only).
99.1(6) -- IRS Private Letter Ruling, dated April 1, 1999.
99.2(4) -- IRS Private Letter Ruling, dated December , 1999.
</TABLE>
- ---------------
(1) Filed previously in connection with KNOLOGY Holdings, Inc.'s Registration
Statement on Form S-4, (File No. 333-43339) and incorporated herein by
reference.
(2) Filed previously in connection with KNOLOGY Holdings, Inc.'s Annual Report
on Form 10-K in the year ended December 31, 1998 and incorporated herein by
reference.
(3) Filed previously in connection with KNOLOGY Holdings, Inc.'s Annual Report
on Form 10-K in the year ended December 31, 1997 and incorporated herein by
reference.
(4) To be filed by amendment.
(5) Filed herewith.
(6) Previously filed.
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit was filed separately with the
Secretary of the Commission without such text pursuant to the approval of
our Application Requesting Confidential Treatment under Rule 406 of the
Securities Act.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set
forth therein is not applicable or is included elsewhere in the Financial
Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Act and is,
therefore, 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
II-8
<PAGE> 201
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 Act and will be governed by the final adjudication of
such issue.
II-9
<PAGE> 202
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-1 and has duly caused this Amended Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Washington, DC on this 27th day of December, 1999.
KNOLOGY, INC.
By: *
------------------------------------
Rodger L. Johnson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amended
Registration Statement has been signed as of December , 1999 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
* President, Chief Executive Officer
- ------------------------------------- and Director
Rodger L. Johnson
* Chief Financial Officer (Principal
- ------------------------------------- Financial and Accounting Officer)
Robert K. Mills
* Chairman of the Board of Directors
- -------------------------------------
Campbell B. Lanier, III
Director
- -------------------------------------
William H. Scott
* Director
- -------------------------------------
Richard Bodman
* Director
- -------------------------------------
Alan A. Burgess
* Director
- -------------------------------------
Donald W. Burton
* Director
- -------------------------------------
L. Charles Hilton, Jr.
* Director
- -------------------------------------
Donald W. Weber
*By: /s/ CHAD WACHTER
- -------------------------------------
Chad Wachter
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 203
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To KNOLOGY, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of KNOLOGY, Inc. (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
November 30, 1999. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed under Schedule II herein
as it relates to KNOLOGY, Inc. and subsidiaries 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 audits 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.
Atlanta, Georgia
November 30, 1999
S-1
<PAGE> 204
SCHEDULE II
KNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Allowance for doubtful accounts, balance at
beginning of year.......................... $ 17,113 $ 23,342 $ 108,528
Addition charged to cost and expense....... 81,082 367,527 1,303,372
Deductions................................. (74,853) (282,341) (1,018,234)
-------- --------- -----------
Allowance for doubtful accounts, balance at
end of year............................. $ 23,342 $ 108,528 $ 393,766
======== ========= ===========
</TABLE>
S-2
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
KNOLOGY, INC.
The undersigned, being the President and Chief Executive Officer and the
Secretary, respectively, of KNOLOGY, Inc., a corporation organized and existing
under the laws of the State of Delaware, on behalf of said corporation, hereby
certify as follows:
FIRST: The name of the corporation (hereinafter the "Corporation") is
KNOLOGY, Inc.
SECOND: The Certificate of Incorporation of the Corporation as in effect
on the date hereof is hereby amended to read in its entirety as set forth on
Exhibit A hereto.
THIRD: That said Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, we have executed this Certificate this _____ day of
______________, 1999.
-------------------------------------
President and Chief Executive Officer
Attest: _____________________
Secretary
<PAGE> 2
EXHIBIT A
- 2 -
<PAGE> 3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
KNOLOGY, INC.
1 NAME
The name of the corporation is KNOLOGY, Inc. (the "Corporation").
2 REGISTERED OFFICE AND AGENT
The registered office of the Corporation shall be located at 1013 Centre
Road, Wilmington, Delaware 19805 in the County of New Castle. The registered
agent of the Corporation at such address shall be Corporation Service Company.
3 PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware as from time to time amended (the "DGCL"). The Corporation
shall have all power necessary or helpful to engage in such acts or activities.
4 CAPITAL STOCK
4.1 AUTHORIZED SHARES.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares of capital stock which the Corporation has authority to issue is three
hundred and seventy-five million (375,000,000) shares, each with a par value of
$0.01 per share, consisting of:
(a) one hundred seventy-five million (175,000,000) shares of
Preferred Stock ("Preferred Stock"); and
(b) two hundred million (200,000,000) shares of Common Stock
("Common Stock").
The number of authorized shares of any class of stock of the Corporation
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the capital
stock of the Corporation entitled to vote (irrespective of the right to vote
thereupon as a class that the holders of the shares of any such class would
otherwise be entitled to under Section 242(b)(2) of the DGCL).
- 3 -
<PAGE> 4
4.2 COMMON STOCK.
4.2.1 DIVIDEND RIGHTS.
As and when dividends are declared or paid thereon, whether in cash,
property or securities of the Corporation, the holders of Common Stock shall be
entitled to participate in such dividends ratably on a per share basis. The
rights of the holders of Common Stock to receive dividends are subject to any
provisions of any Preferred Stock then outstanding.
4.2.2 VOTING RIGHTS.
Except as otherwise provided below and elsewhere in this Article Four
with respect to the Series A Preferred and Series B Preferred or as otherwise
required by applicable law, the holders of Common Stock shall vote as a single
class on all matters to be voted on by the stockholders of the Corporation.
4.2.3 LIQUIDATION.
Subject to the provisions of any Preferred Stock then outstanding, the
holders of Common Stock shall be entitled to participate ratably on a per share
basis in all distributions to the holders of Common Stock in any liquidation,
dissolution or winding up of the Corporation.
4.3 PREFERRED STOCK.
The Board of Directors expressly is authorized, subject to limitations
prescribed by the DGCL and the provisions of this Amended and Restated
Certificate of Incorporation (this "Certificate"), to provide (by resolution and
by filing a certificate of designations pursuant to the DGCL) for the issuance
from time to time of the shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and other rights of the
shares of each such series and to fix the qualifications, limitations and
restrictions thereon, including, but without limiting the generality of the
foregoing, the following:
(i) the number of shares constituting that series and
the distinctive designation of that series;
(ii) the dividend rate (if any) on the shares of that
series, whether dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of payment of dividends on
shares of that series;
(iii) whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(iv) whether that series shall have conversion
privileges, and, if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events as the Board of
Directors shall determine;
- 4 -
<PAGE> 5
(v) whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption dates;
(vi) whether that series shall have a sinking fund for
the redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(vii) the rights of the shares of that series in the event
of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(viii) any other relative powers, preferences, and rights
of that series, and qualifications, limitations or restrictions on that series.
4.4 SERIES A PREFERRED AND SERIES B PREFERRED.
The Corporation shall initially have two series of Preferred Stock
consisting of:
(a) seventy-five million (75,000,000) of the authorized shares
of Preferred Stock are hereby designated "Series A Preferred Stock" ("Series A
Preferred"); and
(b) fifty million (50,000,000) of the authorized shares of
Preferred Stock are hereby designated "Series B Preferred Stock" ("Series B
Preferred").
Together, the Series A Preferred and the Series B Preferred shall hereinafter be
referred to as the "Series Preferred Stock." The rights, preferences,
privileges, restrictions and other matters relating to the Series A Preferred
and Series B Preferred are as follows:
4.4.1 DIVIDEND RIGHTS.
Holders of Series A Preferred and Series B Preferred, prior and in
preference to the holders of the Common Stock, shall be entitled to receive
dividends and distributions, whether in the form of cash, securities or other
property, when, as and if declared by the Board of Directors, out of funds
legally available therefor at the same amount as dividends and distributions
declared with respect to the Common Stock treating each share of Series A
Preferred and Series B Preferred as being equal to the number of shares of
Common Stock into which each share of Series A Preferred and Series B Preferred
is then convertible (pursuant to Section 4.4.4 below). In the event that the
Corporation declares any dividend or distribution, the Series A Preferred and
the Series B Preferred shall be entitled to payment in full of such dividend or
distribution prior to the payment of such dividend or distribution with respect
to the holders of Common Stock.
4.4.2 VOTING RIGHTS.
(a) Generally. Except as otherwise provided herein or as required by
law, the Series A Preferred and Series B Preferred shall vote with the shares of
the Common Stock of the Corporation (and not as a separate class) at any annual
or special meeting of stockholders of the Corporation, and may act by written
consent in the same manner as the Common Stock, in either
- 5 -
<PAGE> 6
case upon the following basis: each holder of shares of Series A Preferred and
Series B Preferred shall be entitled to such number of votes as shall be equal
to the whole number of shares of Common Stock into which such holder's aggregate
number of shares of Series A Preferred and Series B Preferred are convertible
(pursuant to Section 4.4.4 below) immediately after the close of business on the
record date fixed for such meeting or the effective date of such written
consent.
(b) Series A Class Vote Requirement. In addition to any other vote or
consent required herein or by law, the affirmative vote or written consent of
the holders of a majority of the shares of Series A Preferred then outstanding
voting as a separate class (the "Series A Required Holders") shall be necessary
for effecting or validating the following actions:
(i) any authorization or any designation, whether by
reclassification or otherwise, of any new class or series of stock or any other
securities convertible into equity securities of the Corporation with rights,
preferences and privileges superior to, or on parity with, those of the Series A
Preferred, excluding any authorization or designation of the Series B Preferred;
(ii) any issuance of any additional shares of Series A Preferred
which are in addition to Series A Preferred issued as of the date hereof;
(iii) any voluntary dissolution, liquidation or winding up of the
Corporation; or
(iv) any amendment to this Certificate or to the bylaws of the
Corporation (the "Bylaws") that would materially adversely affect the
preferences, powers and other rights of the Series A Preferred.
(c) Series B Class Vote Requirement. In addition to any other vote or
consent required herein or by law, the affirmative vote or written consent of
the holders of a majority of the shares of Series B Preferred then outstanding
voting as separate classes (the "Series B Required Holders") shall be necessary
for effecting or validating the following actions:
(i) any authorization, designation or issuance, whether by
reclassification or otherwise, of any class or series of stock or any other
securities convertible into equity securities of the Corporation with rights,
preferences and privileges superior to, or on parity with, those of the Series B
Preferred;
(ii) any issuance of any additional shares of Series B Preferred
which are in addition to (x) Series B Preferred issued as of the date the first
share of Series B Preferred is issued, and (y) Series B Preferred which it is
contemplated by the Purchase Agreement will be issued upon the Second Closing
(as defined in the Purchase Agreement);
(iii) any redemption or redemptions by the Corporation of Common
Stock, Preferred Stock or other capital stock of the Corporation other than (A)
such redemptions of any capital stock held by an employee or former employee
representing, in the aggregate, during any twelve-month period in which such
redemption or redemptions occur not more than 1% of the outstanding Common Stock
of the Corporation on a fully-diluted basis or (B) such redemptions of capital
stock approved by a Series B Director. For the purposes of this Section
4.4.2(c)(iv),
- 6 -
<PAGE> 7
"fully-diluted basis" means the number of shares of Common Stock issuable upon
exercise, conversion or exchange of all rights, Options or other Convertible
Securities, including the Series A Preferred and Series B Preferred, whether or
not such rights, Options or Convertible Securities are then exercisable,
convertible or exchangeable, and the number of shares of Common Stock held by
all stockholders of the Corporation;
(iv) any voluntary dissolution, liquidation or winding up of the
Corporation; or
(v) any amendment to this Certificate or to the Bylaws that
would materially, adversely affect the preferences, powers and other rights of
the Series B Preferred.
(d) Series A and Series B Class Vote Requirement. In addition to any
other vote or consent required herein or by law, the affirmative vote or written
consent of the holders of 75% of the shares of Series A Preferred and Series B
Preferred then outstanding voting together as a separate class (the "Preferred
Required Holders") or, alternatively, the affirmative vote or written consent of
each of the Series A Required Holders and Series B Required Holders, each voting
as a separate class, shall be necessary for effecting or validating any merger,
consolidation, recapitalization, liquidation, dissolution, winding-up or sale,
or other disposition of all or substantially all the assets of the Corporation
(whether held directly or indirectly through one or more controlled
subsidiaries), other than any such transaction (other than as a sale or other
disposition of all or substantially all of the assets of the Corporation, or the
liquidation, dissolution or winding up of the Corporation) in which the holders
of the Corporation's voting equity securities immediately prior to such
transaction continue to beneficially hold a majority of the Corporation's voting
equity securities immediately after such transaction. The holders of the Series
A Preferred and the Series B Preferred shall receive the same consideration (on
an as converted basis) in the event of any merger, consolidation,
recapitalization, sale or other disposition of all or substantially all of the
assets of the Corporation.
(e) Series B Preferred Board Seats. In addition to the other rights
specified in this Section 4.4.2, the Series B Required Holders, voting as a
separate class, shall at all times have the special and exclusive right to elect
two directors to the Board of Directors (the "Series B Directors"). In any
election of directors by the holders of Series B Preferred pursuant to this
Section 4.4.2(e), each holder of Series B Preferred shall be entitled to one
vote for each share of Series B Preferred held. The Corporation shall take all
actions necessary to effectuate the terms and provisions of this Section
4.4.2(e). The special and exclusive voting rights of the holders of Series B
Preferred contained in this Section 4.4.2(e) may be exercised either at a
special meeting of the holders of Series B Preferred called as provided below,
or at any annual or special meeting of the stockholders of the Corporation, or
by written consent of such holders in lieu of a meeting. Each director to be
elected pursuant to this Section 4.4.2(e) shall serve for a term extending from
the date of such director's election and qualification until such director's
successor shall have been elected and qualified. If at any time any directorship
to be filled by the holders of Series B Preferred pursuant to this Section
4.4.2(e) has been vacant for a period of ten days, the Secretary of the
Corporation shall, upon the written request of any holder of such Series B
Preferred, call a special meeting of the holders of the Series B Preferred for
the purpose of electing a director or directors to fill such vacancy or
vacancies. Such meeting shall be held at the earliest practicable date, and at
such place, as is specified in or determined in accordance with the Bylaws. If
such meeting shall not be called by the Secretary of the Corporation within ten
days after personal
- 7 -
<PAGE> 8
service of such written request on him or her, then any holder of Series B
Preferred may designate in writing one of their members to call such meeting at
the expense of the Corporation, and such meeting may be called by such person so
designated upon the notice required for annual meetings of stockholders and
shall be held at the place specified in such notice. Any holder of Series B
Preferred so designated shall have access to the stock books of the Corporation
relating to Series B Preferred for the purpose of calling a meeting of the
stockholders pursuant to these provisions. At any meeting held for the purpose
of electing directors as provided in this Section 4.4.2(e), the presence, in
person or by proxy, of the holders of record of shares representing at least a
majority of the voting power of the Series B Preferred then outstanding shall be
required to constitute a quorum of the Series B Preferred for such election. A
vacancy in any directorship to be elected by the holders of the Series B
Preferred pursuant to this Section 4.4.2(e) may be filled only by vote or
written consent in lieu of a meeting of the holders of at least a majority of
the voting power of the Series B Preferred.
4.4.3 LIQUIDATION.
(a) Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, before any distribution or
payment shall be made to the holders of any other equity security of the
Corporation, the holders of Series B Preferred shall be entitled to be paid out
of the assets of the Corporation an amount with respect to each share of Series
B Preferred equal to the greater of (1) the initial per share price of four
dollars and seventy-five cents ($4.75), or (2) the amount the holder would have
received had the holder's shares of Series B Preferred been converted into
Common Stock immediately before a liquidation (the "Series B Liquidation
Value"). If upon any such liquidation, dissolution or winding up of the
Corporation, the Corporation's assets to be distributed among the holders of the
Series B Preferred are insufficient to permit payment to such holders of the
aggregate amount which they are entitled to be paid under this Section 4.4.3(a),
then the entire assets available to be distributed to the Corporation's
stockholders shall be distributed pro rata among such holders of Series B
Preferred based upon the aggregate Series B Liquidation Value (plus all accrued
and unpaid dividends) in proportion to the full amounts to which they would
otherwise be respectively entitled. To the extent that a combination of cash and
other property is to be distributed to the equity holders of the Corporation
upon any liquidation, dissolution or winding up of the Corporation, the
available cash shall be first distributed to the holders of the Series B
Preferred prior to any distribution of cash to the holders of any other equity
security of the Corporation.
(b) After the indefeasible payment of the full aggregate Series B
Liquidation Value as set forth in Section 4.4.3(a) above, upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any distribution or payment shall be made to the holders of any other
equity security of the Corporation, the holders of the Series A Preferred shall
be entitled to be paid out of the assets of the Corporation an amount with
respect to each share of Series A Preferred equal to the greater of (1) the
initial per share price of four dollars and seventy-five cents ($4.75), or (2)
the amount the holder would have received had the holder's shares of Series A
Preferred been converted into Common Stock immediately before a liquidation (the
"Series A Preferred Liquidation Value"). If, upon any such liquidation,
dissolution or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of the Series A Preferred (after the indefeasible
payment of the aggregate Series B Liquidation Value) are insufficient to permit
payment to such holders of the aggregate amount
- 8 -
<PAGE> 9
which they are entitled to be paid under this Section 4.4.3(b), then the entire
assets available to be distributed to the Corporation's stockholders shall be
distributed pro rata among such holders of Series A Preferred (after the
indefeasible payment of the aggregate Series B Liquidation Value) based upon the
aggregate Series A Preferred Liquidation Value (plus all accrued and unpaid
dividends) in proportion to the full amounts to which they would otherwise be
respectively entitled. To the extent that a combination of cash and other
property is to be distributed to the equity holders of the Corporation upon any
liquidation, dissolution or winding up of the Corporation, the Corporation
shall, after the indefeasible payment in cash of the full aggregate Series B
Liquidation Value as set forth in Section 4.4.3(a) above, pay any remaining
available cash to the holders of the Series A Preferred prior to any
distribution of cash to the holders of any other equity security of the
Corporation.
(c) After the indefeasible payment of the full aggregate Series B
Preferred Liquidation Value and Series A Preferred Liquidation Value as set
forth in Section 4.4.3(a) and Section 4.4.3(b) above, the remaining assets of
the Corporation legally available for distribution, if any, shall be distributed
to the holders of Common Stock. The holders of Series A Preferred and Series B
Preferred shall be entitled to participate in distributions to holders of the
Common Stock such that, after giving effect to all distributions pursuant to
Section 4.4.3(a) and Section 4.4.3(b) above, the holders of Series A Preferred
and Series B Preferred receive aggregate distributions equal to the greater of
the Series A Preferred Liquidation Value or Series B Preferred Liquidation
Value, as the case may be, or the amounts that such holders would have received
if the Series A Preferred or Series B Preferred, as the case may be, had been
converted into Common Stock immediately prior to such liquidation, dissolution
or winding up of the Corporation.
4.4.4 CONVERSION OF PREFERRED STOCK.
The holders of the Series A Preferred and Series B Preferred shall have
the following rights with respect to the conversion of the Series A Preferred
and Series B Preferred into shares of Common Stock:
(a) Optional Conversion. Subject to and in compliance with the
provisions of this Section 4.4.4, any shares of Series Preferred Stock may, at
the option of the holder, be converted at any time into fully paid and
nonassessable shares of Common Stock. The number of shares of Common Stock to
which a holder of Series A Preferred shall be entitled upon conversion shall be
the product obtained by multiplying the "Series A Preferred Conversion Rate"
then in effect (determined as provided in Section 4.4.4(b)) by the number of
shares of Series A Preferred being converted. The number of shares of Common
Stock to which a holder of Series B Preferred shall be entitled upon conversion
shall be the product obtained by multiplying the "Series B Preferred Conversion
Rate" then in effect (determined as provided in Section 4.4.4(b)) by the number
of shares of Series B Preferred being converted.
(b) Conversion Rates. The conversion rate in effect at any time for
conversion of the Series A Preferred (the "Series A Preferred Conversion Rate")
shall be the quotient obtained by dividing the "Deemed Series A Preferred Issue
Price" by the "Series A Preferred Conversion Price" calculated as provided in
Section 4.4.4(c). The "Deemed Series A Preferred Issue Price" shall be four
dollars and seventy-five cents ($4.75), as appropriately adjusted for any future
stock
- 9 -
<PAGE> 10
splits, stock combinations, stock dividends or similar transactions affecting
the Series A Preferred. The conversion rate in effect at any time for conversion
of the Series B Preferred (the "Series B Preferred Conversion Rate") shall be
the quotient obtained by dividing the "Deemed Series B Preferred Issue Price" by
the "Series B Preferred Conversion Price" calculated as provided in Section
4.4.4(c). The "Deemed Series B Preferred Issue Price" shall be four dollars and
seventy-five cents ($4.75), as appropriately adjusted for any future stock
splits, stock combinations, stock dividends or similar transactions affecting
the Series B Preferred.
(c) Conversion Price; Issuance of Securities Below Adjusted Conversion
Price. The conversion price for the Series A Preferred (the "Series A Preferred
Conversion Price") and the Series B Preferred (the "Series B Preferred
Conversion Price") shall each initially be four dollars and seventy-five cents
($4.75). Such initial Series A Preferred Conversion Price and such initial
Series B Preferred Conversion Price shall be adjusted from time to time in
accordance with this Section 4.4.4. If and whenever on or after the date of the
original issuance of shares of Series B Preferred (the "Original Series B Issue
Date"), the Corporation issues or sells, or in accordance with this Section
4.4.4(c) is deemed to have issued or sold, any shares of its Common Stock (other
than pursuant to a Permitted Issuance as defined in Section 4.4.5) for a
consideration per share less than the Series A Preferred Conversion Price or the
Series B Preferred Conversion Price, as applicable, in effect immediately prior
to the time of such issuance or sale, then immediately upon such issuance or
sale or deemed issuance or sale the Series A Preferred Conversion Price or the
Series B Preferred Conversion Price, as applicable, shall be reduced to the
amount determined by dividing (a) the sum of (1) the product derived by
multiplying the Series A Preferred Conversion Price or the Series B Preferred
Conversion Price, as applicable, in effect immediately prior to such issuance or
sale by the number of shares of Common Stock Deemed Outstanding immediately
prior to such issuance or sale, plus (2) the consideration, if any, received or
deemed to have been received by the Corporation upon such issuance or sale, by
(b) the number of shares of Common Stock Deemed Outstanding immediately after
such issuance or sale. All references to the Series A Preferred Conversion Price
and the Series B Preferred Conversion Price shall mean the Series A Preferred
Conversion Price or the Series B Preferred Conversion Price, as applicable, as
so adjusted. For purposes of determining the adjusted Series A Preferred
Conversion Price or Series B Preferred Conversion Price, as the case may be, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants or sells any Options (as defined in Section 4.4.5) (other than
Options for the purchase of Reserved Employee Stock) and the price per share for
which Common Stock is issuable upon the exercise of such Options, or upon
conversion or exchange of any Convertible Securities issuable upon exercise of
such Options, is less than the Series A Preferred Conversion Price or the Series
B Preferred Conversion Price in effect immediately prior to the time of the
granting or sale of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to have been issued and sold
by the Corporation at the time of the granting or sale of such Options for such
price per share. For purposes of this paragraph, the "price per share for which
Common Stock is issuable" shall be determined by dividing (A) the total amount,
if any, received or receivable by the Corporation as consideration for the
granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon exercise of all
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such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance or sale of such Convertible
Securities and the conversion or exchange thereto by (B) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Series A Preferred
Conversion Price or the Series B Preferred Conversion Price, as the case may be,
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon conversion or exchange thereof is less
than the Series A Preferred Conversion Price or the Series B Preferred
Conversion Price, as applicable, in effect immediately prior to the time of such
issue or sale, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities shall be deemed to have
been issued and sold by the Corporation at the time of the issuance or sale of
such Convertible Securities for such price per share. For the purposes of this
paragraph, the "price per share for which Common Stock is issuable" shall be
determined by dividing (A) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereto by (B)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No further adjustment of the
Series A Preferred Conversion Price or the Series B Preferred Conversion Price,
as applicable, shall be made when Common Stock is actually issued upon the
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Series A Preferred Conversion Price or the Series B
Preferred Conversion Price had been or are to be made pursuant to other
provisions of this Section 4.4.4, no further adjustment of the Series A
Preferred Conversion Price or the Series B Preferred Conversion Price, as
applicable, shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
price provided for in any Options (other than Options for the purchase of
Reserved Employee Stock), the additional consideration (if any) payable upon the
conversion or exchange of any Convertible Securities, or the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
changes at any time, the Series A Preferred Conversion Price or the Series B
Preferred Conversion Price, as applicable, in effect at the time of such change
shall be immediately adjusted to the Series A Preferred Conversion Price or the
Series B Preferred Conversion Price (not greater than the initial Series A
Preferred Conversion Price or the initial Series B Preferred Conversion Price,
as the case may be, subject to stock splits and combinations), as applicable,
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold.
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(iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Series A Preferred Conversion Price or the Series B
Preferred Conversion Price, as applicable, then in effect hereunder shall be
adjusted immediately to the Series A Preferred Conversion Price or the Series B
Preferred Conversion Price, as applicable, which would have been in effect at
the time of such expiration or termination had such Option or Convertible
Security, to the extent outstanding immediately prior to such expiration or
termination, never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
Option or Convertible Security is issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (net of discounts, commissions and
related expenses). If any Common Stock, Option or Convertible Security is issued
or sold for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be the fair value of such
consideration. If any Common Stock, Option or Convertible Security is issued to
the owners of the non-surviving entity in connection with any merger in which
the Corporation is the surviving Corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Option or Convertible Security, as the case may be. The fair value of any
consideration other than cash and securities shall be determined in good faith
by the Board of Directors of the Corporation.
(vi) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the Board of Directors in good
faith, the Option shall be deemed to have been issued for a consideration of
$0.01.
(vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
(d) Stock Splits and Combinations. If the Corporation shall at any
time or from time to time effect a subdivision of the outstanding Common Stock
without a corresponding subdivision of the Series A Preferred and Series B
Preferred, the Series A Preferred Conversion Price and Series B Preferred
Conversion Price in effect immediately before that subdivision shall be
proportionately decreased. Conversely, if the Corporation shall at any time or
from time to time combine the outstanding shares of Common Stock into a smaller
number of shares, the Series A Preferred Conversion Price and Series B Preferred
Conversion Price in effect immediately before the combination shall be
proportionately increased. Any adjustments under this Section 4.4.4(d) shall
become effective at the close of business on the date the subdivision or
combination becomes effective.
(e) Reclassification, Exchange and Substitution. If, at any time or
from time to time, the Common Stock issuable upon the conversion of the Series A
Preferred and Series B
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<PAGE> 13
Preferred is changed into the same or a different number of shares of any class
or classes of stock, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend or a
reorganization, merger, consolidation or sale of assets provided for elsewhere
in this Section 4.4.4), in any such event each holder of Series A Preferred and
Series B Preferred shall have the right thereafter to convert such stock into
the kind and amount of stock and other securities and property receivable in
connection with such recapitalization, reclassification or other change by
holders of the maximum number of shares of Common Stock into which such shares
of Series A Preferred and Series B Preferred could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustments as provided herein or with respect to such other
securities or property by the terms thereof.
(f) Reorganizations, Mergers; Consolidations or Sales of Assets. If,
at any time or from time to time, there is a capital reorganization of the
Common Stock (other than a recapitalization, subdivision, combination,
reclassification, exchange or substitution of shares provided for elsewhere in
this Section 4.4.4), as a part of such capital reorganization, provision shall
be made so that the holders of the Series A Preferred and Series B Preferred
shall thereafter be entitled to receive upon conversion of the Series A
Preferred and Series B Preferred the number of shares of stock or other
securities or property of the Corporation to which a holder of the maximum
number of shares of Common Stock deliverable upon conversion would have been
entitled in connection with such capital reorganization, subject to adjustment
in respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4.4.4 with respect to the rights of the holders of Series A
Preferred and Series B Preferred after the capital reorganization to the end
that the provisions of this Section 4.4.4 (including adjustment of the Series A
Preferred Conversion Price and the Series B Preferred Conversion Price then in
effect and the number of shares issuable upon conversion of the Series A
Preferred and Series B Preferred) shall be applicable after that event and be as
nearly equivalent as practicable.
(g) Certificate of Adjustment. In each case of an adjustment or
readjustment of the Series A Preferred Conversion Price and the Series B
Preferred Conversion Price for the number of shares of Common Stock or other
securities issuable upon conversion of the Series A Preferred and Series B
Preferred, as applicable, the Corporation, at its expense, shall compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
Series A Preferred and Series B Preferred, as applicable, at the holder's
address as shown in the Corporation's books. The certificate shall set forth
such adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (1) the
consideration received or deemed to be received by the Corporation for any
additional shares of Common Stock issued or sold or deemed to have been issued
or sold, (2) the Series A Preferred Conversion Price and the Series B Preferred
Conversion Price, as the case may be, at the time in effect, (3) the number of
additional shares of Common Stock issued or sold or deemed to have been issued
or sold, and (4) the type and amount, if any, of other property which at the
time would be received upon conversion of the Series A Preferred or Series B
Preferred.
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<PAGE> 14
(h) Notices of Record Date. Upon (i) any taking by the Corporation of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any acquisition or other capital reorganization of
the Corporation, any reclassification or recapitalization of the capital stock
of the Corporation, any merger or consolidation of the Corporation with or into
any other corporation, any sale or other disposition of all or substantially all
of the assets of the Corporation, or any voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, the Corporation shall mail to each
holder of Series A Preferred and Series B Preferred at least 20 days prior to
the record date specified therein a notice specifying (1) the date on which any
such record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (2) the date on which any such
acquisition, reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective and (3)
the date, if any, that is to be fixed for determining the holders of record of
Common Stock (or other securities) that shall be entitled to exchange their
shares of Common Stock (or other securities) for securities or other property
deliverable upon such acquisition, reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up.
(i) Automatic Conversion Upon Public Offering. Each share of Series A
Preferred and Series B Preferred shall automatically be converted into shares of
Common Stock, based on the then-effective Series A Preferred Conversion Price or
Series B Preferred Conversion Price, as applicable, immediately upon the closing
of a firm-commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation in which
(i) the per share price to the public is at least $6.00 (as adjusted for stock
splits, recapitalizations and the like occurring after the date hereof) (ii) the
gross cash proceeds to the Corporation (before underwriting discounts,
commissions and fees) are at least $50,000,000 and (iii) and the Common Stock
shall be listed for quotation on the Nasdaq National Market or on a national
securities exchange (a "Qualified Public Offering"). Upon such automatic
conversion, all declared but unpaid dividends, if any, shall be paid in
accordance with Section 4.4.4(j)(ii).
(j) Mechanics of Conversion.
(i) Optional Conversion. Each holder of Series A Preferred or
Series B Preferred who desires to convert the same into shares of Common Stock
pursuant to this Section 4.4.4 shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any transfer agent
for the Series A Preferred or Series B Preferred, as applicable, and shall give
written notice to the Corporation at such office that such holder elects to
convert the same. Such notice shall state the number of shares of Series A
Preferred or Series B Preferred, as the case may be, being converted. Thereupon,
the Corporation shall promptly (i) issue and deliver at such office to such
holder a certificate or certificates for the number of shares of Common Stock to
which such holder is entitled, (ii) pay in cash or, to the extent sufficient
funds are not then legally available therefor, in, Common Stock (at the Common
Stock's fair market value determined by the Board of Directors as of the date of
such conversion), any declared but unpaid dividends on the shares of Series A
Preferred or Series B Preferred, as applicable, being converted and (iii) if
less than all of the shares of Series A Preferred or Series B Preferred, as
applicable, represented by the surrendered certificates are being converted,
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<PAGE> 15
reissue certificates representing the balance of the number of shares of Series
A Preferred or Series B Preferred, as applicable, not being converted. Such
conversion shall be deemed to have been made at the close of business on the
date of such surrender of the certificate representing the shares of Series A
Preferred or Series B Preferred, as applicable, to be converted, and the person
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares of Common
Stock on such date.
(ii) Automatic Conversion. Upon the occurrence of the event
specified in Section 4.4.4(i) above, the outstanding shares of Series A
Preferred and Series B Preferred, as applicable, shall be converted into Common
Stock automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided however that the Corporation shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Series A Preferred and Series B Preferred, as applicable, are either delivered
to the Corporation or its transfer agent as provided below, or the holder
notifies the Corporation or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. Upon surrender by any holder of the
certificates formerly representing shares of Series A Preferred or Series B
Preferred, as applicable, at the office of the Corporation or any transfer agent
for the Series A Preferred or Series B Preferred, as applicable, there shall be
issued and delivered to such holder promptly at such office and in its name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
Series A Preferred or Series B Preferred, as applicable, surrendered were
convertible on the date on which such automatic conversion occurred, and the
Corporation shall promptly pay in cash or, at the option of the Corporation,
Common Stock (at the Common Stock's fair market value determined by the Board as
of the date of such conversion) or, at the option of the Corporation, a
combination of both cash and Common Stock, all declared and unpaid dividends on
the shares of Series A Preferred or Series B Preferred which are automatically
converted. Until surrendered as provided above, each certificate formerly
representing shares of Series A Preferred or Series B Preferred shall be deemed
for all corporate purposes to represent the number of shares of Common Stock
resulting from such automatic conversion.
(k) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series A Preferred or Series B Preferred. All shares
of Common Stock (including fractions thereof) issuable upon conversion of more
than one share of Series A Preferred or Series B Preferred by a holder thereof
shall be aggregated for purposes of determination whether the conversion would
result in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of any fractional
share, the Corporation shall, in lieu of issuing any fractional share, pay cash
equal to the product of such fraction multiplied by the Common Stock's fair
market value (as determined in good faith by the Board) on the date of
conversion.
(l) Reservation of Common Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock sufficient Reserved Employee Stock, as well
as such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of
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<PAGE> 16
the Series A Preferred and Series B Preferred. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
satisfy the needs of Reserved Employee Stock or to effect the conversion of all
then outstanding shares of the Series A Preferred and Series B Preferred, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(m) Status of Shares of Series A Preferred or Series B Preferred. All
shares of Series A Preferred and Series B Preferred acquired by the Corporation
by reason of redemption, purchase, conversion or otherwise shall be deemed
authorized but unissued shares.
4.4.5 CERTAIN DEFINITIONS.
An "affiliate" of, or person "affiliated" with, a specified person means
a person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, the person
specified, where "control" means the possession, directly or indirectly, of the
power to direct the management and policies of a person whether through the
ownership of voting securities, contract or otherwise, provided, however, an
individual shall not be deemed an affiliate solely because such individual
serves as a director, including as chairman of the Board of Directors, of a
corporation, or in a similar capacity with respect to a limited liability
company, partnership or other entity.
"Common Stock Deemed Outstanding" means, at any given time, the sum of
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to have been issued pursuant to the
exercise of Options and the conversion of Convertible Securities, including the
Series A Preferred and Series B Preferred, whether or not the Options or
Convertible Securities are actually exercisable at such time.
"Convertible Securities" means any stock or securities directly or
indirectly convertible into or exchangeable for Common Stock.
"fully-diluted basis" means the number of shares of Common Stock issuable
upon exercise, conversion or exchange of all rights, Options or other
Convertible Securities, including the Series A Preferred and Series B Preferred,
whether or not such rights, Options or Convertible Securities are then
exercisable, convertible or exchangeable, and the number of shares of Common
Stock held by all stockholders of the Corporation.
"Options" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
"Permitted Issuance" means (i) any issuance of Common Stock upon
conversion of shares of Series A Preferred or Series B Preferred, (ii) issuances
of Reserved Employee Stock, (iii) any issuance of Common Stock upon exercise of
any Options or Convertible Securities outstanding as of the date the first share
of Series B Preferred is issued, and (iv) any issuances of Options or
Convertible Securities issued in connection with any financings or strategic
relationships entered into by the Corporation which shall not in the aggregate
exceed 2% of the outstanding Common Stock on a fully-diluted basis (provided,
however, that such 2% cap shall
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not apply to any such issuances approved by a Series B Director), and any
issuances of Common Stock upon exercise of any of the foregoing.
"Purchase Agreement" means the Series B Preferred Stock Purchase
Agreement, dated as of December 31, 1999 by and among the Corporation and the
purchasers of the Series B Preferred Stock identified on the signature pages
thereto.
"Reserved Employee Stock" means shares of Common Stock issuable to
employees, directors or consultants of the Corporation pursuant to incentive
compensation plan(s) of the Corporation which have been approved and adopted by
the Corporation's Board of Directors and which shall not exceed 12% of the sum
of (i) the shares of Common Stock on a fully-diluted basis outstanding as of the
date of the First Closing (as defined in the Purchase Agreement), plus (ii) the
shares of Common Stock issuable upon conversion of the Series B Preferred issued
at the Second Closing (as defined in the Purchase Agreement).
"Subsidiary" means any Corporation of which the shares of outstanding
capital stock possessing the voting power (under ordinary circumstances) in
electing the board of directors are, at the time as of which any determination
is being made, owned by the Corporation either directly or indirectly through
Subsidiaries.
4.5 RIGHTS OF FIRST REFUSAL.
4.5.1 TRANSFER SUBJECT TO RIGHTS OF CORPORATION.
No holder of shares of Common Stock or Preferred Stock shall (during his
lifetime, in the case of an individual), without consent of the Corporation
transfer any shares of Common Stock or Preferred Stock to any individual or
entity except upon receipt of a bona fide third party offer (a "Third Party
Offer") and after the party desiring to make such transfer (the "Transferor")
shall have first made the offer required by Section 4.5.1, and such offer shall
not have been accepted as provided in Section 4.5.1. Any purported transfer
contrary to the terms of this Section 4.5 shall be null and void and of no force
and effect.
(a) Transfer. The term "transfer" as used in this Section 4.5
shall include a sale, gift, mortgage, pledge, exchange, assignment or other
disposition, including a disposition under judicial order, legal process,
execution, attachment or enforcement of an encumbrance, but shall not include
the following: (i) a pledge, grant of security interest or other encumbrance
effected in a bona fide transaction with an unrelated and unaffiliated pledgee,
under a written pledge agreement that assures that, before any foreclosure may
be had thereon, the pledgee shall first notify the Corporation of its intent to
foreclose and shall first offer the shares subject to such foreclosure to the
Corporation pursuant to Section 4.5.1, at the price and on the other terms and
conditions specified in a written offer from a prospective purchaser (which may
be the pledgee), in connection with such foreclosure; (ii) a transfer (other
than by an individual) to a person or entity (or simultaneous transfers in
partial or complete liquidation to or for the benefit of the persons or
entities, if no more than five in number) owning all of the outstanding common
stock of the Transferor or a transfer to a corporation all of the outstanding
common stock of which is directly or indirectly owned by such Transferor or a
transfer to a corporation all of the outstanding common stock of which is owned
by a corporation that owns all the outstanding
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<PAGE> 18
common stock of the Transferor; (iii) a transfer to any affiliate of the
Transferor, any partner or retired partner of the Transferor, the estates and
immediate family members of such partners and retired partners and their spouses
and any trusts for the benefit of any of the foregoing persons or (iv) a
transfer to members of Transferor's immediate family, or to trustees or
custodians for their benefit. "Immediate family" shall be deemed to include only
the Transferor's spouse, children and grandchildren.
(b) Offer. If the Transferor has received a Third Party Offer the
Transferor shall, prior to transferring any or all of its capital stock of the
Corporation (except as otherwise permitted in this Section 4.5) make to the
Corporation an offer in writing to sell such capital stock proposed to be
transferred by the Transferor (the "Offer"). Attached to the Offer, which shall
be sent to the Corporation, shall be a statement of intention to transfer, and
all particulars, including, but not limited to, (i) the name(s) and address(es)
of the individual or entity making the Third Party Offer, (ii) the number and
class of capital stock involved in the proposed transfer, (iii) a description of
all of the terms of the Third Party Offer (which must include a cash price
unless the Third Party Offer consists partly or wholly of consideration other
than cash), and a copy of the Third Party Offer, and (iv) the address of the
Transferor to which notice or acceptance of the Offer is to be sent.
(c) Acceptance. Within 30 days after the receipt of the Offer (the
"Offer Period"), the Corporation shall notify the Transferor whether or not it
desires to purchase any of the capital stock of the Corporation offered and the
amount of such capital stock it desires to purchase. If a purchase is intended,
the notice shall fix a closing date not more than 30 days after the expiration
of the Offer Period.
(d) Specified Minimum Purchase. Notwithstanding the foregoing, if the
Transferor has received a Third Party Offer which contains a condition that such
prospective purchaser will not purchase less than the total, or a specified
minimum, amount of capital stock of the Corporation owned by the Transferor at
the time of the bona fide written offer, then in order to exercise the foregoing
options the Corporation must purchase, in the aggregate, either (i) all of the
capital stock of the Corporation offered by the Transferor, or (ii) no more than
that amount of capital stock of the Corporation which, when deducted from the
total capital stock of the Corporation being offered by the Transferor, results
in the minimum amount of capital stock of the Corporation specified in the bona
fide written offer from such prospective purchaser. Otherwise, the Offer shall
be deemed to have been completely rejected by the Corporation.
(e) Purchase Price. The purchase price for each share of the capital
stock purchased from the Transferor by the Corporation shall be the same as, and
on the same terms and conditions as, specified in the Third Party Offer. The
purchase price shall be payable in cash. In the event that the Third Party Offer
specifies the payment of consideration other than cash, the purchase price for
purposes of this Section 4.5.1(e) shall be the cash equivalent of such
consideration, determined on a per share basis by the Board of Directors in good
faith.
(f) Release of Transferor from Restrictions. If the Corporation shall
fail to purchase the capital stock of the Corporation offered by the Transferor
pursuant to the terms of this Section 4.5, the Transferor shall be free for a
period of 60 days to sell the offered but unsold capital stock of the
Corporation to the individual or entity making the Third Party Offer, for the
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price and on terms no more favorable to such transferee(s) than were available
to the Corporation under the Offer. If the offered but unsold capital stock of
the Corporation is not so sold by the Transferor within the 60-day period, the
Transferor shall not transfer such capital stock without again complying with
the restrictions contained in this Section 4.5 shall terminate.
4.5.2 WAIVER OF RIGHTS OF FIRST REFUSAL.
The Board of Directors may, at any time, whether at the time of a
proposed transfer, prior to the proposed transfer or after the proposed
transfer, at its discretion, waive or terminate the restrictions on the transfer
of capital stock of the Corporation set forth in this Section 4.5 with respect
to any one or more transfers.
4.5.3 TERMINATION OF RIGHTS OF FIRST REFUSAL.
The transfer restrictions set forth in this Section 4.5 shall terminate
upon a Qualified Public Offering.
4.6 GENERAL PROVISIONS.
4.6.1 NOTICES.
Any notice required by the provisions of this Certificate shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day, (iii) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (iv) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
verification of receipt. All notices to stockholders shall be addressed to each
holder of record at the address of such holder appearing on the books of the
Corporation.
4.6.2 AMENDMENT AND WAIVER.
In addition to any other vote or consent required herein or by law, no
amendment, modification or waiver of any of the terms or provisions of the
Series A Preferred shall be binding or effective without the prior written
consent of the Series A Required Holders, and no change in the terms thereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the Series A Required Holders. Further, no amendment, modification or
waiver of any of the terms or provisions of the Series B Preferred shall be
binding or effective without the prior written consent of the Series B Required
Holders, and no change in the terms thereof may be accomplished by merger or
consolidation of the Corporation with another corporation or entity unless the
Corporation has obtained the prior written consent of the Series B Required
Holders. Any amendment, modification or waiver of any of the terms or provisions
of the Series A Preferred or Series B Preferred by the Series A Required Holders
or the Series B Required Holders, as applicable, including, without limitation,
any of the terms and provisions of Section 4.4.4 governing adjustments to the
Series A Preferred Conversion Price and Series B Preferred Conversion Price,
whether prospective or retroactively effective, shall be binding upon all
holders of Series A Preferred or Series B Preferred, as applicable.
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4.6.3 REGISTRATION OF TRANSFER.
The Corporation shall keep at its principal office (or shall appoint a
transfer agent which shall keep) a register for the registration of the
Preferred Stock and Common Stock. Upon the surrender of any certificate
representing Preferred Stock or Common Stock at such place, the Corporation
shall, at the request of the record holder of such certificate, execute and
deliver (or cause to be executed and delivered, in each case at the Corporation'
s expense) a new certificate or certificates in exchange therefor representing
in the aggregate the number of shares represented by the surrendered
certificate. Each such new certificate shall be registered in such name and
shall represent such number of shares as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate. The Corporation shall not close its books against the
transfer of shares of Common Stock or Preferred Stock in any manner which would
interfere with the timely conversion of any shares of Common Stock or Preferred
Stock.
4.6.4 REPLACEMENT.
Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder shall be satisfactory) of the ownership and
loss, theft, destruction or mutilation of any certificate evidencing shares of
Preferred Stock or Common Stock, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement shall be satisfactory), or in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
4.6.5 PAYMENT OF TAXES.
The Corporation will pay all taxes (other than taxes based upon income)
and other governmental charges that may be imposed with respect to the issue or
delivery of shares of Common Stock upon conversion of shares of Series A
Preferred or Series B Preferred, excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series A Preferred
or Series B Preferred so converted were registered.
4.6.6 NO DILUTION OR IMPAIRMENT.
The Corporation shall not amend this Certificate, as amended, or
participate in any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, for the
purpose of avoiding or seeking to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation.
4.7 REDEMPTION.
Notwithstanding any other provision of this Certificate of Incorporation
to the contrary, outstanding shares of stock of the Corporation shall always be
subject to redemption by the
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Corporation, by action of the Board of Directors, if in the good faith judgment
of the Board of Directors such action should be taken, pursuant to Section
151(b) of the DGCL or any other applicable provision of law, to the extent, and
only to the extent, necessary to prevent the loss or secure the reinstatement of
any license or franchise from any governmental agency held by the Corporation or
any of its subsidiaries to conduct any portion of the business of the
Corporation or any of its subsidiaries, which license or franchise is
conditioned upon some or all of the holders of the Corporation's stock
possessing prescribed qualifications. The terms and conditions of such
redemption shall be as follows:
4.7.1 The redemption price of the shares to be redeemed pursuant
to this Section 4.7.1 shall be determined by the Board of Directors and shall be
equal to the Fair Market Value (as defined herein) of such shares or, if such
shares were purchased by one or more Disqualified Holders (as defined herein)
within one year of the Redemption Date (as defined herein), the greater of (i)
the Fair Market Value of such shares and (ii) the purchase price paid by such
Disqualified Holder for such shares. The redemption price shall be payable on
the Redemption Date.
4.7.2 At the election of the Corporation, the redemption price of
such shares may be paid in cash, Redemption Securities (as defined herein) or
any combination thereof; provided that if a Disqualified Holder objects to
payment in the form of Redemption Securities within 20 days of the proposed
Redemption Date, such Disqualified Holder shall be paid in cash.
4.7.3 If fewer than all shares held by Disqualified Holders are
to be redeemed, the shares to be redeemed shall be selected in such manner as
shall be determined by the Board of Directors, which may include selection first
of the most recently purchased shares thereof, selection by lot or selection in
any other manner determined by the Board of Directors.
4.7.4 At least 30 days' prior written notice of the Redemption
Date shall be given to any Disqualified Holder of shares selected to be redeemed
(unless waived in writing by any such holder), provided that the Redemption Date
may be the date on which written notice shall be given to such holder if the
cash or Redemption Securities necessary to effect the redemption shall have been
deposited in trust for the benefit of such holder and subject to immediate
withdrawal by it upon surrender of the stock certificates formerly representing
the shares redeemed.
4.7.5 From and after the Redemption Date, provided that the
redemption price therefor has been tendered by the Corporation, any and all
rights of whatever nature that any Disqualified Holder may have with respect to
any shares selected for redemption (including, without limitation, any rights to
vote or participate in dividends declared on stock of the same class or series
as such shares) shall cease and terminate, and such Disqualified Holder shall
thenceforth be entitled only to receive, with respect to such shares, the cash
or Redemption Securities payable upon redemption.
4.7.6 For purposes of this Section 4.7
(i) "Disqualified Holder" shall mean any holder of
shares of stock of the Corporation whose holding of such stock, either
individually or when taken together with the
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holding of shares of stock of the Corporation by any other holders, is more
likely than not to result, in the good faith judgment of the Board of Directors,
in the loss of, or the failure to secure the reinstatement of, any license or
franchise from any governmental agency held by the Corporation or any of its
subsidiaries to conduct any portion of the business of the Corporation or any of
its subsidiaries.
(ii) "Fair Market Value" of a share of the Corporation's
stock of any class or series shall mean the average Closing Price (as defined
herein) for such a share for each of the 45 most recent days on which shares of
stock of such class or series shall have been traded preceding the day on which
notice of redemption shall be given pursuant to Section 4.7.4; provided,
however, that if shares of stock of such class or series are not traded on any
securities exchange or in the over-the-counter market, "Fair Market Value" shall
be determined by the Board of Directors in good faith; provided that if the
Disqualified Holder challenges the good faith determination of the Board of
Directors, the dispute shall be resolved by an investment banking firm of
recognized national standing selected by the Disqualified Holder and acceptable
to the Corporation, the fees of such investment banker to be borne by the
Disqualified Holder. "Closing Price" on any day means the reported closing sales
price or, in case no such sale takes place, the average of the reported closing
bid and asked prices on the principal United States securities exchange
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing sales price or bid quotation for such stock on the Nasdaq National
Market of The Nasdaq Stock Market, Inc. or any system then in use, or if no such
prices or quotations are available, the fair market value on the day in question
as determined by the Board of Directors in good faith.
(iii) "Redemption Date" shall mean the date fixed by the
Board of Directors for the redemption of any shares of stock of the Corporation
pursuant to this Section 4.7.
(iv) "Redemption Securities" shall mean any debt or
equity securities of the Corporation, any of its subsidiaries or any other
corporations, or any combination thereof, having such terms and conditions as
shall be approved by the Board of Directors and which, together with any cash to
be paid as part of the redemption price, in the opinion of any investment
banking firm selected by the Board of Directors (which may be a firm which
provides other investment banking, brokerage or other services to the
Corporation), has a value, at the time notice of redemption is given pursuant to
Section 4.7.4, at least equal to the price required to be paid pursuant to
Section 4.7.1 (assuming for purposes of such valuation, in the case of
Redemption Securities to be publicly traded, such Redemption Securities were
fully distributed and trading under normal conditions).
5 BOARD OF DIRECTORS
5.1 CLASSIFICATION.
5.1.1 Except as otherwise provided in this Certificate or a
certificate of designations relating to the rights of the holders of any series
of Preferred Stock, voting separately by series, to elect additional directors
under specified circumstances, the number of directors of the Corporation shall
be as fixed from time to time by the Board of Directors of the
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Corporation. The directors, other than those who may be elected by the holders
of any series of Preferred Stock voting separately by series, shall be
classified, with respect to the time for which they severally hold office, into
three classes, Class I, Class II and Class III, which shall be as nearly equal
in number as possible, and shall be adjusted from time to time by the Board of
Directors to maintain such proportionality. Each initial director in Class I
shall hold office for a term expiring at the 2001 annual meeting of
stockholders, each initial director in Class II shall hold office for a term
expiring at the 2000 annual meeting of stockholders, and each initial director
in Class III shall hold office for a term expiring at the 1999 annual meeting of
stockholders. Elections of directors need not be by written ballot.
5.1.2 Notwithstanding the foregoing provisions of this Section
5.1, each director shall serve until such director's successor is duly elected
and qualified or until such director's earlier death, resignation or removal. At
each annual meeting of stockholders, the successors to the class of directors
whose term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election and until their successors have been duly elected and
qualified or until any such director's earlier death, resignation or removal.
Except as set forth below with respect to vacancies and newly created
directorships, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors.
5.2 REMOVAL.
Except as otherwise provided pursuant to the provisions of this
Certificate or a certificate of designations relating to the rights of the
holders of any series of Preferred Stock, voting separately by series, to elect
directors under specified circumstances, any director or directors may be
removed from office at any time, but only for cause and only by the affirmative
vote of not less than 66-2/3% of the total number of votes of the then
outstanding shares of stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, and only if notice of
such proposal was contained in the notice of such meeting. At least 30 days
prior to any meeting of stockholders where the removal of directors prior to
expiration of their term in office will be considered, written notice shall be
sent to the director or directors whose removal will be considered at such
meeting. Any vacancy in the Board of Directors resulting from any such removal
or otherwise shall be filled in accordance with Section 5.3 hereof.
5.3 VACANCIES AND CHANGE OF AUTHORIZED NUMBER.
Vacancies and newly created directorships resulting from any increase in
the authorized number of directors elected by all of the stockholders having the
right to vote as a single class may only be filled by a vote of the majority of
the directors then in office, although fewer than a quorum, or by a sole
remaining director. In the event that one or more directors resign from the
board, effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have the power to fill such vacancy
or vacancies, the vote thereon to take effect not earlier than the date on which
such resignation or resignations shall become effective. Notwithstanding the
foregoing, whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of this
Certificate, vacancies
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and newly created directorships of such class or classes or series may only be
filled by a majority of the directors elected by such class or classes or series
thereof in office, or by a sole remaining director so elected. Each director
chosen in accordance with this Section 5.3 shall hold office until the next
election of the class for which such director shall have been chosen, and until
such director's successor is elected and qualified, or until the director's
earlier death, resignation or removal.
5.4 DIRECTORS ELECTED BY HOLDERS OF PREFERRED STOCK.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the certificate of designations applicable thereto, and such
directors so elected shall not be divided into classes pursuant to Section 5.1
unless expressly provided by this Certificate or the certificate of designations
applicable thereto.
5.5 LIMITATION OF LIABILITY.
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty as a
director; provided, however, that this provision shall not eliminate or limit
the liability of a director: (a) for any breach of the director's duty of
loyalty to the Corporation or its stockholders; (b) for acts or omissions that
are not in good faith or that involve intentional misconduct or a knowing
violation of law; (c) for liability under Section 174 of the DGCL; or (d) for
any transaction from which the director received any improper personal benefit,
it being the intention of the foregoing provision to eliminate the liability of
the Corporation's directors to the Corporation or its stockholders to the
fullest extent permitted by Section 102(b)(7) of the DGCL. Any repeal or
modification of this Section 5.5 shall be prospective only, and shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification with respect to acts or
omissions occurring prior to such repeal or modification.
6 INDEMNIFICATION
The Corporation shall indemnify, to the fullest extent permitted by
Section 145 of the DGCL, as amended from time to time, all persons who it may
indemnify pursuant thereto. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
7 SPECIAL MEETINGS OF STOCKHOLDERS
Special meetings of the stockholders may be called at any time but only
by (a) the chairman of the board of the Corporation or (b) a majority of the
directors in office, although less than a quorum. The business which shall be
conducted at any special meeting of the stockholders shall: (a) have been
specified in the written notice of the meeting (or any supplement thereto) given
by the Corporation, or (b) be brought before the meeting at the
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direction of the Board of Directors, or (c) be brought before the meeting by the
presiding officer of the meeting provided that a majority of the directors then
in office have approved, on the record, that such business be conducted at the
meeting.
8 AMENDMENT OF CERTIFICATE OF INCORPORATION
Notwithstanding any other provisions of this Certificate or the Bylaws
(and notwithstanding the fact that a lesser percentage may be specified by law,
this Certificate or the Bylaws), the affirmative vote of 75% of the total number
of votes of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal, or to adopt any provision
inconsistent with the purpose or intent of, Section 5, Section 6 or Section 7
hereof, and this Section 8. Notice of any such proposed amendment, repeal or
adoption shall be contained in the notice of the meeting at which it is to be
considered. Subject to the provisions set forth herein, the Corporation reserves
the right to amend, alter, repeal or rescind any provision contained in this
Certificate in the manner now or hereafter prescribed by law.
9 AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the DGCL,
the Board of Directors is expressly authorized and empowered to adopt, amend and
repeal the Bylaws. Notwithstanding any other provisions of this Certificate or
the Bylaws (and notwithstanding the fact that a lesser percentage may be
specified by law, this Certificate or the Bylaws), in order for the stockholders
of the Corporation to amend or repeal the Bylaws, the affirmative vote of 75% of
the total number of votes of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required.
10 DURATION
The Corporation is to have perpetual existence.
11 CORPORATE ACTION OUTSIDE OF DELAWARE
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws.
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EXHIBIT 3.2
BYLAWS
OF
KNOLOGY, INC.
1. OFFICES
1.1. REGISTERED OFFICE
The initial registered office of the Corporation shall be in
Wilmington, Delaware, and the initial registered agent in charge thereof shall
be Corporation Service Company.
1.2. OTHER OFFICES
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors may from
time to time determine or as may be necessary or useful in connection with the
business of the Corporation.
2. MEETINGS OF STOCKHOLDERS
2.1. PLACE OF MEETINGS
All meetings of the stockholders shall be held at such place as
may be fixed from time to time by the Board of Directors, the Chairperson, the
Chief Executive Officer or the President.
2.2. ANNUAL MEETINGS
The Corporation shall hold annual meetings of stockholders,
commencing with the year 1999, on such date and at such time as shall be
designated from time to time by the Board of Directors, the Chairperson, the
Chief Executive Officer or the President, at which stockholders shall elect
successors to that class of directors whose terms shall have expired and
transact such other business as may properly be brought before the meeting.
2.3. SPECIAL MEETINGS
Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called at any time by (a) the
Chairperson or (b) a majority of the directors in office, although less than a
quorum.
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2.4. NOTICE OF MEETINGS
Notice of any meeting of stockholders, stating the place, date and
hour of the meeting, and (if it is a special meeting) the purpose or purposes
for which the meeting is called, shall be given to each stockholder entitled to
vote at such meeting not less than ten nor more than sixty days before the date
of the meeting (except to the extent that such notice is waived or is not
required as provided in the General Corporation Law of the State of Delaware
(the "DELAWARE GENERAL CORPORATION LAW") or these Amended and Restated Bylaws
(the "Bylaws"). Such notice shall be given in accordance with, and shall be
deemed effective as set forth in, Section 222 (or any successor section) of the
Delaware General Corporation Law.
2.5. WAIVERS OF NOTICE
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation of the Corporation (which shall include any
amendments thereto and shall be hereinafter referred to as so amended as the
"CERTIFICATE OF INCORPORATION") or these Bylaws, a waiver thereof, in writing
and delivered to the Corporation, signed by the person or persons entitled to
such notice, whether before or after the event as to which such notice is
required, shall be deemed equivalent to notice. Attendance of a stockholder at a
meeting shall constitute a waiver of notice (1) of such meeting, except when the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (2) (if it is a special meeting) of
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the stockholder
objects to considering the matter at the beginning of the meeting.
2.6. BUSINESS AT SPECIAL MEETINGS
Business transacted at any special meeting of stockholders shall
be limited to the purposes stated in the notice (except to the extent that such
notice is waived or is not required as provided in the Delaware General
Corporation Law or these Bylaws).
2.7. LIST OF STOCKHOLDERS
After the record date for a meeting of stockholders has been
fixed, at least ten days before such meeting, the officer who has charge of the
stock ledger of the Corporation shall make a list of all stockholders entitled
to vote at the meeting, arranged in alphabetical order and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place in the city where
the meeting is to be held, which place is to be specified in the notice of the
meeting, or at the place where the meeting is to be held. Such list shall also,
for the duration of the meeting, be produced and kept open to the examination of
any stockholder who is present at the time and place of the meeting.
2.8. QUORUM AT MEETINGS
Stockholders may take action on a matter at a meeting only if a
quorum exists with respect to that matter. Except as otherwise provided by
statute or by the Certificate of
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Incorporation, the holders of a majority of the shares entitled to vote at the
meeting, and who are present in person or represented by proxy, shall constitute
a quorum at all meetings of the stockholders for the transaction of business.
Where a separate vote by a class or classes is required, a majority of the
outstanding shares of such class or classes, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter. Once a share is represented for any purpose at a meeting
(other than solely to object (1) to holding the meeting or transacting business
at the meeting, or (2) (if it is a special meeting) to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice), it is deemed present for quorum purposes for
the remainder of the meeting and for any adjournment of that meeting unless a
new record date is or must be set for the adjourned meeting. The holders of a
majority of the voting shares represented at a meeting, whether or not a quorum
is present, may adjourn such meeting from time to time.
2.9. VOTING AND PROXIES
Unless otherwise provided in the Delaware General Corporation Law
or in the Certificate of Incorporation, and subject to the other provisions of
these Bylaws, each stockholder shall be entitled to one vote on each matter, in
person or by proxy, for each share of the Corporation's capital stock that has
voting power and that is held by such stockholder. No proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed appointment of proxy shall be irrevocable if the
appointment form states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
2.10. REQUIRED VOTE
When a quorum is present at any meeting of stockholders, all
matters (other than the election of directors) shall be determined, adopted and
approved by the affirmative vote (which need not be by ballot) of a majority of
the votes of the shares present in person or represented by proxy at the meeting
and entitled to vote with respect to the matter, unless the proposed action is
one upon which, by express provision of the Delaware General Corporation Law or
of the Certificate of Incorporation, a different vote is specified and required,
in which case such express provision shall govern and control with respect to
that vote on that matter. Where a separate vote by a class or classes is
required, the affirmative vote of the holders of a majority of the shares of
such class or classes present in person or represented by proxy at the meeting
shall be the act of such class, unless the proposed action is one upon which, by
express provision of the Delaware General Corporation Law or of the Certificate
of Incorporation, a different vote is specified and required, in which case such
express provision shall govern and control with respect to that vote on that
matter. Notwithstanding the foregoing, directors shall be elected by a plurality
of the votes of the shares present in person or represented by proxy at the
meeting and entitled to vote on the election of directors.
2.11. ACTION WITHOUT A MEETING
Except as otherwise provided by the Certificate of Incorporation,
any action required or permitted to be taken by the stockholders of the
Corporation at a duly called annual or special meeting of stockholders may be
effected without a meeting, without prior notice and
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without a vote, but only if the action is effected by one or more written
consents of the majority of stockholders entitled to take such action, and the
writing or writings are delivered to the Corporation within sixty days of the
delivery to the Corporation of the earliest dated consent. All such consents
shall be included in the Minute Book of the Corporation.
3. DIRECTORS
3.1. POWERS
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things, subject to any
limitation set forth in the Certificate of Incorporation or as otherwise may be
provided in the Delaware General Corporation Law.
3.2. NUMBER AND ELECTION; CLASSES
The number of directors which shall constitute the whole Board of
Directors shall not be fewer than three nor more than fifteen. The first Board
of Directors shall consist of three members. Thereafter, within the limits above
specified, the number of directors shall be determined by resolution of the
Board of Directors. The directors shall be elected at the annual meeting of the
stockholders, except as provided in SECTION 3.4 hereof, and each director
elected shall hold office until such director's successor is elected and
qualified or until the director's earlier death, resignation or removal.
Directors need not be stockholders. Unless otherwise provided in the Certificate
of Incorporation, the Board of Directors shall divide the directors into three
classes; and, when the number of directors is changed, shall determine the class
or classes to which the increased or decreased number of directors shall be
apportioned; provided, however, that no decrease in the number of directors
shall affect the term of any director then in office. At each annual meeting of
stockholders, directors elected to succeed those whose terms are expiring shall
be elected for a term of office expiring at the annual meeting of stockholders
held in the third year following their election and until their respective
successors are elected and qualified, or until such director's earlier death,
resignation or removal.
3.3. NOMINATION OF DIRECTORS
Only persons who are nominated in accordance with the procedures
set forth in this SECTION 3.3 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this SECTION 3.3. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder notice
shall be delivered to or mailed and received at the principal executive office
of the Corporation not less than sixty days prior to the meeting; provided,
however, that in the event that less than seventy-five days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the fifteenth day
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following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such stockholder's notice shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation's stock which
are beneficially owned by such person, and (iv) any other information relating
to such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
without limitation such person's written consent to be named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the Corporation's books, of such stockholder and (ii) the class and number of
shares of the Corporation's stock which are beneficially owned by such
stockholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in the
stockholder's notice of nomination which pertains to the nominee. No later than
the tenth day following the date of receipt of a stockholder nomination
submitted pursuant to this SECTION 3.3, the Chairman of the Board of Directors
of the Corporation shall, if the facts warrant, determine and notify in writing
the stockholder making such nomination that such nomination was not made in
accordance with the time limits and/or other procedures prescribed by the
bylaws. If no such notification is mailed to such stockholder within such
ten-day period, such nomination shall be deemed to have been made in accordance
with the provisions of this SECTION 3.3. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this SECTION 3.3.
3.4. VACANCIES
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although fewer than a quorum, or by a
sole remaining director. Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the Certificate of Incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof in office, or by a sole
remaining director so elected. Each director so chosen shall hold office until
the next election of the Class for which such director shall have been chosen,
and until such director's successor is elected and qualified, or until the
director's earlier death, resignation or removal. In the event that one or more
directors resigns from the Board of Directors, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office until the next election of the Class for
which such director shall have been chosen, and until such director's successor
is elected and qualified, or until the director's earlier death, resignation or
removal.
v
<PAGE> 6
3.5. MEETINGS
3.5.1. REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
3.5.2. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called by the
Chairperson, the Chief Executive Officer or the President on one day's notice.
At least one day's notice of special meetings of the Board of Directors shall be
provided to each director, either personally or by telephone, express delivery
service (so that the scheduled delivery date of the notice is at least one day
in advance of the meeting), telegram or facsimile transmission. At least five
days' notice of special meetings of the Board of Directors shall be provided by
first-class mail (effective upon deposit of such notice in the mail). The notice
need not describe the purpose of a special meeting.
3.5.3. TELEPHONE MEETINGS
Members of the Board of Directors may participate in a meeting of
the Board of Directors by any communication by means of which all participating
directors can simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
3.5.4. ACTION WITHOUT MEETING
Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting if the action is taken by all
members of the Board of Directors. The action must be evidenced by one or more
written consents describing the action taken, signed by each director, and
delivered to the Corporation for inclusion in the Minute Book of the
Corporation.
3.5.5. WAIVER OF NOTICE OF MEETING
A director may waive any notice required by statute, the
Certificate of Incorporation or these Bylaws before or after the date and time
stated in the notice. Except as set forth below, the waiver must be in writing,
signed by the director entitled to the notice, and delivered to the Corporation
for inclusion in the Minute Book of the Corporation. Notwithstanding the
foregoing, a director's attendance at or participation in a meeting waives any
required notice to the director of the meeting unless the director at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or assent to action taken at the
meeting.
3.6. QUORUM AND VOTE AT MEETINGS
At all meetings of the Board of Directors, a quorum of the Board
of Directors consists of a majority of the total number of directors prescribed
pursuant to SECTION 3.2 of these Bylaws. The vote of a majority of the directors
present at any meeting at which there is a
vi
<PAGE> 7
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation or by
these Bylaws.
3.7. COMMITTEES OF DIRECTORS
The Board of Directors may by resolution create one or more
committees and appoint members of the Board of Directors to serve on the
committees at the pleasure of the Board of Directors. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. If a member of a
committee shall be absent from any meeting, or disqualified from voting thereat,
the remaining member or members present and not disqualified from voting,
whether or not such member or members constitute a quorum, may, by unanimous
vote, appoint another member of the Board of Directors to act at the meeting in
the place of such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors pursuant to Section 151(a) of the
Delaware General Corporation Law, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation pursuant to Sections 251 or 252 of the Delaware General
Corporation Law, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the Bylaws; and unless the Board resolution appointing
the Committee, these Bylaws or the Certificate of Incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the same to
the Board of Directors, when required. Unless otherwise specified in the board
resolution appointing the Committee, all provisions of the Delaware General
Corporation Law and these Bylaws relating to meetings, action without meetings,
notice (and waiver thereof), and quorum and voting requirements of the Board of
Directors apply, as well, to such committees and their members.
3.8. COMPENSATION OF DIRECTORS
The Board of Directors shall have the authority to fix the
compensation of directors. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
vii
<PAGE> 8
4. OFFICERS
4.1. POSITIONS
The officers of the Corporation shall be a President, a Secretary
and a Treasurer, and such other officers as the Board of Directors (or an
officer authorized by the Board of Directors) from time to time may appoint,
including a Chairperson, a Chief Executive Officer, a Chief Financial Officer
and one or more Vice Chairmen, Senior Vice Presidents, Vice Presidents,
Assistant Secretaries and Assistant Treasurers. Each such officer shall exercise
such powers and perform such duties as shall be set forth below and such other
powers and duties as from time to time may be specified by the Board of
Directors or by any officer(s) authorized by the Board of Directors to prescribe
the duties of such other officers. Any number of offices may be held by the same
person, except that in no event shall the President and the Secretary be the
same person. Each of the Chairperson, Chief Executive Officer, Chief Financial
Officer, President, and/or any Vice President may execute bonds, mortgages and
other documents under the seal of the Corporation, except where required or
permitted by law to be otherwise executed and except where the execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation.
4.2. CHAIRPERSON
The Chairperson shall (when present) preside at all meetings of
the Board of Directors and stockholders, and shall ensure that all orders and
resolutions of the Board of Directors and stockholders are carried into effect.
The Chairperson may execute bonds, mortgages and other contracts, under the seal
of the Corporation, if required, except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation.
4.3. CHIEF EXECUTIVE OFFICER
In the absence of the Chairperson, or if no Chairperson shall have
been appointed, the Chief Executive Officer shall (when present) preside at all
meetings of the Board of Directors and stockholders, and shall ensure that all
orders and resolutions of the Board of Directors and stockholders are carried
into effect. The Chief Executive Officer may execute bonds, mortgages and other
contracts, under the seal of the Corporation, if required, except where required
or permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
4.4. PRESIDENT
The President shall have overall responsibility and authority for
management of the operations of the Corporation, subject to the authority of the
Chief Executive Officer and the Board of Directors. The President may execute
bonds, mortgages and other contracts, under the seal of the Corporation, if
required, except where required or permitted by law to be otherwise signed and
executed and except where the signing and execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation.
viii
<PAGE> 9
4.5. CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall have overall responsibility and
authority for management of the financial operations of the Corporation, subject
to the authority of the Chief Executive Officer and the Board of Directors. The
Chief Financial Officer may execute bonds, mortgages and other contracts, under
the seal of the Corporation, if required, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
4.6. VICE PRESIDENT
In the absence of the President or in the event of the President's
inability or refusal to act, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the President.
4.7. SECRETARY
The Secretary shall have responsibility for preparation of minutes
of meetings of the Board of Directors and of the stockholders and for
authenticating records of the Corporation. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors. The Secretary or an Assistant Secretary may also attest all
instruments signed by any other officer of the Corporation.
4.8. ASSISTANT SECRETARY
The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary.
4.9. TREASURER
The Treasurer shall have responsibility for the custody of the
corporate funds and securities and shall see to it that full and accurate
accounts of receipts and disbursements are kept in books belonging to the
Corporation. The Treasurer shall render to the Chairperson, the Chief Executive
Officer, the President, the Chief Financial Officer and the Board of Directors,
upon request, an account of all financial transactions and of the financial
condition of the Corporation.
4.10. ASSISTANT TREASURER
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there shall have been no
ix
<PAGE> 10
such determination, then in the order of their election), shall, in the absence
of the Treasurer or in the event of the Treasurer's inability or refusal to act,
perform the duties and exercise the powers of the Treasurer.
4.11. TERM OF OFFICE
The officers of the Corporation shall hold office until their
successors are chosen and qualify or until their earlier resignation or removal.
Any officer may resign at any time upon written notice to the Corporation. Any
officer elected or appointed by the Board of Directors may be removed at any
time, with or without cause, by the affirmative vote of a majority of the Board
of Directors.
4.12. COMPENSATION
The compensation of officers of the Corporation shall be fixed by
the Board of Directors or by any officer(s) authorized by the Board of Directors
to prescribe the compensation of such other officers.
4.13. FIDELITY BONDS
The Corporation may secure the fidelity of any or all of its
officers or agents by bond or otherwise.
5. CAPITAL STOCK
5.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES
The shares of the Corporation shall be represented by
certificates, provided that the Board of Directors may provide by resolution
that some or all of any or all classes or series of the Corporation's stock
shall be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates, and upon request
every holder of uncertificated shares, shall be entitled to have a certificate
(representing the number of shares registered in certificate form) signed in the
name of the Corporation by the Chairperson, President or any Vice President, and
by the Treasurer, Secretary or any Assistant Treasurer or Assistant Secretary of
the Corporation. Any or all the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar whose signature or facsimile
signature appears on a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent or registrar at the date of issue.
x
<PAGE> 11
5.2. LOST CERTIFICATES
The Board of Directors, Chairperson, Chief Executive Officer,
President or Secretary may direct a new certificate of stock to be issued in
place of any certificate theretofore issued by the Corporation and alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming that the certificate of stock has been lost, stolen
or destroyed. When authorizing such issuance of a new certificate, the Board of
Directors or any such officer may, as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such owner's legal representative, to advertise the same in
such manner as the Board of Directors or such officer shall require and/or to
give the Corporation a bond or indemnity, in such sum or on such terms and
conditions as the Board of Directors or such officer may direct, as indemnity
against any claim that may be made against the Corporation on account of the
certificate alleged to have been lost, stolen or destroyed or on account of the
issuance of such new certificate or uncertificated shares.
5.3. RECORD DATE
5.3.1. ACTIONS BY STOCKHOLDERS
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty days nor less than
ten days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be the close of business
on the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting, unless the Board of Directors fixes a new record date for the adjourned
meeting.
In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by the Delaware General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation in the manner prescribed by Section 213(b)
of the Delaware General Corporation Law. If no record date has been fixed by the
Board of Directors and prior action by the Board of Directors is required by the
Delaware General Corporation Law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
xi
<PAGE> 12
5.3.2. PAYMENTS
In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
5.4. STOCKHOLDERS OF RECORD
The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
to receive notifications, to vote as such owner, and to exercise all the rights
and powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise may be provided by the Delaware General Corporation Law.
6. INDEMNIFICATION
6.1. AUTHORIZATION OF INDEMNIFICATION
Each person who was or is a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
by or in the right of the Corporation or otherwise (a "PROCEEDING"), by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan, shall be
(and shall be deemed to have a contractual right to be) indemnified and held
harmless by the Corporation (and any successor to the Corporation by merger or
otherwise) to the fullest extent authorized by, and subject to the conditions
and (except as provided herein) procedures set forth in the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but any such
amendment shall not be deemed to limit or prohibit the rights of indemnification
hereunder for past acts or omissions of any such person insofar as such
amendment limits or prohibits the indemnification rights that said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liabilities and losses (including attorneys' fees, judgments, fines, ERISA taxes
or penalties and amounts paid or to be paid in settlement) reasonably incurred
or suffered by such person in connection therewith; provided, however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person (except
for a suit or action pursuant to SECTION 6.2 hereof) only if such proceeding (or
part thereof) was authorized by the Board of Directors of the Corporation.
Persons who are not directors or officers of the Corporation may be similarly
indemnified in respect of such service
xii
<PAGE> 13
to the extent authorized at any time by the Board of Directors of the
Corporation. The indemnification conferred in this SECTION 6.1 also shall
include the right to be paid by the Corporation (and such successor) the
expenses (including attorneys' fees) incurred in the defense of or other
involvement in any such proceeding in advance of its final disposition;
provided, however, that, if and to the extent the Delaware General Corporation
Law requires, the payment of such expenses (including attorneys' fees) incurred
by a director or officer in advance of the final disposition of a proceeding
shall be made only upon delivery to the Corporation of an undertaking by or on
behalf of such director or officer to repay all amounts so paid in advance if it
shall ultimately be determined that such director or officer is not entitled to
be indemnified under this SECTION 6.1 or otherwise; and provided further, that,
such expenses incurred by other employees and agents may be so paid in advance
upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
6.2. RIGHT OF CLAIMANT TO BRING ACTION AGAINST THE CORPORATION
If a claim under SECTION 6.1 is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring an action against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law for the Corporation to indemnify the claimant for the
amount claimed or is otherwise not entitled to indemnification under SECTION
6.1, but the burden of proving such defense shall be on the Corporation. The
failure of the Corporation (in the manner provided under the Delaware General
Corporation Law) to have made a determination prior to or after the commencement
of such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in the Delaware General Corporation Law shall not be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct. Unless otherwise specified in an agreement with the
claimant, an actual determination by the Corporation (in the manner provided
under the Delaware General Corporation Law) after the commencement of such
action that the claimant has not met such applicable standard of conduct shall
not be a defense to the action, but shall create a presumption that the claimant
has not met the applicable standard of conduct.
6.3. NON-EXCLUSIVITY
The rights to indemnification and advance payment of expenses
provided by SECTION 6.1 hereof shall not be deemed exclusive of any other rights
to which those seeking indemnification and advance payment of expenses may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding such office.
xiii
<PAGE> 14
6.4. SURVIVAL OF INDEMNIFICATION
The indemnification and advance payment of expenses and rights
thereto provided by, or granted pursuant to, SECTION 6.1 hereof shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee, partner or agent and shall inure to
the benefit of the personal representatives, heirs, executors and administrators
of such person.
6.5. INSURANCE
The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee, partner (limited or general) or agent of
another corporation or of a partnership, joint venture, limited liability
company, trust or other enterprise, against any liability asserted against such
person or incurred by such person in any such capacity, or arising out of such
person's status as such, and related expenses, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of the Delaware General Corporation Law.
7. GENERAL PROVISIONS
7.1. INSPECTION OF BOOKS AND RECORDS
Any stockholder, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent shall be the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing which authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed to
the Corporation at its registered office or at its principal place of business.
7.2. DIVIDENDS
The Board of Directors may declare dividends upon the capital
stock of the Corporation, subject to the provisions of the Certificate of
Incorporation and the laws of the State of Delaware.
7.3. RESERVES
The directors of the Corporation may set apart, out of the funds
of the Corporation available for dividends, a reserve or reserves for any proper
purpose and may abolish any such reserve.
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<PAGE> 15
7.4. EXECUTION OF INSTRUMENTS
All checks, drafts or other orders for the payment of money, and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board of Directors may from time to time
designate.
7.5. FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of
the Board of Directors.
7.6. SEAL
The corporate seal shall be in such form as the Board of Directors
shall approve. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
7.7. AMENDMENTS
The Board of Directors or the stockholders may from time to time
adopt, amend or repeal the Bylaws of the Corporation. Such action by the Board
of Directors shall require the affirmative vote of at least a majority of the
directors then in office. Such action by the stockholders shall require the
affirmative vote of 66-2/3% of the total number of votes of the then outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class thereon.
* * * * *
The foregoing Bylaws were adopted by the Board of Directors as of
September 25, 1998.
-----------------------------
Chad Wachter, Secretary
xv
<PAGE> 1
EXHIBIT 4.1
Incorporated Under the Laws of the State of Delaware
NUMBER SHARES
*** ***
KNOLOGY, INC.
COMMON STOCK
PAR VALUE, $0.01 PER SHARE
SEE REVERSE SIDE
FOR RESTRICTIONS
ON TRANSFER
THIS CERTIFIES THAT SPECIMEN is the
_____________________________________________________
registered holder of SPECIMEN Shares
______________________________________________________
of the capital stock of the above named corporation, fully paid and
non-assessable, transferable only on the books of the Corporation by the holder
hereof in person or by Attorney upon surrender of this Certificate properly
endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ____________ day of ____________ A.D. 19___
- ------------------------------ ------------------------------
SECRETARY PRESIDENT
<PAGE> 2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THESE SECURITIES NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE RE-OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES
ACT.
THE OWNERSHIP OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS RESTRICTED BY
AND SUBJECT TO THE PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF KNOLOGY, INC. (THE "CORPORATION"), WHICH (I) PROHIBITS THE
TRANSFER OF ANY SECURITIES TO A THIRD PARTY BEFORE OFFERING SUCH SECURITIES TO
THE CORPORATION UPON THE SAME TERMS AS TO THE THIRD PARTY, AND (II) PROVIDES
THAT THE CORPORATION SHALL HAVE THE RIGHT TO REDEEM ANY SECURITIES TO THE EXTENT
NECESSARY TO PREVENT THE LOSS OR SECURE THE REINSTATEMENT OF ANY LICENSE OR
FRANCHISE HELD BY THE CORPORATION OR ANY OF ITS SUBSIDIARIES. A COPY OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION IS AVAILABLE FOR INSPECTION
AT THE OFFICES OF THE CORPORATION.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OR SERIES OF STOCK.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION.
THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE
OF THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL
ACCORDING TO APPLICABLE LAWS OR REGULATIONS:
<TABLE>
<S> <C> <C>
TEN COM -AS TENANTS IN COMMON UNIF GIFT MIN ACT-......CUSTODIAN......
TEN ENT -AS TENANTS BY THE ENTIRETIES (CUST) (MINOR)
JT TEN -AS JOINT TENANTS WITH RIGHT OF UNDER UNIFORM GIFTS TO MINORS
SURVIVORSHIP AND NOT AS TENANTS
IN COMMON ACT...................
(STATE)
</TABLE>
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
FOR VALUE RECEIVED, ____ HEREBY SELL, ASSIGN AND TRANSFER
UNTO____________________________________________________________
__________________________________________________________SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY
CONSTITUTE AND APPOINT
________________________________________________________ATTORNEY
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED _______________ 19___
IN PRESENCE OF
_____________________________
_____________________________
NOTICE THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 4.2
Incorporated Under the Laws of the State of Delaware
NUMBER SHARES
*** ***
KNOLOGY, INC.
SERIES A PREFERRED STOCK
PAR VALUE, $0.01 PER SHARE
SEE REVERSE SIDE
FOR RESTRICTIONS
ON TRANSFER
THIS CERTIFIES THAT SPECIMEN is the
_____________________________________________________
registered holder of SPECIMEN Shares
______________________________________________________
of the capital stock of the above named corporation, fully paid and
non-assessable, transferable only on the books of the Corporation by the holder
hereof in person or by Attorney upon surrender of this Certificate properly
endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ____________ day of ____________ A.D. 19___
- ------------------------------ ------------------------------
SECRETARY PRESIDENT
<PAGE> 2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. NEITHER THESE SECURITIES NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE RE-OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION UNDER THE SECURITIES
ACT.
THE OWNERSHIP OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS RESTRICTED BY
AND SUBJECT TO THE PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION OF KNOLOGY, INC. (THE "CORPORATION"), WHICH (I) PROHIBITS THE
TRANSFER OF ANY SECURITIES TO A THIRD PARTY BEFORE OFFERING SUCH SECURITIES TO
THE CORPORATION UPON THE SAME TERMS AS TO THE THIRD PARTY, AND (II) PROVIDES
THAT THE CORPORATION SHALL HAVE THE RIGHT TO REDEEM ANY SECURITIES TO THE EXTENT
NECESSARY TO PREVENT THE LOSS OR SECURE THE REINSTATEMENT OF ANY LICENSE OR
FRANCHISE HELD BY THE CORPORATION OR ANY OF ITS SUBSIDIARIES. A COPY OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION IS AVAILABLE FOR INSPECTION
AT THE OFFICES OF THE CORPORATION.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OR SERIES OF STOCK.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION.
THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE
OF THIS CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL
ACCORDING TO APPLICABLE LAWS OR REGULATIONS:
<TABLE>
<S> <C> <C>
TEN COM -AS TENANTS IN COMMON UNIF GIFT MIN ACT-......CUSTODIAN......
TEN ENT -AS TENANTS BY THE ENTIRETIES (CUST) (MINOR)
JT TEN -AS JOINT TENANTS WITH RIGHT OF UNDER UNIFORM GIFTS TO MINORS
SURVIVORSHIP AND NOT AS TENANTS
IN COMMON ACT...................
(STATE)
</TABLE>
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
FOR VALUE RECEIVED, ____ HEREBY SELL, ASSIGN AND TRANSFER
UNTO____________________________________________________________
__________________________________________________________SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY
CONSTITUTE AND APPOINT
________________________________________________________ATTORNEY
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED
CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED _______________ 19___
IN PRESENCE OF
_____________________________
_____________________________
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 5.1
December __, 1999
Board of Directors
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Gentlemen:
We are acting as special counsel to KNOLOGY, Inc., a Delaware
corporation (the "COMPANY"), in connection with its registration statement on
Form S-1, as amended (the "REGISTRATION STATEMENT"), filed with the Securities
and Exchange Commission relating to the distribution of 43,211,531 shares of the
Company's Series A preferred stock, par value $.01 per share (the "PREFERRED
SHARES"), and options to purchase 6,258,036 shares of the Company's Series A
preferred stock (the "OPTIONS") by ITC Holding Company, Inc. ("ITC HOLDING") to
holders of certain securities of ITC Holding, and common stock into which the
Preferred Shares are convertible and for which the Options are exercisable .
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. The Amended and Restated Certificate of Incorporation of the
Company, as certified by the Secretary of the Company on the
date hereof as being complete, accurate and in effect.
3. The Bylaws of the Company, as certified by the Secretary of the
Company on the date hereof as being complete, accurate and in
effect.
4. Resolutions of the Board of Directors of the Company, including
resolutions adopted by unanimous written consent on November
22, 1999 and resolutions adopted at a meeting on December 22,
1999, as certified by the Secretary of the
<PAGE> 2
Board of Directors
KNOLOGY, INC.
December __, 1999
Page 2
Company on the date hereof as being complete, accurate and in
effect, relating to the original issuance of the Preferred
Shares and the Options, and authorizing the common stock
issuable upon conversion of the Preferred Shares (the "COMMON
SHARES") and the common stock issuable upon exercise of the
Options (the "OPTION SHARES"), and arrangements in connection
therewith.
5. The Section 351 Agreement, dated November 1, 1999, among the
Company, and certain subsidiaries of ITC Holding, pursuant to
which the Preferred Shares were issued.
6. The Line of Credit Note, dated December 22, 1999, made by the
Company for the benefit of a subsidiary of ITC Holding, which
was converted into the Options (the "NOTE").
7. The Notice of Conversion and Assignment, dated December __,
1999, among the Company, ITC Holding and a subsidiary of ITC
Holding, pursuant to which (i) the right to convert Note into
Options was exercised, and (ii) the Options were transferred to
ITC Holding.
8. The KNOLOGY, INC. Spin-off Plan (the "PLAN"), pursuant to which
the Option Shares are issuable, filed as Exhibit 10.69 to the
Registration Statement.
9. The form of Letter to ITC Holding Option Holders from ITC
Holding (the "OPTIONEE LETTER"), filed as Exhibit 10.70 to the
Registration Statement, which notifies the ITC Holding option
holders of the distribution of the Options.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of 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
Delaware corporate law. We express no opinion herein as to any other laws,
statutes, ordinances, rules or regulations.
<PAGE> 3
Board of Directors
KNOLOGY, INC.
December __, 1999
Page 3
Based upon, subject to and limited by the foregoing and assuming
that at the time the Shares and Options were issued the Company received the
consideration therefor specified in the resolutions referred to in paragraph 6
above:
(i) the Preferred Shares are validly issued, fully paid and
non-assessable under the General Corporation Law of the State of
Delaware;
(ii) the Options constitute binding obligations of the Company,
enforceable against the Company 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
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 Options are considered in a proceeding in equity or at
law);
(iii) the Common Shares have been duly authorized by the Company
and, when issued and delivered upon conversion of the Preferred
Shares in accordance with the terms set forth in the Company's
Certificate of Incorporation and the appropriate resolutions of
the Board of Directors of the Company authorizing the issuance of
the Common Shares, will be validly issued, fully paid and
non-assessable; and
(iv) the Option Shares have been duly authorized by the Company
and, when issued, delivered, and paid for upon exercise of the
Options in accordance with the terms of the Plan, the Optionee
Letter and the appropriate resolutions of the Board of Directors
of the Company authorizing the issuance of the Option Shares, will
be validly issued, fully paid and non-assessable.
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
<PAGE> 4
Board of Directors
KNOLOGY, INC.
December __, 1999
Page 4
in part or otherwise be 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,
HOGAN & HARTSON L.L.P.
<PAGE> 1
EXHIBIT 10.60
RIGHT OF FIRST REFUSAL AND OPTION AGREEMENT
THIS AGREEMENT ("Agreement") is made as of this 19th day of November, 1999, by
and between KNOLOGY of Columbus, Inc., a Delaware Corporation ("Grantor") with
address for purposes of this Agreement at 1241 O.G. Skinner Drive, West Point,
Georgia 31833, and ITC Service Company, a Georgia Corporation ("Grantee") with
address for purposes of this Agreement at 1239 O.G. Skinner Drive, West Point,
Georgia 31833 (Grantor and Grantee collectively referred to herein as the
"Parties" and each individually, a "Party").
WHEREAS, Grantor wishes to make available to Grantee, for a fee, the right of
first refusal and an option to lease up to four (4) strands of fiber optic cable
from the Grantor; and
WHEREAS, Grantee wishes to purchase such right and option;
NOW, THEREFORE, for and in consideration of fifty thousand and 00/100 Dollars
($50,000.00), payable as set forth below, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties hereby promise, covenant and agree as follows:
I. GRANT OF REFUSAL RIGHT AND OPTION.
For and in consideration of the payment by Grantee to Grantor of the sum of
$50,000.00 (the "Option Payment"), Grantor hereby agree as follows:
Grantor hereby grants a First Right of Refusal (the "Refusal Right") and
an Option to Lease up to Four Additional Dark Fibers (the "Option") to
Grantee for the specified fiber count as set forth in the Lease attached
as Exhibit "1" (the "Fibers"). Prior to leasing to a third party the
Fibers detailed in Exhibit 1, Grantor shall provide to Grantee written
notice of the proposed lease. Grantee can exercise this Option, at a
lease price and on other terms no less favorable than those specified on
Exhibit 1, up to 30 days after the date of Grantor informing Grantee in
writing (the "Grantee Notice") that it has a bona fide offer to lease to
a third party the Fibers detailed in Exhibit 1. In the event that Grantee
does not provide written notice to Grantor of its intent to exercise the
Option within the 30 day period after the Grantee Notice, Grantor has the
right to execute the lease of these Fibers to a third party within a
period of 60 days unencumbered by the Refusal Right and the Option of
Grantee. In the event that Grantor does not consummate the lease to that
third party within 180 days, Grantee's Refusal Right and Option are
restored and any subsequent offer to lease the Fibers will require the
above notice requirements, provided that the Refusal Right has not
expired
<PAGE> 2
II. EXERCISE BY GRANTEE.
The election by Grantee to exercise the Refusal Right or the Option must be
evidenced by a written Notice of Exercise delivered to Grantor in accordance
with the provisions below. Grantee, in its Notice of Exercise for the Option,
shall designate a date and time for the effective date of the Lease, which shall
not be earlier than ninety (90) days after the date Grantee delivered the Notice
of Exercise to the Grantor, unless an earlier time is agreed upon by the Parties
in writing. In the event Grantee fails to exercise this Option during the Term,
the Option shall automatically expire and this Agreement shall immediately
terminate and be of no further force or effect.
III. NOTICES
Any notice required or permitted to be given hereunder shall be in writing and
effective on the first business day following the date of receipt. All notices
given under this Agreement shall be addressed, in the case of Grantor, as
follows:
KNOLOGY of Columbus, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attn: Felix Boccucci, Jr.
Senior Vice President,
Business Development
With a copy to:
KNOLOGY of Columbus, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attn: Chad Wachter
General Counsel
And, in the case of Grantee, as follows:
ITC Service Company.
1239 O.G. Skinner Drive
West Point, Georgia 31833
Attn: William H. Scott, III
President
2.
<PAGE> 3
IV. TERM.
The term of the Refusal Right and the Option is ten (10) years, commencing with
the date first above written, unless terminated earlier pursuant to the terms
and conditions of this Agreement.
V. MISCELLANEOUS
1. NO WAIVERS. Neither Party shall be deemed to waive any of its rights,
powers or remedies under this Agreement unless such waiver is in writing and
signed by said Party. No delay or failure by a Party in exercising any of said
rights, powers or remedies shall operate as a waiver thereof. The effective
waiver by a Party of any breach of the covenants, conditions or agreements
binding on the other Party on one or more occasions shall not be construed as a
waiver or consent to such breach on any future occasion or a waiver of any other
covenant, condition, or provision of this Agreement.
2. INDEMNITY. Grantee shall indemnify and save harmless the Grantor from
failure by Grantee to secure and obtain any required governmental approvals,
consents, licenses, or permits necessary for Grantee to legally obtain title,
own or operate the Fibers, or to in any other manner comply with rules,
regulations, Laws or ordinances of any governmental or quasi-governmental body.
A Party claiming indemnity under this provision shall notify the other Party
promptly of written claims or demands against such claiming Party for which it
asserts the other Party is responsible. Each Party shall cooperate fully with
the other, and the indemnifying Party shall control the right to settle, appeal
(provided it pays the cost of any required appeal bond), compromise or otherwise
resolve any such claim or resulting judgment; provided that such settlement,
compromise or other resolution of such claim does not result in any liability to
the indemnified Party.
3. INTERPRETATION AND CONSTRUCTION. All of the terms and provisions of
this Agreement shall be construed and interpreted pursuant to the law of the
State of Georgia, without reference to its choice of law provisions. Each party
shall, in the event of a dispute, consent and submit itself to the exclusive
jurisdiction of the State of Georgia.
4. ASSIGNMENT. Either party may assign or delegate its obligations
hereunder without the prior written consent of the other party, but upon
reasonable written notice to the other party; provided, however, such assignment
shall not relieve the assigning party of any of its liabilities. This Agreement
shall be binding upon and inure to the benefit of the parties their successors
and their assigns.
5. SEVERABILITY. Any provision of this Agreement held or determined by an
arbitrator or by a court (or other legal authority) of competent jurisdiction to
be illegal, invalid, or
3.
<PAGE> 4
unenforceable in any jurisdiction shall be deemed separate, distinct and
independent, and shall be ineffective to the extent of such holding or
determination without (i) affecting or invalidating the remaining provisions of
this Agreement in that jurisdiction or (ii) affecting the legality, validity or
enforceability of such provision in any other jurisdiction.
6. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original and all of which taken together shall
constitute one and the same Agreement.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding of the Parties with respect to the subject matter hereof, and is
intended as the Parties' final expression and complete and exclusive statement
of the terms thereof, superseding all prior or contemporaneous agreements,
representations, promises and understandings, whether written or oral. Except as
otherwise expressly provided in this Agreement, neither Party is to be bound by
any pre-printed terms appearing in the other Party's form documents, tariffs,
purchase orders, quotations, acknowledgments, invoices, or other instruments.
After the date of this Agreement, it may be amended or modified only by an
instrument in writing signed by both Parties.
IN WITNESS WHEREOF, the Parties have caused their respective duly
authorized officers to execute this Agreement the day and year first above
written.
KNOLOGY OF COLUMBUS, INC.
"GRANTOR"
By: /s/ Felix L. Boccucci, Jr.
------------------------------------
Name: Felix L. Boccucci, Jr.
----------------------------------
Title: VP - Business DEvelopment
---------------------------------
ITC SERVICE COMPANY
"GRANTEE"
By: /s/ Bryan W. Adams
------------------------------------
Name: Bryan W. Adams
----------------------------------
Title: Vice President
---------------------------------
4.
<PAGE> 5
EXHIBIT "1"
FIBER LEASE AGREEMENT
5.
<PAGE> 6
FIBER LEASE AGREEMENT
BETWEEN
KNOLOGY OF COLUMBUS, INC.
AND
ITC SERVICE COMPANY
1
<PAGE> 7
FIBER LEASE
THIS AGREEMENT (hereinafter the "Agreement"), made as of the ____ day of
___________, ____, (the "Effective Date") by and between KNOLOGY of Columbus,
Inc., a Delaware corporation ("LESSOR") and ITC Service Company ("LESSEE"), a
Georgia corporation, sets forth the terms and conditions for the provision of
certain telecommunications facilities and services as hereinafter described.
WHEREAS, LESSOR has existing fiber optic facilities between West Point,
Georgia and Columbus, Georgia; and
WHEREAS, LESSEE desires to lease dark fibers from LESSOR pursuant to the
terms and conditions of this Agreement, and LESSOR is willing to lease certain
designated dark optical fibers for the purpose of transmission of digital
telecommunications signals to LESSEE pursuant to the terms and conditions of
this Agreement; and
WHEREAS, LESSEE desires, at its own expense, to obtain, supply, install
and maintain any and all equipment that LESSEE lawfully chooses to use in
connection with the Leased Fibers in order to lawfully transmit digital
telecommunications signals; and
WHEREAS, LESSEE is able and willing to pay LESSOR all payments required
under the terms and conditions of this Agreement; and
WHEREAS, the parties desire to define and set forth the terms and
conditions under which such rights will be accomplished; and
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and premises hereinafter set forth, the parties hereto agree as
follows:
2
<PAGE> 8
ARTICLE 1. DEFINITIONS
1.1 Affiliate - an "Affiliate" of a party means any corporation,
partnership (general or limited), limited liability company, joint venture,
corporate or government instrumentality, or other person or entity that is
controlled by or is under common control with that Party; "control" in this
context means either (i) directly or indirectly owning or having the right to
vote ownership interests possessing a majority of the aggregate voting power of
all ownership interests in that entity, or (ii) in fact having the power to
control and direct, either directly or indirectly, the business and affairs of
that entity or to elect or appoint the person (or if more than one, a majority
of the persons) who is responsible for the management and control of the
business and affairs of that entity.
1.2 Equipment - all power, electronic, optronic and telecommunications
equipment, including, without limitation, transmission, testing, switching,
alarm-monitoring, and repair equipment and all other articles of personal
property used in conjunction with the Leased Fibers.
1.3 Events of Default - has the meaning set forth in paragraph 16.
1.4 Fiber Termination Point(s) - physical locations along LESSOR's
network where LESSEE splices its facilities to the Leased Fibers.
1.5 Leased Fibers - the optical fibers which LESSOR permits LESSEE to
use pursuant to the terms and conditions of this Agreement. The number of Leased
Fibers and the particular fibers available to LESSEE under this Agreement is set
forth in Exhibit "A", attached hereto and made a part hereof. The term "Leased
Fibers" refers solely to the optical fibers themselves, and does not include any
associated Equipment that may be necessary or desirable to enable LESSEE or any
other person or entity to use such Leased Fibers for the purpose of transmitting
or receiving telecommunications signals.
1.6 Service Affecting Outage - any interruption or reduction in
transmission capacity or quality of the Leased Fibers that materially adversely
affects LESSEE's ability to operate and use the Leased Fibers so long as such
interruption or reduction is not caused by LESSEE's Equipment or is not due to
LESSEE's acts or omissions.
1.7 Specifications - the performance specifications for the Leased
Fibers that are the subject of this Agreement and are set forth in Exhibit "B",
attached hereto and made a part hereof.
ARTICLE 2. TERM
2.0 The original term of this Agreement shall commence on the Effective
Date of this Agreement and shall end on the fifteenth (15) anniversary of the
Effective Date (the "Term").
ARTICLE 3. OBLIGATIONS OF LESSOR
3
<PAGE> 9
3.1 Lease. Subject to the terms and conditions of this Agreement, LESSOR
hereby grants to LESSEE the right to use the Leased Fibers during the Term in a
lawful manner for the purpose of transmitting digital telecommunications signals
and for any other lawful purpose that does not interfere with, impair or
adversely effect LESSOR or any other present or future use of the LESSOR's fiber
network or communication system.
3.2 Provision of Leased Fibers. Subject to the terms and conditions of
this Agreement, LESSOR shall lease to LESSEE the Leased Fibers substantially in
accordance with the Specifications on Exhibit "B".
3.3 Fiber Termination. Fiber Termination Point(s) shall be mutually
agreed upon by the Parties and shall be the only points at which LESSEE's
Equipment is connected to the Leased Fibers.
3.4 Interconnection Point. LESSOR shall provide collocation space in the
POP sites (as shown on Exhibit "A") if requested by LESSEE to extent space is
available. LESSEE agrees to pay a collocation charge for this service at the
then prevailing fair market rates for such collocation space. If LESSOR is
unable to provide entrance facilities into the POP sites when requested by
LESSEE during the Term, LESSOR shall install a splice can at a point in
reasonable proximity to the POP sites and LESSEE shall access the Leased Fibers
through the splice cans.
3.5 Maintenance and Repair. LESSOR, at its sole cost and expense, will
maintain, repair and restore the Leased Fibers in accordance with sound industry
practices.
3.6 Services Notification. Except in the case of an emergency where
notice is not feasible, LESSOR will notify LESSEE by telephone twenty-four hours
before performing maintenance, repair or restoration services which, in LESSOR's
reasonable opinion, present a risk of damage to or interference with service
over the Leased Fibers.
3.7 Service Restoration Priority. If LESSOR notifies LESSEE of any
potential or actual failure, interruption or impairment in the Leased Fibers
that LESSOR reasonably considers an emergency, then LESSOR will use good faith
efforts to take remedial action within a commercially reasonable time.
ARTICLE 4. OBLIGATIONS OF LESSEE
4.1 Payment. LESSEE shall pay LESSOR two thousand nine hundred ten
Dollars ($2,910.00) per month for each fiber leased by LESSEE from LESSOR under
this Agreement during the Term ("Rent").
4
<PAGE> 10
4.2 Disconnection of Equipment. Upon termination of this Agreement for
any cause or reason whatsoever, LESSEE shall immediately cease and desist from
using the Leased Fibers for any purpose whatsoever. LESSOR shall have the right
to immediately disconnect, at LESSEE's sole expense, any and all splices on the
Leased Fiber joining LESSEE's Equipment, if any, to the Leased Fibers.
ARTICLE 5. APPROVALS AND CONSULTATION
5.1 Non-Liability Generally. Except as provided in Paragraph 5.2 below,
LESSOR shall not be liable to LESSEE for any Service Affecting Outage caused, in
whole or in part by:
5.1.1 an event of Force Majeure, as described in Article 14 of
this Agreement, below; or
5.1.2 construction, maintenance, repairs, replacements,
installation of equipment, investigations and inspections, of or related
to the Leased Fibers, performed by, on behalf of, or at the direction of
LESSEE, except to the extent that such activities are performed by LESSOR
on behalf of LESSEE.
5.2 Restoration Schedule; Compensation for Late Restoration of a Service
Affecting Outage. In the event of a Service Affecting Outage, LESSOR will use
its reasonable best efforts to restore LESSEE's use of the Leased Fibers within
six (6) hours after LESSOR's receipt of notice from LESSEE of the Service
Affecting Outage (the "Repair Period"). If LESSEE's use of the Leased Fibers is
not restored within twenty-four (24) continuous hours after LESSOR's receipt of
notice of such Service Affecting Outage then (i) LESSEE shall be entitled to a
credit against Rent in an amount equal to one month's Rent for the Leased
Fiber(s) (the "Rent Credit"). The Rent Credit, expense reimbursement and rights
to restore set forth in Paragraph 5.2 shall be the sole and exclusive remedies
available to LESSEE for any Service Affecting Outage.
5.3 LESSOR Notice of Work. Notwithstanding anything to the contrary in
paragraphs 5.1 and 5.2, LESSOR shall use its reasonable efforts to give LESSEE
advance notice of work that may cause a Service Affecting Outage, and, in the
event of such Service Affecting Outage caused in whole or in part by work
undertaken by or on behalf of LESSOR, LESSOR shall use its reasonable efforts to
restore LESSEE's use of the Leased Fibers as promptly as possible. Except to the
extent that such action is delayed by an event of Force Majeure as described in
Article 14 of this Agreement, or by an event set forth in subparagraph 5.1.2 of
this Agreement, all maintenance, repairs, replacements, installation of
equipment, investigations and/or inspections by LESSOR shall be performed in
accordance with a mutually agreed-upon schedule, so as to minimize inconvenience
by both Parties (hereinafter "Scheduled Maintenance").
ARTICLE 6. TITLE AND USE OF LESSOR SYSTEM
6.1 Leased Fibers. As between LESSOR and LESSEE, it is expressly
understood that LESSOR is and will at all times remain the sole owner and holder
of title to the Leased Fibers
5
<PAGE> 11
and the conduits and all real property associated with the Leased Fiber. Nothing
in this Agreement shall be construed as conveying to LESSEE any right, title or
interest in the Leased Fibers, except for the license and right to use the
Leased Fibers for the transmission of digital telecommunications signals or any
other lawful purpose pursuant to this Agreement that does not interfere with or
adversely affect LESSOR or any other present or future use of the LESSOR's fiber
optic network.
ARTICLE 7. ALTERATION OF ROUTE
7.1 Relocation Options. Before LESSOR significantly changes any part of
the Leased Fibers (including, without limitation, relocating or dismantling any
part of the fiber network of which the Leased Fiber is a part) or substantially
alters the character of any part of the Leased Fibers, LESSOR will give LESSEE
at least three (3) months notice, or if such notice period is impractical, then
as much notice as practical. LESSEE agrees to the extent alternative facilities
are available and re-routing is technically feasible and economically viable, to
re-route such affected part of the Leased Fiber to a new or existing fiber optic
network facilities on an alternate route between the origination and termination
points shown on Exhibit "A";
7.2 Relocation Expenses. If LESSOR makes a significant change or
alteration described in Section 7.1 upon LESSEE's request, then LESSEE will pay
all costs of such change or alteration. In all other cases, LESSOR will pay the
full costs of re-routing due to such change or alteration.
ARTICLE 8. REGULATION
8.1 LESSOR and LESSEE specifically acknowledge that this Agreement has
been negotiated and tailored to satisfy special requirements of LESSEE. LESSOR
and LESSEE intend that the transactions contemplated by this Agreement not be
classified as regulated common carriage, whether according to the classification
scheme of the Federal Communications Commission, the Georgia Public Service
Commission, or otherwise.
8.2 The Parties agree that in the event a decision by a
telecommunications regulatory authority at the federal, state or local level
necessitates modifications in this Agreement the Parties will negotiate in good
faith to modify such documents in light of such decision to permit each Party,
to the extent practicable, to enjoy the intended benefits of this Agreement.
ARTICLE 9. CONFIDENTIALITY
9.1 Confidentiality. Neither Party hereto shall, without the other
Party's specific prior written consent, disclose to any third party any
information supplied to it by such other Party in connection with this
Agreement, which such other Party designated as confidential, proprietary or
private, if such information is not otherwise generally available to the public.
LESSOR hereby designates the terms, conditions, and Exhibits of this Agreement
as confidential. Each
6
<PAGE> 12
Party's obligation under this Section 9.1 shall survive termination of this
Agreement to the fullest extent permitted by applicable law.
9.2 Remedies. Each Party acknowledges that a violation by it of the
covenants and terms of Paragraph 9.1 shall cause the other Party material and
irreparable harm and shall entitle such other Party, in addition to any other
remedy available to such other Party, including an award of monetary damages, to
a temporary restraining order and permanent injunction restraining and enjoining
the breaching Party from further violations of Paragraph 9.1.
ARTICLE 10. COMPLIANCE WITH LAWS
10.1 Each Party to this Agreement shall materially comply, at its own
expense, with all applicable laws, statutes, regulations, rules, ordinances,
orders, injunctions, writs, decrees or awards of any government or political
subdivision thereof, or any agency, authority, bureau, commission, department or
instrumentality thereof, or any court, tribunal, or arbitrator, in all
applicable, material respects in connection with this Agreement.
10.2 Each Party hereto agrees to comply, and to cause its employees to
comply, with all applicable requirements of law pertaining to its activities in
connection with this Agreement.
ARTICLE 11. LIMITATION OF LIABILITY
11.1 Limitation of Damages. Neither Party nor its affiliates will
be liable to the other Party for any special, indirect or consequential
damages or loss of use, lost revenues or lost profits arising out of this
Agreement or the performance or non-performance thereof, even if it or
any of its affiliates has been informed of the possibility of such
damages.
11.2 Time To Bring Claims. Either Party's failure to bring a claim
against the other Party within six (6) months after the date on which the
claiming Party knows or should have known of the existence of a potential
claim constitutes a waiver of such claim.
11.3 Disclaimer of any Implied Warranties. Other than the
warranties expressly provided herein regarding the Specifications to be
met by the Leased Fibers, LESSOR does not warrant the Leased Fibers, or
any other product, equipment or service to be provided in connection with
this Agreement, and LESSOR HEREBY DISCLAIMS ALL OTHER EXPRESS AND IMPLIED
WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE OR USE. LESSOR MAKES NO WARRANTY TO
LESSEE OR ANY THIRD PERSON OR ENTITY AS TO THE AVAILABILITY OR GRADE OF
SERVICE TO BE PROVIDED BY OR OVER THE LEASED FIBERS.
7
<PAGE> 13
ARTICLE 12. INDEMNIFICATION
12.1 LESSEE Indemnification of LESSOR. LESSEE shall and hereby agrees
to indemnify and hold harmless and defend LESSOR and all employees, directors,
officers, shareholders, agents, representatives, counsel, affiliates, Parents,
successors and permitted assigns of LESSOR (the "Indemnified LESSOR Parties")
from and for any and all liabilities, damages, lawsuits, obligations, claims,
costs, expenses, assessments, and penalties, including reasonable attorneys'
fees and expenses and court costs, incurred by or asserted against any such
Indemnified LESSOR Parties by reason of, arising out of, or related to:
12.1.1 any work on or near the Leased Fibers or other portion of
the LESSEE System (including transit to or from any such work) which work
is undertaken by or at the direction or request of LESSEE or of any of
LESSEE's employees, agents, representatives or contractors (other than
work undertaken by or at the direction of LESSOR or any of its employees,
agents, representatives or contractors);
12.1.2 any use, nonuse, possession, occupation, operation,
maintenance, or management of the Leased Fibers by LESSEE or its
employees, agents, representatives, contractors, customers, licensees or
invitees, or for which LESSEE or any of its employees, agents,
representatives, contractors, customers, licensees or invitees is
directly or indirectly responsible;
12.1.3 any negligent or tortious or illegal act of LESSEE or any
of its employees, agents, representatives, contractors, customers,
licensees, or invitees;
12.1.4 any failure by LESSEE, whether knowing or unknowing, to
perform any of its material obligations under this Agreement;
12.1.5 any claim for or liability to any person using part or all
of the transmission capacity leased by LESSEE for transmission purposes
to the extent such claim, judgment, or liability is related to such use
of the leased transmission capacity and exceeds the relief available to
LESSEE under this Agreement;
12.1.6 LESSEE's use, misuse, abuse, misapplication or improper use
of the Leased Fibers, including without limitation claims for defective
transmission, actions for libel, slander, and actions for infringement of
copyright and/or unauthorized use of material; or
12.1.7 property damage, bodily injury or death caused by LESSEE's
acts or omissions related to this Agreement.
12.2 LESSOR Indemnification of LESSEE. LESSOR shall and hereby agrees
to indemnify and hold harmless and defend LESSEE and all employees, directors,
officers, shareholders, agents, representatives, counsel, affiliates, Parents,
successors and permitted assigns of LESSEE (the "Indemnified LESSEE Parties")
from and for any and all liabilities,
8
<PAGE> 14
damages, lawsuits, obligations, claims, costs, expenses, assessments, and
penalties, including reasonable attorneys' fees and expenses and court costs,
incurred by or asserted against any such Indemnified LESSEE Parties by reason
of, arising out of, or related to:
12.2.1 any work on or near the Leased Fibers or other portion of
the LESSEE System (including transit to or from any such work) which work
is undertaken by or at the direction or request of LESSOR or of any of
LESSOR's employees, agents, representatives or contractors (other than
work undertaken by or at the direction of LESSEE or any of its employees,
agents, representatives or contractors);
12.2.2 any negligent or tortious or illegal act of LESSOR or any
of its employees, agents, representatives, contractors, customers,
licensees, or invitees;
12.2.3 any failure by LESSOR, whether knowing or unknowing, to
perform any of its material obligations under this Agreement; or
12.2.4 property damage, bodily injury or death caused by LESSOR's
acts or omissions related to this Agreement.
ARTICLE 13. INSURANCE
13.1 Coverage Required of LESSEE. During the Term, LESSEE and all
contractors or subcontractors hired by LESSEE shall take out, pay the premiums
on, and continuously maintain insurance coverages described below. Promptly
after the Effective Date, LESSEE shall deliver to LESSOR, pursuant to the notice
provisions of this Agreement, certificates of insurance, reasonably acceptable
to LESSOR, evidencing at least the following levels of insurance coverage:
13.1.1 worker's compensation insurance coverage complying with the
law of the State of Georgia and employers liability insurance with limits
of not less than $500,000 per occurrence;
13.1.2 comprehensive general liability insurance coverage and
excess umbrella, if necessary, with broad form endorsement attached, for
a combined bodily injury and property damages limit of not less than
$2,000,000 per occurrence, which coverage shall include blanket
contractual, products liability, and completed operations liability
coverage; and
13.2 LESSOR shall be specifically named as an "Additional Insured" on
the liability policy.
13.3 Notice of Cancellation. All such insurance coverage described in
this paragraph shall provide for not less than thirty (30) days' prior written
notice to LESSOR of cancellation or material change. LESSEE shall maintain all
such coverage in force at all times during the Term of this Agreement.
9
<PAGE> 15
ARTICLE 14. FORCE MAJEURE
14.1 NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY DELAY,
IMPAIRMENT OR FAILURE TO PERFORM DURING ANY PERIOD IN WHICH SUCH DELAY,
IMPAIRMENT OR FAILURE IS (i) DUE TO CAUSES BEYOND ITS CONTROL AND REASONABLE
ANTICIPATION, AND (II) WITHOUT SUCH PARTY'S FAULT OR NEGLIGENCE (HEREINAFTER A
"FORCE MAJEURE"), INCLUDING, BUT NOT LIMITED TO, FIRES, FLOODS, EPIDEMICS,
THIRD-PARTY NEGLIGENCE, QUARANTINE RESTRICTIONS, WAR, LABOR DISPUTES AND FREIGHT
EMBARGOES.
14.2 EACH PARTY WHOSE PERFORMANCE IS IMPAIRED UNDER THIS SECTION 14
SHALL EXERCISE BEST EFFORTS (INCLUDING INTERCONNECTION AND COOPERATION WITH
OTHER CARRIERS) TO MITIGATE THE EXTENT OF SUCH DELAY OR FAILURE, INCLUDING THOSE
ARISING FROM LABOR DISPUTES OR STRIKES.
ARTICLE 15. DISPUTE RESOLUTION
15.1 Any controversy or claim arising out of or relating to this
Agreement, including but not limited to a claim based on or arising from an
alleged tort, shall be settled by arbitration administered by the American
Arbitration Association under its Commercial Arbitration Rules. All statutes of
limitation which would otherwise be applicable in a judicial action brought by a
party shall apply to any arbitration and shall be given effect by the
arbitrator(s). The arbitrator(s) is authorized, in the exercise of his or her
discretion, to award costs and reasonable attorney's fees to the prevailing
party. The arbitrator shall have no authority to award punitive damages or any
other damages not measured by the prevailing party's actual damages, nor shall
any party seek punitive damages relating to any matter arising of this Agreement
in any other forum.
15.2 The parties acknowledge that this Agreement evidences a transaction
in interstate commerce. The United States Arbitration Act and federal
arbitration law shall govern the interpretation, enforcement and proceedings
pursuant to this arbitration clause. Judgment on the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. By
signing and delivering this Agreement, each of the parties accepts for itself
and in respect to its property, generally and unconditionally, the jurisdiction
of any court having jurisdiction.
ARTICLE 16. DEFAULT
16.1 Events of Default. Events of default shall be and include: (i) the
failure of LESSEE to pay any installment of Rent within thirty (30) days of its
due date; (ii) the failure by either Party to comply in good faith with any or
all of the material terms and conditions of this Agreement and such defaulting
Party's failure to cure such default within thirty (30) days after written
notice thereof or, if such default cannot be cured within thirty (30) days, such
defaulting Party commencing curative actions within such thirty (30) days and
diligently and continuously pursuing such curative action to a conclusion; (iii)
any material misrepresentation or breach of
10
<PAGE> 16
any warranty or representation contained in this Agreement; (iv) either Party
ceasing to do business as a going concern; or (v) either Party makes a general
assignment for the benefit of, or enters into any composition or arrangement
with creditors; is unable to or admits in writing its inability to pay its debts
a they become due; authorizes, applies for, or consents to the appointment of
trustee or liquidator of all or substantial part of its assets or has
proceedings seeking such appointment commenced against it which are not
terminated within sixty (60) days of such commencement; files a voluntary
petition under any bankruptcy or insolvency law or files a voluntary petition
under the reorganization or arrangement provisions of the laws of the United
States pertaining to bankruptcy or similar law of any jurisdiction or has
proceedings under any such law instituted against it which are not terminated
within sixty (60) days of such commencement; or has any substantial part of its
property become subject to any levy, seizure, assignment or sale for or by any
creditor or governmental agency without said levy, seizure, assignment or sale
being released, lifted, reversed or satisfied within ten (10) days thereafter.
16.2 Remedies Upon An Event of Default. Except as otherwise provided in
this Agreement, upon the occurrence of such an Event of Default, the
non-defaulting Party shall have all remedies available to it at law or equity or
under this Agreement. Unless otherwise stated herein, all such remedies shall be
cumulative and non-exclusive.
ARTICLE 17. TERMINATION OF AGREEMENT
17.1 This Agreement and the rights created hereby may be terminated:
17.1.1 upon the mutual written agreement of both Parties;
17.1.2 by either Party for any default of the other Party
hereunder; or
17.1.3 as expressly provided herein.
ARTICLE 18. MISCELLANEOUS
18.1 Assignment. Either party may assign or delegate its obligations
hereunder without the prior written consent of the other party, but upon
reasonable written notice to the other party; provided, however, such assignment
shall not relieve the assigning party of any of its liabilities. This Agreement
shall be binding upon and inure to the benefit of the parties their successors
and their assigns.
18.2 Modification. This Agreement shall not be amended, altered or
modified except by an instrument in writing duly executed by both Parties.
18.3 Limitation of Benefits. This Agreement shall be binding upon and
shall inure to the benefit of the Parties hereto and their respective successors
and permitted assigns. The Parties do not intend that this Agreement benefit any
persons or entities other than the Parties hereto. It is the explicit intention
of the Parties hereto that no person or entity other than the
11
<PAGE> 17
Parties hereto is or shall be entitled to bring any action to enforce any
provision of this Agreement against any of the Parties hereto, and that the
covenants, undertakings, and agreements set forth in this Agreement shall be
enforceable only by, the Parties hereto or their respective successors or
permitted assigns.
18.4 Notices. Any notice required or permitted to be given hereunder
shall be (a) in writing, (b) effective on the first business day following the
date of receipt, and (c) delivered by one of the following means: (i) by
personal delivery; (ii) by prepaid, overnight package delivery or courier
service; (iii) by the United States Postal Service, first class, certified mail,
return receipt requested, postage prepaid; or (iv) by prepaid telecopier, telex,
or other similar means of electronic communication (followed by confirmation on
the same or following day by overnight delivery or by mail as aforesaid). All
notices given under this Agreement shall be addressed, in the case of LESSOR, as
follows:
Chad S. Wachter
VP and General Counsel
KNOLOGY Holdings, Inc.
1241 O.G. Skinner Drive
West Point, GA 31833
and, in the case of LESSEE, as follows:
William H. Scott, III
President
ITC Service Company
1239 O. G. Skinner Drive
West Point, GA 31833
with a copy to:
Kimberley E. Thompson
Senior Vice President and General Counsel
ITC Service Company
4717 Dolphin Lane
Alexandria, VA 22309
or to such other addresses or telecopier numbers of which the Parties have been
advised in writing by any of the above-described means. Personal delivery to a
Party or to any officer, partner, agent, or employee of such Party at its
address herein shall constitute receipt. The following shall also constitute
receipt: (i) a Party's rejection or other refusal to accept notice, and (ii) the
inability to deliver to a Party because of a changed address or telecopier
number of which no notice has been received by the other Party. Notwithstanding
the foregoing, no notice of change of address or telecopier number shall be
effective until ten (10) days after the date of receipt thereof. This paragraph
shall not be construed in any way to affect or impair any waiver of notice or
demand herein provided.
12
<PAGE> 18
18.5 Independent Contractors. In all matters pertaining to this
Agreement, the relationship of LESSOR and LESSEE shall be that of independent
contractors, and neither LESSOR nor LESSEE shall make any representations or
warranties that their relationship is other than that of independent
contractors. This Agreement is not intended to create nor shall it be construed
to create any partnership, joint venture, employment, franchise, or agency
relationship between LESSOR and LESSEE; and no Party hereto shall be liable for
the payment or performance of any debts, obligations, or liabilities of the
other Party, unless expressly assumed in writing herein or otherwise. Each Party
retains full control over the employment, direction, compensation and discharge
of its employees, agents and representatives and will be solely responsible for
all compensation of such employees, agents and representatives, including but
not limited to any applicable social security, insurance, tax withholding and
worker's compensation responsibilities.
18.6 Non-Exercise of Right Not Waiver. No failure or delay on the part
of either Party hereto in exercising any right, power or privilege hereunder and
no course of dealing between the Parties shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege.
18.7 Survival. It is the express intention and agreement of the Parties
hereto that all covenants, agreements, statements, representations, warranties
and indemnities made in this Agreement shall survive the execution and delivery
of this Agreement. It is the express intention and agreement of the Parties that
the obligations of each Party to protect the other Party's Confidential
Information, and the obligations to indemnify the other Party and other persons
and entities, pursuant to the terms and conditions of this Agreement, shall
survive the execution, delivery and termination (whether by expiration, default,
extinguishment or otherwise) of this Agreement.
18.8 Headings. Article headings contained in this Agreement are
inserted for convenience of reference only, shall not be deemed to be a part of
this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
18.9 Incorporation of Exhibits and Amendments Thereto. The Exhibits
referenced in this Agreement, as it may be amended from time to time in writings
executed by both Parties, shall be deemed an integral part hereof to the same
extent as if written at length herein.
18.10 Governing Law. The validity, interpretation, construction and
performance of this Agreement and each of its provisions shall be governed by
the laws of the State of Georgia.
18.11 Counterparts. To facilitate execution, this Agreement may be
executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of or on behalf of each Party appear on each
counterpart; but it shall be sufficient that the signature of or on behalf of
each Party appear on one or more of the counterparts. All counterparts shall
collectively constitute a single agreement. It shall not be necessary in any
proof of this
13
<PAGE> 19
Agreement to produce or account for more than any counterpart or counterparts
contain signatures of both Parties.
18.12 Entire Agreement; No Oral Modifications. This Agreement, together
with all Exhibits attached, constitutes the entire agreement between the parties
with respect to the transaction contemplated herein, and supersedes all prior
oral or written agreements commitments or understandings with respect to the
matters provided for herein. This Agreement shall not be amended or modified
except by a writing executed by both Parties.
18.13 Severability. Any provision of this Agreement held or determined
by a court (or other legal authority) of competent jurisdiction to be illegal,
invalid, or unenforceable in any jurisdiction shall be deemed separate, distinct
and independent, and shall be ineffective to the extent of such holding or
determination without (i) invalidating the remaining provisions of this
Agreement in that jurisdiction or (ii) affecting the legality, validity or
enforceability of such provision in any other jurisdiction.
IN WITNESS WHEREOF, THE UNDERSIGNED PARTIES HAVE CAUSED THIS AGREEMENT TO BE
DULY EXECUTED ON THEIR BEHALF, AS OF THE DAY AND YEAR FIRST HEREINABOVE SET
FORTH.
SIGNED AND DELIVERED
ITC SERVICE COMPANY KNOLOGY OF COLUMBUS, INC.
By: By:
--------------------------------- ---------------------------------
Its: Name:
-------------------------------- -------------------------------
Title: Title:
------------------------------ ------------------------------
Address: Address:
---------------------------- ----------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
- ------------------------------------ -------------------------------------
TEL: TEL:
-------------------------------- --------------------------------
FAX: FAX:
-------------------------------- --------------------------------
Contact Person: Contact Person:
--------------------- ---------------------
14
<PAGE> 20
EXHIBIT A
LEASED FIBER ROUTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Origination Point Termination Point Length ITC Service Co. Fibers
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IVT Central Office Knology Hub A 42 miles Brown buffer tube of 48
West Point, GA 1515 49th Street fiber cable
Columbus, GA (fibers 37-48).
- -------------------------------------------------------------------------------------------
Knology Hub A, ITC /\DeltaComm Pop 4 miles Brown buffer tube of 48
Columbus, GA Columbus, GA fiber cable
(fibers 37-48)
- -------------------------------------------------------------------------------------------
Opelika Cell Tower, IVT Central Office 27 miles Brown buffer tube of 48
Opelika, AL West Point, GA fiber cable
(fibers 37-48)
- -------------------------------------------------------------------------------------------
TOTAL LENGTH 105 MILE (97 MILES
"BILLABLE")
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
EXHIBIT B
SPECIFICATIONS
FIBER CABLE SPECIFICATIONS. The outside plant cable will contain single
mode, dual window fibers..
FIBER OPTIC SPECIFICATIONS. The Fibers are single mode and conform to all
the following minimum specifications:
Operating Wavelength 1310 NM 1550 NM
Maximum Attenuation .40dB/KM .30 dB/KM
Maximum Dispersion 3.5 PS/NM-KM 4 PS/NM-KM
Core Diameter (Typical) 8.7 microns
Core Noncircularity (Max) 10%
Cladding Diameter 125 microns
3 um
Cladding Noncircularity 2%
Core Cladding Offset 1.0 micron
Proof Test 50 KPSI (100 KPSI
for OPGW)
Fiber Bandwidth Limitation None
Cut Off Wavelength 1100-1310 NM
Note: NM = nanometers; dB = decibels; KM = kilometers; PS = picoseconds
um = microns; KPSI = Kilopounds per square inch
SPLICE SPECIFICATIONS. LESSOR will utilize "Fusion Splicing" and meet an
average of 0.15 dB loss per splice with a maximum splice loss not to exceed 0.3
dB on any individual splice. LESSOR will record the actual dB loss reading as
displayed on the splicer or Optical Time Domain Reflectometer ("OTDR") as the
splice is completed. LESSOR will provide the results to LESSEE.
END TO END ANALYSIS. LESSOR will measure the maximum End to End Optical
Loss for all Fibers on the Route. This will be measured by a laboratory
calibrated optical power meter utilizing a stabilized single mode light source.
LESSOR will provide the results to LESSEE. LESSOR will make the End to End OTDR
tracings at 1300 NM and 1500 NM for each Fiber after all the splicing has been
completed. This tracing will be provided to LESSEE.
<PAGE> 1
EXHIBIT 10.61
SERVICES AGREEMENT
This Services Agreement (this "Agreement") is made and entered into as of
the 2nd day of November, 1999, by and between KNOLOGY, Inc., a Delaware
corporation ("KNOLOGY"), and ITC Service Company, a Georgia corporation ("ITC").
RECITALS
WHEREAS, the parties desire to obtain services from each other on the
terms and conditions set forth in this Agreement.
NOW THEREFORE, for and in consideration of the covenants contained in
this Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
1. Services. KNOLOGY agrees to provide ITC with certain services, as
described on Exhibit "A". In consideration for the provision of these services
by KNOLOGY, ITC agrees to provide KNOLOGY with certain services, as described in
Exhibit "A", and agrees to pay KNOLOGY the amount of five thousand Dollars
($5,000) per month. KNOLOGY will pay ITC to store documents at a rate of
eighty-five cents per foot.
2. Term. This Agreement is effective as of the date set forth above.
ITC Service Company may terminate this Agreement upon giving thirty (30) days
written notice to KNOLOGY, Inc.
3. Confidentiality. KNOLOGY and ITC recognize they will come into
possession of confidential or proprietary information of the other company,
including without limitation financial information, methods of operation,
marketing information and plans, technical data, and other similar information
(collectively, the "Confidential Information"). Accordingly, KNOLOGY and ITC
agree that they will treat as confidential and will not, directly or indirectly,
use or disclose any Confidential Information during the term of this Agreement
and for a period of three years thereafter.
4. Relationship of the Parties. In performing its obligations and
services hereunder, each party shall act at all times as an independent
contractor, and nothing contained herein shall be deemed or construed to create
any partnership or joint venture between KNOLOGY and ITC.
5. Miscellaneous. This Agreement contains the entire agreement
between the parties with respect to the subject matter herein. No modifications
or amendments of this Agreement shall be binding upon either party unless set
forth in writing duly executed by each party. If any term or provision of this
Agreement shall be found by a court of competent jurisdiction to be illegal,
invalid or otherwise unenforceable, the same shall not invalidate the whole of
this Agreement, but such term or provision shall be
<PAGE> 2
deemed modified to the extent necessary in the court's opinion to render such
term or provision enforceable, and the rights and obligations of the parties
shall be construed and enforced accordingly, preserving to the fullest
permissible extent the intent and agreements of the parties set forth herein.
This Agreement and the obligations of the parties hereunder shall be
interpreted, construed and enforced in accordance with the internal laws of the
state of Georgia. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
KNOLOGY, INC.
By: /s/ Felix L. Boccucci, Jr.
-------------------------------
Name: Felix L. Boccucci, Jr.
-----------------------------
Title: VP - Business Development
----------------------------
ITC SERVICE COMPANY
By: /s/ William H. Scott, III
------------------------------
Name: William H. Scott, III
----------------------------
Title: President and COO
---------------------------
2
<PAGE> 3
EXHIBIT "A"
SERVICES PROVIDED BY KNOLOGY
Mail support, computer and technology support, payroll services and
administrative support for benefit programs.
SERVICES PROVIDED BY ITC
Storage facilities for documents and administrative support for
conference facilities.
3
<PAGE> 1
EXHIBIT 10.62
SUPPORT AGREEMENT
Interstate Telephone Company, Inc., a Georgia Corporation, located at 910 First
Avenue, P.O. Box 510, West Point, Georgia 31833 (hereinafter referred to as
"ITC") by signature agrees to grant and
ITC Service Company
1239 O.G. Skinner Drive
West Point, GA 31833
(Hereinafter referred to as the "Service Co") agrees to accept on the following
terms and conditions, support and miscellaneous services detailed below. ITC
agrees to accept on the following terms and conditions, the miscellaneous
services provided by Service Co.
1. INCLUSIONS FOR SERVICES PROVIDED TO SERVICE CO BY ITC:
A. Provide support for mail / postage services - External and
Internal Mail
B. Support & maintenance on personal computers, network, video
conferencing equipment, board room computer and
presentation equipment, accounting and fixed asset
software, tax, network and desktop software.
C. Support for payroll & management of employment related
benefits programs
2. SUPPORT FEES FOR SERVICES PROVIDED BY ITC TO SERVICE CO:
1A. Mail & postage services - $450.00 per month plus actual
cost of postage
1B. IT Support - $5,255 per month per attached schedule. A one
time license fee of $20,500 to compensate ITC for capital
cost of hardware and software
1C. Payroll & HR benefits management - $250.00 per month plus
actual cost of any specific payroll or benefit fees
3. INCLUSIONS FOR SERVICES PROVIDED TO ITC BY SERVICE CO:
A. Scheduling, collection and billing for cabin utilization
B. Storage of old financial records and equipment at
facilities owned by Service Co
4. SUPPORT FEES FOR SERVICES & FACILITIES PROVIDED BY SERVICE CO TO ITC:
<PAGE> 2
3A. Scheduling & management of cabin utilization - $100 per
month
3B. Storage fee will be based on square footage used x $0.85
per square foot. To be billed monthly.
5. OTHER FEES:
A. Service Co will be billed for telephone and cable services
per usage with appropriate local companies.
B. Service Co will be billed extra software development fees
at $47 per hr for development of new lotus notes
applications or other software specifically requested by
the company for their use.
C. Service Co will be billed for all software upgrades and new
software ordered and utilized specifically for them.
D. Service Co will be billed for all personal computers and
hardware ordered and utilized specifically for them.
E. Service Co will be billed for concession lines for 10 of
their current employees. No new concession lines will be
given to employees of Service Co.
6. EFFECTIVE DATE AND TERMINATION:
This agreement is effective as of the date accepted by both parties
below. Prices are subject to change January 1st of each year, beginning
with January 2002. The Agreement is automatically renewed January 1st of
each year, if no written notice of termination has been given. Service Co
and ITC may terminate receiving services within this Agreement upon
thirty (30) days written notice. Termination of part of the services will
not terminate this Agreement on the other services. Both companies agree
to continue providing services until termination by the other party.
Accepted by: Accepted by:
Interstate Telephone Company ITC Service Company
Signature: /s/ Felix L. Boccucci Signature: /s/ William H. Scott, III
-------------------------- -----------------------------
Typed Name: Felix L. Boccucci Typed Name: William H. Scott, III
------------------------- ----------------------------
Title: Vice President Title: President and COO
------------------------------ ---------------------------------
Date: November 2, 1999 Date: October 29, 1999
------------------------------- ----------------------------------
<PAGE> 3
SERVICES AGREEMENT
This Services Agreement (this "Agreement") is made and entered into as of
the 2nd day of November, 1999, by and between KNOLOGY, Inc., a Delaware
corporation ("KNOLOGY"), and ITC Service Company, a Georgia corporation ("ITC").
RECITALS
WHEREAS, the parties desire to obtain services from each other on the
terms and conditions set forth in this Agreement.
NOW THEREFORE, for and in consideration of the covenants contained in
this Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
1. Services. KNOLOGY agrees to provide ITC with certain services, as
described on Exhibit "A". In consideration for the provision of these services
by KNOLOGY, ITC agrees to provide KNOLOGY with certain services, as described in
Exhibit "A", and agrees to pay KNOLOGY the amount of five thousand Dollars
($5,000) per month. KNOLOGY will pay ITC to store documents at a rate of
eighty-five cents per foot.
2. Term. This Agreement is effective as of the date set forth above.
ITC Service Company may terminate this Agreement upon giving thirty (30) days
written notice to KNOLOGY, Inc.
3. Confidentiality. KNOLOGY and ITC recognize they will come into
possession of confidential or proprietary information of the other company,
including without limitation financial information, methods of operation,
marketing information and plans, technical data, and other similar information
(collectively, the "Confidential Information"). Accordingly, KNOLOGY and ITC
agree that they will treat as confidential and will not, directly or indirectly,
use or disclose any Confidential Information during the term of this Agreement
and for a period of three years thereafter.
4. Relationship of the Parties. In performing its obligations and
services hereunder, each party shall act at all times as an independent
contractor, and nothing contained herein shall be deemed or construed to create
any partnership or joint venture between KNOLOGY and ITC.
5. Miscellaneous. This Agreement contains the entire agreement
between the parties with respect to the subject matter herein. No modifications
or amendments of this Agreement shall be binding upon either party unless set
forth in writing duly executed by each party. If any term or provision of this
Agreement shall be found by a court of competent jurisdiction to be illegal,
invalid or otherwise unenforceable, the same shall not invalidate the whole of
this Agreement, but such term or provision shall be
<PAGE> 4
deemed modified to the extent necessary in the court's opinion to render such
term or provision enforceable, and the rights and obligations of the parties
shall be construed and enforced accordingly, preserving to the fullest
permissible extent the intent and agreements of the parties set forth herein.
This Agreement and the obligations of the parties hereunder shall be
interpreted, construed and enforced in accordance with the internal laws of the
state of Georgia. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
KNOLOGY, INC.
By: /s/ Felix L. Boccucci, Jr.
-------------------------------
Name: Felix L. Boccucci, Jr.
-----------------------------
Title: VP - Business Development
----------------------------
ITC SERVICE COMPANY
By: /s/ William H. Scott, III
------------------------------
Name: William H. Scott, III
----------------------------
Title: President and COO
---------------------------
2
<PAGE> 5
EXHIBIT "A"
SERVICES PROVIDED BY KNOLOGY
Mail support, computer and technology support, payroll services and
administrative support for benefit programs.
SERVICES PROVIDED BY ITC
Storage facilities for documents and administrative support for
conference facilities.
3
<PAGE> 1
EXHIBIT 10.65
- --------------------------------------------------------------------------------
WARRANT AGREEMENT
between
KNOLOGY, INC.
and
UNITED STATES TRUST COMPANY OF NEW YORK
Dated as of December 3, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I CERTAIN DEFINITIONS......................................................2
ARTICLE II ORIGINAL ISSUE OF WARRANTS...............................................7
Section 2.1. Form of Warrant Certificates.......................................7
Section 2.2. Restrictive Legends................................................9
Section 2.3. Execution and Delivery of Warrant Certificates....................11
Section 2.4. Certificated Warrants.............................................11
ARTICLE III EXERCISE PRICE, EXERCISE AND REPURCHASE OF WARRANTS....................12
Section 3.1. Exercise Price....................................................12
Section 3.2. Exercise; Restrictions on Exercise................................12
Section 3.3. Method of Exercise; Payment of Exercise Price.....................12
Section 3.4. Repurchase Offers.................................................14
ARTICLE IV ADJUSTMENTS.............................................................17
Section 4.1. Adjustments.......................................................17
Section 4.2. Notice of Adjustment..............................................25
Section 4.3. Statement on Warrants.............................................26
Section 4.4. Notice of Consolidation, Merger, Etc..............................26
Section 4.5. Fractional Interests..............................................26
Section 4.6. When Issuance or Payment May Be Deferred..........................27
Section 4.7. Initial Public Offering...........................................27
ARTICLE V DECREASE IN EXERCISE PRICE...............................................27
ARTICLE VI LOSS OR MUTILATION......................................................28
ARTICLE VII RESERVATION AND AUTHORIZATION OF PREFERRED STOCK......................28
ARTICLE VIII WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER......................29
Section 8.1. Transfer and Exchange.............................................29
Section 8.2. Book-Entry Provisions for the Global Warrants.....................29
Section 8.3. Special Transfer Provisions.......................................31
Section 8.4. Surrender of Warrant Certificates.................................35
ARTICLE IX WARRANT HOLDERS.........................................................35
Section 9.1. Warrant Holder Deemed Not a Shareholder...........................35
Section 9.2. Right of Action...................................................36
ARTICLE X REMEDIES.................................................................36
Section 10.1. Defaults.........................................................36
Section 10.2. Payment Obligations..............................................36
Section 10.3. Remedies; No Waiver..............................................36
ARTICLE XI THE WARRANT AGENT.......................................................36
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 11.1. Duties and Liabilities...........................................37
Section 11.2. Right to Consult Counsel.........................................38
Section 11.3. Compensation; Indemnification....................................38
Section 11.4. No Restrictions on Actions.......................................39
Section 11.5. Discharge or Removal; Replacement Warrant Agent..................39
Section 11.6. Successor Warrant Agent..........................................40
ARTICLE XII MISCELLANEOUS..........................................................40
Section 12.1. Monies Deposited with the Warrant Agent..........................40
Section 12.2. Payment of Taxes.................................................40
Section 12.3. No Merger, Consolidation or Sale of Assets of the Company........41
Section 12.4. Reports to Holders...............................................41
Section 12.5. Notices; Payment.................................................42
Section 12.6. Binding Effect...................................................42
Section 12.7. Counterparts.....................................................43
Section 12.8. Amendments.......................................................43
Section 12.9. Headings.........................................................43
Section 12.10. Preferred Stock Legend..........................................43
Section 12.11. Third Party Beneficiaries.......................................45
Section 12.12. Termination.....................................................45
Section 12.13. Governing Law...................................................45
</TABLE>
EXHIBIT A FORM OF WARRANT CERTIFICATE
EXHIBIT B FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH
TRANSFERS PURSUANT TO REGULATION S
EXHIBIT C-1 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEROR IN
CONNECTION WITH TRANSFERS TO INSTITUTIONAL ACCREDITED
INVESTORS
EXHIBIT C-2 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEREES IN
CONNECTION WITH TRANSFERS TO INSTITUTIONAL ACCREDITED
INVESTORS
EXHIBIT D FORM OF CERTIFICATE
APPENDIX A LIST OF FINANCIAL EXPERTS
- ii -
<PAGE> 4
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of December 3, 1999 (this
"Agreement"), between KNOLOGY, Inc., a Delaware corporation (the "Company"), and
United States Trust Company of New York (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, KNOLOGY Holdings, Inc., a Delaware corporation
("KHI") issued and sold a total of 444,100 units (the "KHI Units") each of which
consisted of one 11-7/8% Senior Discount Note due 2007 of KHI (each a "KHI
Note") issued pursuant to the provisions of an Indenture dated as of October 22,
1997 (the "Indenture") between KHI, as issuer, and United States Trust Company
of New York, as trustee, and one warrant (each, a "KHI Warrant"), each KHI
Warrant initially entitling the holder thereof to purchase .003734 shares of KHI
Preferred Stock, par value $.01 per share ("KHI Preferred Stock"), of KHI at an
exercise price of $.01 per share, of which 373,050 KHI Units were purchased by
the Placement Agents and 71,050 KHI Units were purchased by SCANA
Communications, Inc.
WHEREAS, pursuant to the terms of a Placement Agreement dated
October 16, 1997 (the "Placement Agreement"), among KHI and Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc. and First Union Capital Markets Corp.,
as placement agents (the "Placement Agents"), KHI issued and sold to the
Placement Agents an aggregate of 373,050 KHI Warrants as part of 373,050 KHI
Units.
WHEREAS, the KHI Note and the KHI Warrant included in each
Unit became separately transferable in February 1998, upon the commencement of
an exchange offer with respect to the KHI Notes; and
WHEREAS, as part of a reorganization (the "Reorganization") in
which the Company will become (either directly or indirectly) the parent company
of KHI and four other corporations referred to as the TELCOs, the Company has
made an offer to the KHI stockholders and warrant holders (including holders of
the KHI Warrants) to exchange their KHI securities for securities of the
Company, as described more fully in a Confidential Information Statement of the
Company dated November 3, 1999.
WHEREAS, in the Reorganization the Company has offered to
exchange 600 shares of Preferred Stock (as defined below) for each share of KHI
Preferred Stock, and based on the same exchange ratio has offered to issue
Warrants (as defined below), each Warrant initially entitling the holder to
purchase 2.2404 shares of Preferred Stock at an exercise price of $.01 per
share, in exchange for the KHI Warrants;
<PAGE> 5
WHEREAS, the Company desires to engage the Warrant Agent to
act on the Company's behalf, and the Warrant Agent desires to act on behalf of
the Company, in connection with the issuance of the Warrant Certificates (as
defined below) and the other matters as provided herein, including, without
limitation, for the purpose of defining the terms and provisions of the Warrants
and the respective rights and obligations thereunder of the Company and the
record holders thereof (together with the holders of shares of Preferred Stock
(or other securities) received upon exercise thereof, the "Holders").
NOW, THEREFORE, in consideration of the foregoing and of the
mutual agreements contained herein and in the Placement Agreement, the Company
and the Warrant Agent hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
"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.
"Agent Members" has the meaning specified in Section 8.2
hereof.
"Auditors" means, at any time, the independent auditors of the
Company at such time.
"Board" means the board of directors of the Company from time
to time.
"Business Day" means a day except a Saturday, Sunday or other
day on which commercial banks in The City of New York, or in the city of the
corporate trust office of the Warrant Agent, are authorized by law to close.
"Cedel Bank" means Cedel Bank, societe anonyme.
"Certificated Warrants" has the meaning specified in Section
2.1 hereof.
"Certificate for Surrender" means the form on the reverse side
of the Warrant Certificate substantially in the form of Exhibit A hereto.
- 2 -
<PAGE> 6
"Commission" means the United States Securities and Exchange
Commission.
"Company" has the meaning specified in the preamble to this
Agreement.
"Current Market Value" has the meaning specified in Section
4.1(f) hereof.
"Default" has the meaning specified in Section 10.1 hereof.
"Depositary" means The Depository Trust Company, its nominees
and their respective successors.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear System.
"Exchange Act" means the United States Securities Exchange Act
of 1934, as amended.
"Exercise Price" has the meaning specified in Section 3.1
hereof.
"Expiration Date" means October 21, 2007.
"Final Surrender Time" has the meaning specified in Section
3.4 hereof.
"Financial Expert" means one of the Persons listed in Appendix
A hereto.
"Global Warrants" has the meaning specified in Section 2.1
hereof.
"Holders" has the meaning specified in the recitals to this
Agreement.
"IAI Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Indenture" has the meaning specified in the recitals to this
Agreement.
"Independent Financial Expert" means 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 it is called upon to give independent financial advice to the Company
is not (and none of its
- 3 -
<PAGE> 7
directors, executive officers or 5% stockholders is) a promoter, director, or
officer of the Company or any of its subsidiaries or Affiliates. The Independent
Financial Expert may be compensated and indemnified by the Company for opinions
or services it provides as an Independent Financial Expert.
"Institutional Accredited Investor" shall mean an institution
that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act.
"KHI" has the meaning specified in the recitals to this
Agreement.
"KHI Note" has the meaning specified in the recitals to this
Agreement.
"KHI Preferred Stock" has the meaning specified in the
recitals to this Agreement.
"KHI Unit" has the meaning specified in the recitals to this
Agreement.
"KHI Warrant" has the meaning specified in the recitals to
this Agreement.
"Legended Regulation S Global Warrant" has the meaning
specified in Section 2.1 hereof.
"Non-U.S. Person" means a person who is not a U.S. person as
defined in Rule 902 of Regulation S.
"Notice Date" has the meaning specified in Section 3.4 hereof.
"Officer" means, with respect to the Company, (i) the Chairman
of the Board, the Chief Executive Officer, the Chief Financial Officer and any
Vice President of the Company or (ii) the Treasurer or any Assistant Treasurer,
the Company's Secretary or any Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by one
Officer listed in clause (i) of the definition thereof and one Officer listed in
clause (ii) of the definition thereof; provided, however, that any such
certificate may be signed by any two of the Officers listed in clause (i) of the
definition thereof in lieu of being signed by one Officer listed in clause (i)
of the definition thereof and one Officer listed in clause (ii) of the
definition thereof.
- 4 -
<PAGE> 8
"Offshore Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Opinion of Counsel" means a written opinion signed by legal
counsel who may be an employee of or counsel to the Company.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Placement Agents" has the meaning specified in the recitals
to this Agreement.
"Placement Agreement" has the meaning specified in the
recitals to this Agreement.
"Preferred Stock" means the Series A Preferred Stock, par
value $0.01, of the Company and any other capital stock of the Company into
which such Preferred Stock may be converted, or reclassified or that may be
issued in respect of, in exchange for or in substitution of, such Preferred
Stock by reason of any stock splits, stock dividends, distributions, mergers,
consolidations or other like events (including automatic conversion of the
Preferred Stock pursuant to its terms).
"Private Placement Legend" means the legend set forth on the
Warrant Certificates in the form set forth in Section 2.2(a) hereof.
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Warrant" has the meaning specified in
Section 2.1 hereof.
"Relevant Value" has the meaning specified in Section 3.4(d)
hereof.
"Reorganization " has the meaning specified in the recitals to
this Agreement.
"Repurchase Event" means and shall be deemed to occur on any
date when the Company (i) consolidates with or merges into or with another
Person (but only where the holders of the 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
- 5 -
<PAGE> 9
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.
"Repurchase Notice" has the meaning specified in Section
3.4(a) hereof.
"Repurchase Obligation" has the meaning specified in Section
10.2 hereof.
"Repurchase Offer" means the Company's offer to repurchase the
Warrants in accordance with Section 3.4 hereof.
"Repurchase Price" has the meaning specified in Section 3.4(d)
hereof.
"Restricted Certificated Warrants" has the meaning specified
in Section 2.1 hereof.
"Restricted Global Warrant" has the meaning specified in
Section 2.1 hereof.
"Right" has the meaning specified in Section 4.1(c) hereof.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the United States Securities Act of
1933, as amended.
"Spread" means, with respect to any Warrant, the Current
Market Value of the Preferred Stock (or other securities) issuable upon exercise
of such Warrant, less the Exercise Price of such Warrant, in each case as
adjusted as provided herein.
"Subscription Form" means the form on the reverse side of the
Warrant Certificate substantially in the form of Exhibit A hereto.
"U.S. Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Unlegended Regulation S Global Warrant" has the meaning
specified in Section 2.1 hereof.
"Valuation Date" means the date five Business Days prior to
the Notice Date.
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<PAGE> 10
"Value Certificate" has the meaning specified in Section 3.4
hereof.
"Value Report" has the meaning specified in Section 4.1(k)
hereof.
"Warrant" has the meaning specified in the recitals to this
Agreement.
"Warrant Agent" has the meaning specified in the preamble to
this Agreement.
"Warrant Certificates" has the meaning specified in Section
2.1 hereof.
"Warrant Registration Rights Agreement" means the Warrant
Registration Rights Agreement, dated December 3, 1999, between the Company and
the Warrant Agent.
"Warrant Registration Statement" has the meaning specified in
Section 3 of the Warrant Registration Rights Agreement.
ARTICLE II
ORIGINAL ISSUE OF WARRANTS
Section 2.1. Form of Warrant Certificates. Certificates
representing the Warrants (the "Warrant Certificates") shall be substantially in
the form attached hereto as Exhibit A, shall be dated the date on which such
Warrant Certificates are countersigned by the Warrant Agent and shall have such
insertions as are appropriate or required or permitted by this Agreement and may
have such letters, numbers or other marks of identification and such legends and
endorsements stamped, printed, lithographed or engraved thereon as the Company
may deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation pursuant thereto or with any rule or regulation of any securities
exchange on which the Warrants may be listed, or to conform to usage.
Warrants offered and sold in reliance on Rule 144A shall be
issued initially in the form of one or more permanent global Warrant
Certificates in definitive, fully registered form, substantially in the form set
forth in Exhibit A (the "Restricted Global Warrant"), deposited with the Warrant
Agent, as custodian for, and registered in the name of the nominee for, the
Depositary, duly executed by the Company and countersigned by the Warrant Agent
as hereinafter provided. The aggregate number of Warrants represented by the
Restricted Global Warrant may from time to time be increased or decreased by
adjustments made on the records of the Warrant Agent, as custodian for the
Depositary, or its nominee, as provided in Section 2.4 and Section 8.3 hereof.
- 7 -
<PAGE> 11
Warrants offered and sold in offshore transactions in reliance
on Regulation S shall be issued initially in the form of one or more permanent
global Warrant Certificates in definitive, fully registered form, substantially
in the form set forth in Exhibit A (the "Legended Regulation S Global Warrant"),
deposited with the Warrant Agent, as custodian for, and registered in the name
of, the Depositary or its nominee for the accounts of Euroclear and Cedel Bank,
duly executed by the Company and countersigned by the Warrant Agent as
hereinafter provided. Prior to the date one year after the date hereof,
beneficial interests in the Legended Regulation S Global Warrant may be held
only through Euroclear and Cedel Bank. At any time on or after the date one year
after the date hereof, upon receipt by the Warrant Agent and the Company of a
certificate substantially in the form of Exhibit D hereto, one or more global
Warrant Certificates in registered form substantially in the form set forth in
Exhibit A (the "Unlegended Regulation S Global Warrants" and together with the
Legended Regulation S Global Warrant, the "Regulation S Global Warrant") shall
be deposited with the Warrant Agent, as custodian for, and registered in the
name of the nominee for, the Depositary, duly executed by the Company and
countersigned by the Warrant Agent as hereinafter provided, and the Warrant
Agent shall reflect on its books and records the date and a decrease in the
Legended Regulation S Global Warrant in an amount equal to the number of
Warrants evidenced by the Legended Regulation S Global Warrant transferred. The
aggregate number of Warrants represented by the Regulation S Global Warrants may
from time to time be increased or decreased by adjustments made on the records
of the Warrant Agent, as custodian for the Depositary, or its nominee, as
provided in Section 2.4 and Section 8.3 hereof.
Warrants offered and sold to Institutional Accredited
Investors who are not QIBs shall be issued initially in registered form
substantially in the form set forth in Exhibit A ("IAI Certificated Warrants").
Warrants issued pursuant to Section 2.4 and Section 8.2(b) in
exchange for interests in the Restricted Global Warrant shall be issued in the
form of permanent Warrant Certificates in registered form, substantially in the
form set forth in Exhibit A (the "Restricted Certificated Warrants" and,
together with IAI Certificated Warrants, the "U.S. Certificated Warrants").
Warrants issued pursuant to Section 2.4 and Section 8.2(b) in exchange for
interests in the Regulation S Global Warrant shall be issued in the form of
permanent Warrant Certificates in registered form, substantially in the form set
forth in Exhibit A (the "Offshore Certificated Warrants"). The Offshore
Certificated Warrants and the U.S. Certificated Warrants are sometimes herein
collectively referred to as the "Certificated Warrants". The Restricted Global
Warrant and the Regulation S Global Warrant are sometimes herein collectively
referred to as the "Global Warrants."
The definitive Warrant Certificates shall be typed, printed,
lithographed or engraved or produced by any combination of these methods or may
- 8 -
<PAGE> 12
be produced in any other manner permitted by the rules of any securities
exchange on which the Warrants may be listed, all as determined by the officers
executing such Warrant Certificates, as evidenced by their execution of such
Warrant Certificates.
Section 2.2. Restrictive Legends. (a) The Warrant
Certificates, other than the Unlegended Regulation S Global Warrants, shall bear
substantially the following legend on the face thereof:
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER"
(AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2),
(3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THESE WARRANTS IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION
S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE
TIME PERIOD REFERRED TO UNDER RULE 144(k) UNDER THE SECURITIES ACT AS
IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR
OTHERWISE TRANSFER THESE WARRANTS EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO
SUCH TRANSFER, FURNISHES TO THE WARRANT AGENT A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN
BE OBTAINED FROM THE WARRANT AGENT) AND AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF
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<PAGE> 13
AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON
TO WHOM THESE WARRANTS ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THESE
WARRANTS WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST
CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO
THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE WARRANT
AGENT. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED
INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
WARRANT AGENT AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR
OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT CONTAINS A
PROVISION REQUIRING THE WARRANT AGENT TO REFUSE TO REGISTER ANY
TRANSFER OF THESE WARRANTS IN VIOLATION OF THE FOREGOING RESTRICTIONS.
(b) Each Global Warrant shall also bear the following
legend on the face thereof:
UNLESS THIS WARRANT CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO KNOLOGY HOLDINGS,
INC. OR THE WARRANT AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.
- 10 -
<PAGE> 14
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR
TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE VIII OF THE
WARRANT AGREEMENT.
Section 2.3. Execution and Delivery of Warrant Certificates.
Warrant Certificates evidencing up to 444,100 Warrants, each Warrant to purchase
initially 2.2404 shares of Preferred Stock, may be executed, on or after the
date of this Agreement, by the Company and delivered to the Warrant Agent for
countersignature, and the Warrant Agent shall thereupon countersign and deliver
such Warrant Certificates upon the order and at the written direction of the
Company signed by its Chief Executive Officer or other duly authorized executive
officer to the purchasers thereof on the date of issuance. The Warrant Agent is
hereby authorized to countersign and deliver Warrant Certificates as required by
this Section 2.3 or by Section 3.3, Article VI or Article VIII hereof.
The Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, Chief Financial
Officer, any Vice President or other duly authorized executive officer of the
Company either manually or by facsimile signature printed thereon. The Warrant
Certificates shall be countersigned by manual signature of the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In case any officer
or director of the Company whose signature shall have been placed upon any of
the Warrant Certificates shall cease to be such officer or director of the
Company before countersignature by the Warrant Agent and the issuance and
delivery thereof, such Warrant Certificates may nevertheless be countersigned by
the Warrant Agent and issued and delivered with the same force and effect as
though such person had not ceased to be such officer or director of the Company.
Section 2.4. Certificated Warrants. Beneficial owners of
interests in a Global Warrant may receive Certificated Warrants (which, except
as set forth in Section 8.3(d), shall bear the Private Placement Legend) in
accordance with the procedures of the Warrant Agent and the Depositary;
provided, however, that beneficial owners of interests in a Regulation S Global
Warrant may not receive Offshore Certificated Warrants in exchange for such
interests prior to the date one year after the date hereof. In connection with
the execution and delivery of such Certificated Warrants, the Warrant Agent
shall reflect on its books and records the date and a decrease in the number of
Warrants represented by the relevant Global Warrant equal to the number of such
Certificated Warrants and the Company shall
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execute and the Warrant Agent shall countersign and deliver to said beneficial
owners one or more Certificated Warrants in an equal aggregate number.
ARTICLE III
EXERCISE PRICE, EXERCISE AND REPURCHASE OF WARRANTS
Section 3.1. Exercise Price. Each Warrant Certificate shall,
when countersigned by the Warrant Agent, initially entitle the Holder thereof,
subject to the provisions of this Agreement, to purchase the number of shares of
Preferred Stock indicated thereon at a purchase price (the "Exercise Price") of
$.01 per share, subject to adjustment as provided in Section 4.1 and Article V
hereof.
Section 3.2. Exercise; Restrictions on Exercise. At any time
prior to 5:00 p.m., New York City time, on the Expiration Date, any outstanding
Warrants may be exercised on any Business Day; provided that the Warrant
Registration Statement is, at the time of exercise, effective and available for
the exercise of the Warrants 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 of other jurisdictions in which the various Holders reside.
Any Warrants not exercised by 5:00 p.m., New York City time, on the Expiration
Date shall expire and all rights of the Holders of such Warrants shall
terminate. Additionally, pursuant to Section 4.1(j)(ii) hereof, the Warrants
shall expire and all rights of the Holders of such Warrants shall terminate in
the event the Company merges or consolidates with or sells all or substantially
all of its property and assets to a Person (other than an Affiliate of the
Company) if the consideration payable to holders of Preferred Stock (or any
capital stock issuable upon conversion of the Preferred Stock) in exchange for
their Preferred Stock (or any capital stock issuable upon conversion of the
Preferred Stock) in connection with such merger, consolidation or sale consists
solely of cash or in the event of the dissolution, liquidation or winding up of
the Company.
Section 3.3. Method of Exercise; Payment of Exercise Price. In
order to exercise all or any of the Warrants represented by a Warrant
Certificate, the Holder thereof must surrender for exercise the Warrant
Certificate to the Warrant Agent at its corporate trust office address set forth
in Section 12.5 hereof, with the Subscription Form set forth on the reverse of
the Warrant Certificate duly executed, together with payment in full of the
Exercise Price then in effect for each share of Preferred Stock (or other
securities) issuable upon exercise of the Warrants as to which a Warrant is
exercised; such payment may be made in cash or by certified or official bank or
bank cashier's check payable to the order of the Company and shall be made to
the Warrant Agent at its corporate trust office address set forth in Section
12.5 hereof prior to the close of business on the date the Warrant Certificate
is surrendered to the Warrant Agent for exercise. Notwithstanding the foregoing,
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the Exercise Price may be paid by surrendering additional Warrants to the
Warrant Agent having an aggregate Spread equal to the aggregate Exercise Price
of the Warrants being exercised. All payments received upon exercise of Warrants
shall be delivered to the Company by the Warrant Agent as instructed in writing
by the Company. If less than all the Warrants represented by a Warrant
Certificate are exercised or surrendered (in connection with a cashless
exercise), such Warrant Certificate shall be surrendered and a new Warrant
Certificate of the same tenor and for the number of Warrants which were not
exercised or so surrendered shall be executed by the Company and delivered to
the Warrant Agent and the Warrant Agent shall countersign the new Warrant
Certificate, registered in such name or names as may be directed in writing by
the Holder, and shall deliver the new Warrant Certificate to the Person or
Persons entitled to receive the same. Global Warrants will be exercised in
accordance with the procedures of the Warrant Agent and the Depositary. Upon the
exercise of any Warrants following the surrender of a Warrant Certificate in
conformity with the foregoing provisions, the Warrant Agent shall instruct the
Company to transfer promptly to the Holder or, upon the written order of the
Holder of such Warrant Certificate, appropriate evidence of ownership of any
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
may be directed in writing by the Holder, and to deliver such evidence of
ownership to the Person or Persons entitled to receive the same and fractional
shares, if any, or an amount in cash, in lieu of any fractional shares, as
provided in Section 4.5 hereof; provided that the Holder of such Warrant shall
be responsible for the payment of any transfer taxes required as the result of
any change in ownership of such Warrants or the issuance of such Preferred Stock
other than to the Holder of such Warrants and any such transfer shall comply
with applicable law. Upon the exercise of a Warrant or Warrants, the Warrant
Agent is hereby authorized and directed to requisition from any transfer agent
of the Preferred Stock (and all such transfer agents are hereby irrevocably
authorized to comply with all such requests) certificates (bearing the legend
set forth in Section 12.10 hereof, if applicable, unless a registration
statement with the Commission relating to such Preferred Stock shall then be in
effect or the Company and the Holder exercising such Warrant or Warrants
otherwise agree) for the necessary number of shares of Preferred Stock to which
said Holder may be entitled. The Company shall enter, or shall cause any
transfer agent of the Preferred Stock to enter, the name of the Person entitled
to receive the Preferred Stock upon exercise of the Warrants into the Company's
register of shareholders within 14 days of such exercise. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
date of the surrender for exercise, as provided above, of the Warrant
Certificate representing such Warrant and, for all purposes under this
Agreement, the Person entitled to receive any Preferred Stock deliverable upon
such exercise shall, as between such Person and the Company, be deemed to be the
Holder of record of such Preferred Stock as of the close of business on such
date and shall be entitled to receive, and the Warrant Agent shall deliver to
such Person, any Preferred Stock to
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which such Person would have been entitled had such Person been the registered
holder on such date.
Section 3.4. Repurchase Offers. (a) Notice of Repurchase
Event. Within five Business Days following the occurrence of a Repurchase Event,
the Company shall give notice (a "Repurchase Notice") to the Holders of the
Warrants and the Warrant Agent that such event has occurred.
(b) Repurchase Offers Generally. Following the occurrence
of a Repurchase Event, the Company shall offer to repurchase for cash all
outstanding Warrants pursuant to the provisions of this Section 3.4 (a
"Repurchase Offer"). The Company shall give notice of a Repurchase Offer in
accordance with Section 3.4(f) hereof. Each date on which the Company gives any
such notice is referred to as the "Notice Date." The Repurchase Offer shall
commence on the Notice Date for such Repurchase Offer and shall expire at 5:00
p.m., New York City time, on a date determined by the Company (the "Final
Surrender Time") that is at least 30 but not more than 60 days after the Notice
Date. Once a Repurchase Event has occurred, there is no limit on the number of
Repurchase Offers that the Company may make.
(c) Repurchase Offers. (i) In any Repurchase Offer, the
Company shall offer to purchase for cash at the Repurchase Price all Warrants
outstanding on the Notice Date for such Repurchase Offer that are properly
tendered to the Warrant Agent on or prior to the Final Surrender Time for such
Repurchase Offer.
(ii) Each Holder may, but shall not be obligated to, accept
such Repurchase Offer by tendering to the Warrant Agent, on or prior to the
Final Surrender Time for such Repurchase Offer, the Warrant Certificates
evidencing the Warrants such Holder desires to have repurchased in such offer,
together with a completed Certificate for Surrender in substantially the form
attached to the Warrant Certificate. A Holder may withdraw all or a portion of
the Warrants tendered to the Warrant Agent at any time prior to the Final
Surrender Time for such Repurchase Offer. If less than all the Warrants
represented by a Warrant Certificate shall be tendered, such Warrant Certificate
shall be surrendered and a new Warrant Certificate of the same tenor and for the
number of Warrants which shall not be tendered shall be executed by the Company
and delivered to the Warrant Agent and the Warrant Agent shall countersign the
new Warrant Certificate, registered in such name or names as may be directed in
writing by the Holder, and shall deliver the new Warrant Certificate to the
Person or Persons entitled to receive the same; provided that the Holder of such
Warrants shall be responsible for the payment of any transfer taxes required as
the result of any change in ownership of such Warrants.
(d) Repurchase Price. (i) The purchase price (the
"Repurchase Price") for each Warrant properly tendered to the Warrant Agent
pursuant to a
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Repurchase Offer shall be equal to the value (the "Relevant Value") on the
Valuation Date of the Preferred Stock issuable, and other securities or property
of the Company which would have been delivered, upon exercise of Warrants had
the Warrants been exercised (regardless of whether the Warrants are then
exercisable), less the Exercise Price in effect on the Notice Date for such
Repurchase Offer.
(ii) The Relevant Value of the Preferred Stock and other
securities or property issuable upon exercise of all the Warrants, on any
Valuation Date, shall be:
(1) (A) if the Preferred Stock (or other securities
issuable upon exercise of the Warrants or conversion of the Preferred
Stock) is registered under the Exchange Act, deemed to be the average
of the daily market prices (on the stock exchange that is the primary
trading market for the Preferred Stock (or other securities)) of the
Preferred Stock (or other securities) for the 20 consecutive trading
days immediately preceding such Valuation Date or (B) if the Preferred
Stock (or other securities) have been registered under the Exchange Act
for less than 20 consecutive trading days before such date, then the
average of the daily market prices for all of the trading days before
such date for which daily market prices are available, in the case of
each of (A) and (B), as certified to the Warrant Agent by the
President, any Vice President or the Chief Financial Officer of the
Company (the "Value Certificate"). The market price for each such
trading day shall be: (A) in the case of a security listed or admitted
to trading on any national securities exchange, the closing sales price
on such day, or if no sale takes place on such day, the average of the
closing bid and asked prices on such day, (B) in the case of a security
not then listed or admitted to trading on any national securities
exchange, the last reported sale price on such day, or if no sale takes
place on such day, the average of the closing bid and asked prices on
such day, as reported by a reputable quotation source designated by the
Company, (C) in the case of a security not then listed or admitted to
trading on any national securities exchange and as to which no such
reported sale price or bid and asked prices are available, the average
of the reported high bid and low asked prices on such day, as reported
by a reputable quotation service, or a newspaper of general circulation
in the Borough of Manhattan, City and State of New York customarily
published on each Business Day, designated by the Company, or, if there
shall be no bid and asked prices on such day, the average of the high
bid and low asked prices, as so reported, on the most recent day (not
more than 30 days prior to the date in question) for which prices have
been so reported and (D) if there are no bid and asked prices reported
during the 30 days prior to the date in question, the Relevant Value
shall be determined as if the Preferred Stock (or other securities)
were not registered under the Exchange Act; or
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(2) if the Preferred Stock (or other securities issuable
upon exercise of the Warrants or conversion of the Preferred Stock) is
not registered under the Exchange Act or if the value cannot be
computed under clause (1) above, deemed to be equal to the value set
forth in the Value Report (as defined below) as determined by an
Independent Financial Expert, which shall be selected by the Board in
accordance with Section 3.4(e) hereof, and retained on customary terms
and conditions, using one or more valuation methods that the
Independent Financial Expert, in its best professional judgment,
determines to be most appropriate but 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 Preferred Stock (or other securities) or property issuable upon
exercise of the Warrants represent a minority interest in the Company.
The Company shall 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, within 45
days of the appointment of the Independent Financial Expert in
accordance with Section 3.4(e) hereof, a value report (the "Value
Report") stating the Relevant Value of the Preferred Stock (or other
securities) being valued as of the Valuation Date and containing a
brief statement as to the nature and scope of the methodologies upon
which the determination of Relevant Value was made. The Warrant Agent
shall 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. The determination of the Independent
Financial Expert as to Relevant Value in accordance with the provisions
of this Section 3.4(d) shall be conclusive on all Persons. The
Independent Financial Expert shall consult with management of the
Company in order to allow management to comment on the proposed
Relevant Value prior to delivery to the Company of any Value Report of
the Independent Financial Expert.
(e) Selection of Independent Financial Expert. If clause
(d)(ii)(2) is applicable, the Board of Directors of the Company shall select an
Independent Financial Expert not more than five Business Days following a
Repurchase Event. Within two days after such selection of the Independent
Financial Expert, the Company shall deliver to the Warrant Agent a notice
setting forth the name of such Independent Financial Expert.
(f) Notice of Repurchase Offer. Each notice of a
Repurchase Offer (an "Offer Notice") given by the Company pursuant to Section
3.4(b)(i) shall be given by the Company directly to all Holders of the Warrants,
with a copy to the Warrant Agent, shall be given simultaneously with the
Repurchase Notice (or, in the event that the Relevant Value of the Preferred
Stock (or other securities) or property issuable upon exercise of the Warrants
cannot be determined pursuant to Section 3.4(d)(ii)(1), then such Offer Notice
shall be given within five Business Days after the Company receives the Value
Report with respect to such offer) and shall
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specify (A) the Final Surrender Time for such Repurchase Offer, (B) the manner
in which Warrants may be surrendered to the Warrant Agent for repurchase by the
Company, (C) the Repurchase Price at which the Warrants will be repurchased by
the Company, (D) if applicable, the name of the Independent Financial Expert
whose valuation of the Preferred Stock (or other securities) was utilized in
connection with determining such Repurchase Price and (E) that payment of the
Repurchase Price will be made by the Warrant Agent. Each such notice shall be
accompanied by a Certificate for Surrender for Repurchase Offer in substantially
the form attached to the Warrant Certificate and a copy of the Value Report, if
any.
(g) Payment for Warrants. Upon surrender for repurchase of
any Warrants in conformity with the provisions of this Section 3.4, the Warrant
Agent shall thereupon promptly notify the Company of such surrender. On or
before the Final Surrender Time for any Repurchase Offer, the Company shall
deposit with the Warrant Agent funds sufficient to make payment for the Warrants
tendered to the Warrant Agent and not withdrawn. After receipt of such deposit
from the Company, the Warrant Agent shall make payment, by delivering a check in
such amount as is appropriate, to such Person or Persons as it may be directed
in writing by the Holder surrendering such Warrants, net of any transfer taxes
required to be paid in the event that the check is to be delivered to a Person
other than the Holder.
(h) Compliance with Laws. Notwithstanding anything
contained in this Section 3.4, if the Company is required to comply with laws or
regulations in connection with making any Repurchase Offer, such laws,
regulations shall govern the making of such Repurchase Offer.
ARTICLE IV
ADJUSTMENTS
Section 4.1. Adjustments. Subject to Section 4.1(l) hereof,
the Exercise Price and the number of shares of Preferred Stock issuable upon
exercise of each Warrant shall be subject to adjustment from time to time as
follows:
(a) Divisions; Consolidations; Reclassifications. In case
the Company shall, on or before the Expiration Date, (i) issue any Preferred
Stock in payment of a dividend or other distribution with respect to its
Preferred Stock, (ii) subdivide its issued and outstanding Preferred Stock,
(iii) consolidate its issued and outstanding Preferred Stock into a smaller
number of shares, or (iv) reclassify or convert the Preferred Stock (other than
a reclassification in connection with a merger, consolidation or other business
combination which will be governed by Section 4.1(j)), then the number of shares
of Preferred Stock issuable upon exercise of each Warrant immediately prior to
the record date for such issue or distribution or the effective date of such
subdivision, consolidation, reclassification or conversion shall be adjusted so
that the Holder of each Warrant shall thereafter be entitled to receive the kind
and number of shares of Preferred Stock which such Holder would
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have been entitled to receive after the happening of any of the events described
above had such Warrant been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this Section 4.1(a) shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event.
(b) Rights; Options; Warrants. In case the Company shall
issue rights, options, warrants or convertible or exchangeable securities (other
than an issuance of convertible or exchangeable securities subject to Section
4.1(a)) to all holders of its Preferred Stock, entitling them to subscribe for
or purchase Preferred Stock at a price per share which is lower than the then
Current Market Value per share of Preferred Stock, then the Company shall ensure
that at the time of such issuance, the same or a like offer or invitation is
made to the Holders of the Warrants as if their Warrants had been exercised on
the day immediately preceding the record date of such offer or invitation on the
terms (subject to any adjustment pursuant to Section 4.1(a) for a prior event)
on which such Warrants could have been exercised on such date; provided that if
the Board so resolves, the Company shall not be required to ensure that the same
offer or invitation is made to the Holders of the Warrants, but the number of
shares of Preferred Stock thereafter issuable upon the exercise of each Warrant
shall instead be adjusted and shall be determined by multiplying the number of
shares of Preferred Stock theretofore issuable upon exercise of each Warrant by
a fraction, the numerator of which shall be the sum of (i) the number of shares
of Preferred Stock outstanding immediately prior to the issuance of such rights,
options, warrants or convertible or exchangeable securities plus (ii) the number
of additional shares of Preferred Stock which may be purchased or subscribed for
upon exercise, exchange or conversion of such rights, options, warrants or
convertible or exchangeable securities and the denominator of which shall be the
sum of (x) the number of shares of Preferred Stock outstanding immediately prior
to the issuance of such rights, options, warrants or convertible or exchangeable
securities plus (y) the number of shares of Preferred Stock which the total
consideration received by the Company for such rights, options, warrants or
convertible or exchangeable securities so offered would purchase at the then
Current Market Value per share of Preferred Stock. Except as otherwise provided
above, such adjustment shall be made whenever such rights, options, warrants or
convertible or exchangeable securities are issued, and shall become effective
retroactively immediately after the record date for the determination of
shareholders entitled to receive such rights, options, warrants or convertible
or exchangeable securities.
(c) Issuance of Preferred Stock at Lower Values. In case
the Company shall sell and issue any shares of Preferred Stock or Right (as
defined below) (excluding (i) any Right issued in any of the transactions
described in Section 4.1(a) or (b) above, (ii) Preferred Stock issued pursuant
to (x) any Rights outstanding on the date of this Agreement or any Right issued
in any transaction
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described in Section 4.1(a) or (b) above or (y) a Right, if on the date such
Right was issued, the exercise, conversion or exchange price per share of
Preferred Stock (or any capital stock issuable upon conversion of the Preferred
Stock) with respect thereto was at least equal to the then Current Market Value
per share of Preferred Stock and (iii) any Preferred Stock or Right issued as
consideration when any corporation or business is acquired, merged into or
becomes part of the Company or a subsidiary of the Company in an arm's-length
transaction between the Company and a Person other than an Affiliate of the
Company) at a price per share of Preferred Stock (determined in the case of any
such Right, by dividing (x) the total consideration receivable by the Company in
consideration of the sale and issuance of such Right, plus the total
consideration payable to the Company upon exercise, conversion or exchange
thereof, by (y) the total number of shares of Preferred Stock covered by such
Right) that is lower than the Current Market Value per share of Preferred Stock
in effect immediately prior to such sale or issuance, then the number of shares
of Preferred Stock thereafter issuable upon the exercise of each Warrant shall
be determined by multiplying the number of shares of Preferred Stock theretofore
issuable upon exercise of such Warrant by a fraction, the numerator of which
shall be the number of shares of Preferred Stock outstanding immediately after
such sale or issuance and the denominator of which shall be the number of shares
of Preferred Stock outstanding immediately prior to such sale or issuance plus
the number of shares of Preferred Stock which the aggregate consideration
received (determined as provided below) for such sale or issuance would purchase
at such Current Market Value per share of Preferred Stock. For purposes of this
Section 4.1(c), the Preferred Stock which the holder of any such Right shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale and issuance and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company for such Right, plus the consideration or premiums
stated in such Right to be paid for the Preferred Stock covered thereby. In case
the Company shall sell and issue any Right together with one or more other
securities as part of a unit at a price per unit, then in determining the "price
per share of Preferred Stock" and the "consideration received by the Company"
for purposes of the first sentence of this Section 4.1(c), the Board shall
determine, in good faith, the fair value of the Right then being sold as part of
such unit. For purposes of this paragraph, a "Right" shall mean any right,
option, warrant or convertible or exchangeable security containing the Right to
subscribe for or acquire one or more shares of Preferred Stock, excluding the
Warrants. This Section 4.1(c) shall not apply to: (i) the exercise of Warrants,
or the conversion or exchange of other securities convertible or exchangeable
for Preferred Stock; or (ii) Preferred Stock issued upon the exercise of Rights
or warrants issued to all holders of Preferred Stock.
(d) Distributions of Debt, Assets, Subscription Rights or
Convertible Securities. In case the Company shall make a distribution to all
holders of its Preferred Stock of evidences of its indebtedness, or assets, or
other distributions (excluding any issuance of Preferred Stock referred to in
Section 4.1(a) above and
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excluding distributions in connection with the dissolution, liquidation or
winding-up of the Company which shall be governed by Section 4.1(j) and
distributions of securities referred to in Section 4.1(a), Section 4.1(b) or
Section 4.1(c)), then, in each case, the number of shares of Preferred Stock
issuable after such record date upon the exercise of each Warrant shall be
determined by multiplying the number of shares of Preferred Stock issuable upon
the exercise of such Warrant immediately prior to such record date by a
fraction, the numerator of which shall be the Current Market Value per share of
Preferred Stock immediately prior to the record date for such distribution and
the denominator of which shall be the Current Market Value per share of
Preferred Stock immediately prior to the record date for such distribution less
the then fair value (as determined in good faith by the Board) of the evidences
of its indebtedness, or assets or other distributions so distributed
attributable to one share of Preferred Stock. Such adjustment shall be made
whenever any such distribution is made, and shall become effective on the date
of distribution retroactive to the record date for the determination of
shareholders entitled to receive such distribution.
(e) Expiration of Rights, Options and Conversion
Privileges. Upon the expiration of any rights, options, warrants or conversion
or exchange privileges (including, without limitation, any Rights) that have
previously resulted in an adjustment hereunder, if any thereof shall not have
been exercised, exchanged or converted, the Exercise Price and the number of
shares of Preferred Stock (or any capital stock issuable upon conversion of the
Preferred Stock) issuable upon the exercise of each Warrant shall, upon such
expiration, be readjusted and shall thereafter, upon any future exercise, be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
shares of Preferred Stock so issued were the shares of Preferred Stock (or any
capital stock issuable upon conversion of the Preferred Stock), if any, actually
issued or sold upon the exercise, exchange or conversion of such rights,
options, warrants or conversion or exchange rights (including, without
limitation, any Rights) and (ii) such Preferred Stock (or any capital stock
issuable upon conversion of the Preferred Stock), if any, were issued or sold
for the consideration actually received by the Company upon such exercise,
exchange or conversion plus the consideration, if any, actually received by the
Company for issuance, sale or grant of all such rights, options, warrants or
conversion or exchange rights (including, without limitation, any Rights)
whether or not exercised.
(f) Current Market Value. For the purposes of any
computation under this Article IV, the "Current Market Value" of any security at
any date herein specified shall be:
(i) if the security is not registered under the Exchange
Act, the value of the security (1) most recently determined as of a
date within the six months preceding such date by an Independent
Financial Expert selected by
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the Company in accordance with the criteria for such valuation set out
in Section 4.1(k), or (2) if no such determination shall have been made
within such six-month period or if the Company so chooses, determined
as of such a date by an Independent Financial Expert selected by the
Company in accordance with the criteria for such valuation set out in
Section 4.1(k), or
(ii) if the security is registered under the Exchange Act,
the average of the daily market prices of the security for the 20
consecutive trading days immediately preceding such date or, if the
security has been registered under the Exchange Act for less than 20
consecutive trading days before such date, then the average of the
daily market prices for all of the trading days before such date for
which daily market prices are available. The market price for each such
trading day shall be: (A) in the case of a security listed or admitted
to trading on any national securities exchange, the closing sales
price, regular way, on such day, or if no sale takes place on such day,
the average of the closing bid and asked prices on such day on the
principal national securities exchange on which such security is listed
or admitted, as determined by the Board, in good faith, (B) in the case
of a security not then listed or admitted to trading on any national
securities exchange, the last reported sale price on such day, or if no
sale takes place on such day, the average of the closing bid and asked
prices on such day, as reported by a reputable quotation source
designated by the Company, (C) in the case of a security not then
listed or admitted to trading on any national securities exchange and
as to which no such reported sale price or bid and asked prices are
available, the average of the reported high bid and low asked prices on
such day, as reported by a reputable quotation service, or a newspaper
of general circulation in the Borough of Manhattan, City and State of
New York customarily published on each Business Day, designated by the
Company, or, if there shall be no bid and asked prices on such day, the
average of the high bid and low asked prices, as so reported, on the
most recent day (not more than 30 days prior to the date in question)
for which prices have been so reported and (D) if there are no bid and
asked prices reported during the 30 days prior to the date in question,
the Current Market Value of the security shall be determined as if the
security were not registered under the Exchange Act.
(g) Consideration Received. For purposes of any
computation respecting consideration received pursuant to this Section 4.1, the
following shall apply:
(i) in the case of the issuance of Preferred Stock for
cash, the consideration shall be the amount of such cash, provided that
in no case shall any deduction be made for any commissions, discounts
or other expenses
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incurred by the Company for any underwriting of the issue or otherwise
in connection therewith;
(ii) in the case of the issuance of Preferred Stock for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the Board (irrespective of the accounting
treatment thereof), whose determination shall be conclusive and
described in reasonable detail in a board resolution which shall be
provided as soon as practicable thereafter to the Warrant Agent; and
(iii) in the case of the issuance of rights, options,
warrants or securities convertible into or exchangeable for Preferred
Stock (including, without limitation, any Rights), the aggregate
consideration received therefor shall be deemed to be the consideration
received by the Company for the issuance of such rights, options,
warrants or securities convertible into or exchangeable for Preferred
Stock, plus the additional minimum consideration, if any, to be
received by the Company upon the exercise, conversion or exchange
thereof (the consideration in each case to be determined in the same
manner as provided in clauses (i) and (ii) of this Section 4.1(g)).
(h) De Minimis Adjustments. No adjustment in the number of
shares of Preferred Stock issuable hereunder shall be required unless such
adjustment would require an increase or decrease of at least one percent (1%) in
the number of shares of Preferred Stock issuable upon the exercise of each
Warrant; provided, however, that any adjustments which by reason of this Section
4.1(h) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations shall be made to the
nearest ten-thousandth of a share.
(i) Adjustment of Exercise Price. Whenever the number of
shares of Preferred Stock issuable upon the exercise of each Warrant is
adjusted, as herein provided, the Exercise Price per share of Preferred Stock
payable upon exercise of such Warrant shall be adjusted (calculated to the
nearest $.01) so that it shall equal the price determined by multiplying such
Exercise Price immediately prior to such adjustment by a fraction the numerator
of which shall be the number of shares of Preferred Stock issuable upon the
exercise of each Warrant immediately prior to such adjustment and the
denominator of which shall be the number of shares of Preferred Stock so
issuable immediately thereafter. Following any adjustment to the Exercise Price
pursuant to this Article IV, the amount payable, when adjusted, shall never be
less than the par value per share of Preferred Stock at the time of such
adjustment.
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If after an adjustment, a Holder of a Warrant upon exercise of
it may receive shares of two or more classes in the capital of the Company, the
Company shall determine the allocation of the adjusted Exercise Price between
such classes of shares in a manner that the Board deems fair and equitable to
the Holders. After such allocation, the exercise privilege and the Exercise
Price of each class of shares shall thereafter be subject to adjustment on terms
comparable to those applicable to the Preferred Stock in this Article IV.
Such adjustment shall be made successively whenever any event
listed above shall occur.
(j) Consolidation, Merger, Etc. (i) Subject to the
provisions of Subsection (ii) below of this Section 4.1(j), in case of the
consolidation of the Company with, or merger of the Company with or into, or of
the sale of all or substantially all of the properties and assets of the Company
to, any Person, and in connection therewith consideration is payable to holders
of Preferred Stock (or other securities or property issuable upon exercise of
Warrants) in exchange therefor, the Warrants shall remain subject to the terms
and conditions set forth in this Agreement and each Warrant shall, after such
consolidation, merger or sale, entitle the Holder to receive upon exercise the
number of shares in the capital stock or other securities or property (including
cash) of or from the Person resulting from such consolidation or surviving such
merger or to which such sale shall be made or of the parent company of such
Person, as the case may be, that would have been distributable or payable on
account of the Preferred Stock if such Holder's Warrants had been exercised
immediately prior to such merger, consolidation or sale (or, if applicable, the
record date therefor); and in any such case the provisions of this Agreement
with respect to the rights and interests thereafter of the Holders of Warrants
shall be appropriately adjusted by the Board in good faith so as to be
applicable, as nearly as may reasonably be, to any shares, other securities or
any property thereafter deliverable on the exercise of the Warrants.
(ii) Notwithstanding the foregoing, (x) if the Company
merges or consolidates with, or sells all or substantially all of its property
and assets to, another Person (other than an Affiliate of the Company) and
consideration is payable to holders of Preferred Stock in exchange for their
Preferred Stock in connection with such merger, consolidation or sale which
consists solely of cash, or (y) in the event of the dissolution, liquidation or
winding up of the Company, then the Holders of Warrants shall be entitled to
receive distributions on the date of such event on an equal basis with holders
of Preferred Stock (or other securities issuable upon exercise of the Warrants)
as if the Warrants had been exercised immediately prior to such event, less the
Exercise Price. Upon receipt of such payment, if any, the rights of a Holder
shall terminate and cease and such Holder's Warrants shall expire. 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
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(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 shall deposit promptly
with the Warrant Agent the funds, if any, necessary to pay the Holders of the
Warrants. After receipt of such deposit from such Person or the Company and
after receipt of surrendered Warrant Certificates, the Warrant Agent shall 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 Holder
surrendering such Warrants.
(k) If required pursuant to Section 4.1(f)(i), the Current
Market Value shall be deemed to be equal to the value set forth in the Value
Report as determined by an Independent Financial Expert, which shall be selected
by the Board in its sole discretion, and retained on customary terms and
conditions, using one or more valuation methods that the Independent Financial
Expert, in its best professional judgment, determines to be most appropriate.
The Company shall 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, within 45 days of the
appointment of the Independent Financial Expert, a Value Report stating the
value of the Preferred Stock and other securities or property of the Company, if
any, being valued as of the Valuation Date and containing a brief statement as
to the nature and scope of the methodologies upon which the determination of
value was made. The Warrant Agent shall 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. The determination as to Current Market
Value in accordance with the provisions of this Section 4.1(k) shall be
conclusive on all Persons. The Independent Financial Expert shall consult with
management of the Company in order to allow management to comment on the
proposed value prior to delivery to the Company of any Value Report.
(l) When No Adjustment Required. No adjustment need be
made for:
(i) grants or exercises of Rights granted to employees of
the Company or any of its subsidiaries or Preferred Stock issued or
granted to such employees, whether or not upon the exercise, exchange
or conversion of any such Rights (to the extent that all such
securities do not have an aggregate value in excess of 15% of the
equity value of the Company on a fully diluted basis, as determined in
good faith by the Board);
(ii) options, warrants or other agreements or rights to
purchase capital stock of the Company entered into prior to the date of
the issuance of the Warrants;
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(iii) rights to purchase Preferred Stock pursuant to a
Company plan for reinvestment of dividends or interest;
(iv) a change in the par value (including a change from par
value to no par value or vice versa) of the Preferred Stock;
(v) bona fide public offerings or private placements
pursuant to Section 4(2) of the Securities Act, Regulation D thereunder
or Regulation S, involving at least one investment bank of national
reputation, if (i) in the case of any security trading on any national
securities exchange or in the over the counter market, or of a security
directly or indirectly convertible or exchangeable for any such
security (the latter security being a "Reference Security"), such
security (or the Reference Security as applicable) is sold to investors
at a price at least equal to the closing sale, bid or ask price
(whichever is customary) of such security (or the Reference Security as
applicable) on the date of the public offering or private placement, or
(ii) the security or Reference Security is issued as part of a public
offering or a private placement of debt securities; and
(vi) issuances of up to an aggregate of 60,000 shares of
Preferred Stock in transactions, the primary purpose of which, in the
good faith opinion of the Board evidenced by Board resolution, is not
to raise capital for the Company (such as settlements of disputes,
severance payments for employees, and similar matters).
To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
Section 4.2. Notice of Adjustment. Whenever the number of
shares of Preferred Stock issuable upon the exercise of each Warrant or the
Exercise Price is adjusted, as herein provided, the Company shall cause the
Warrant Agent promptly to mail, at the expense of the Company, to each Holder
notice of such adjustment or adjustments and shall deliver to the Warrant Agent
a certificate of the Auditors setting forth the number of shares of Preferred
Stock issuable upon the exercise of each Warrant and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such certificate shall be conclusive evidence of the correctness of such
adjustment except in the case of manifest error. The Warrant Agent shall be
entitled to rely on such certificate and shall be under no duty or
responsibility with respect to any such certificate, except to exhibit the same,
from time to time, to any Holder desiring an inspection thereof during
reasonable business hours upon reasonable notice. The Warrant Agent shall not at
any time be under any duty or responsibility to any Holders to determine whether
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<PAGE> 29
any facts exist which may require any adjustment of the Exercise Price or the
number of shares of Preferred Stock issuable on exercise of the Warrants or any
of the other adjustments set forth in Section 4.1, or with respect to the nature
or extent of any such adjustment when made, or with respect to the method
employed in making such adjustment, or the validity or value (or the kind or
amount) of any Preferred Stock which may be issuable on exercise of the
Warrants. The Warrant Agent shall not be responsible for any failure of the
Company to make any cash payment or to issue, transfer or deliver any Preferred
Stock or share certificates upon the exercise of any Warrant.
Section 4.3. Statement on Warrants. Irrespective of any
adjustment in the Exercise Price or the number or kind of shares issuable upon
the exercise of the Warrants, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in the Warrants initially issuable pursuant to this Agreement.
Section 4.4. Notice of Consolidation, Merger, Etc. In case at
any time after the date hereof and prior to 5:00 p.m., New York City time, on
the Expiration Date, there shall be (i) any consolidation or merger involving
the Company or sale, transfer or other disposition of all or substantially all
of the Company's property, assets or business (except a merger or other
reorganization in which the Company shall be the surviving corporation and
holders of Preferred Stock (or any capital stock issuable upon conversion of the
Preferred Stock) receive no consideration in respect of their shares) or (ii)
any other transaction contemplated by Section 4.1(j)(ii) above, then, in any one
or more of such cases, the Company shall cause to be mailed to the Warrant Agent
and shall cause the Warrant Agent to mail, at the Company's expense, to each
Holder of a Warrant, at the earliest practicable time (and, in any event, not
less than 20 days before any date set for definitive action), notice of the date
on which such reorganization, sale, consolidation, merger, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also set forth such facts as shall indicate the effect of such action (to
the extent such effect may be known at the date of such notice) on the Exercise
Price and the kind and amount of the Preferred Stock and other securities, money
and other property deliverable upon exercise of the Warrants. Such notice shall
also specify the date as of which the holders of record of the Preferred Stock
or other securities or property issuable upon exercise of the Warrants or
conversion of the Preferred Stock shall be entitled to exchange their shares for
securities, money or other property deliverable upon such reorganization, sale,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be.
Section 4.5. Fractional Interests. The Company may but shall
not be required to issue fractional shares of Preferred Stock upon the exercise
of Warrants. If more than one Warrant shall be presented for exercise in full at
the same time by the same Holder, the number of full shares of Preferred Stock
which shall be issuable upon such exercise thereof shall be computed on the
basis of the aggregate
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number of shares of Preferred Stock issuable on exercise of the Warrants so
presented. If any fraction of a shares of Preferred Stock would, except for the
provisions of this Section 4.5, be issuable on the exercise of any Warrant (or
specified portion thereof), the Company may, at its option, pay an amount in
cash calculated by it to be equal to the then Current Market Value per share of
Preferred Stock multiplied by such fraction computed to the nearest whole cent.
Section 4.6. When Issuance or Payment May Be Deferred. In any
case in which this Article IV shall require that an adjustment in the Exercise
Price be made effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event (i) issuing to the holder
of any Warrant exercised after such record date the Preferred Stock and other
shares in the capital of the Company, if any, issuable upon such exercise over
and above the Preferred Stock and other shares in the capital of the Company, if
any, issuable upon such exercise and (ii) paying such holder any amount in cash
in lieu of a fractional share; provided, however, that the Company shall deliver
to such Holder a due bill or other appropriate instrument evidencing such
Holder's right to receive such additional Preferred Stock, other shares and cash
upon the occurrence of the event requiring such adjustment.
Section 4.7. Initial Public Offering. Notwithstanding anything
to the contrary herein contained, 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 the Holders the opportunity to convert Warrants
into warrants to purchase such equity securities and to convert Preferred Stock
(or any capital stock issuable upon conversion of the Preferred Stock) or such
other securities that have been received by the Holders upon the exercise of
Warrants 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.
Section 4.8. Other Adjustments. The number of shares of
capital stock issuable upon conversion of the Preferred Stock shall be subject
to adjustment from time to time in a manner and or terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
this Article IV.
ARTICLE V
DECREASE IN EXERCISE PRICE
The Board, in its sole discretion, shall have the right at any
time, or from time to time, to decrease the Exercise Price of the Warrants
and/or increase the number of shares issuable upon the exercise of the Warrants.
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ARTICLE VI
LOSS OR MUTILATION
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership and the loss, theft, destruction or
mutilation of any Warrant Certificate and of indemnity or bond satisfactory to
them and (in the case of mutilation) upon surrender and cancellation thereof,
then, in the absence of notice to the Company or the Warrant Agent that the
Warrants represented thereby have been acquired by a bona fide purchaser, the
Company shall execute and the Warrant Agent shall countersign and deliver to the
registered Holder of the lost, stolen, destroyed or mutilated Warrant
Certificate, in exchange for or in lieu thereof, a new Warrant Certificate of
the same tenor and for a like aggregate number of Warrants. Upon the issuance of
any new Warrant Certificate under this Article VI, the Company may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and other expenses (including the fees and
expenses of the Warrant Agent) in connection therewith. Every new Warrant
Certificate executed and delivered pursuant to this Article VI in lieu of any
lost, stolen or destroyed Warrant Certificate shall constitute a contractual
obligation of the Company whether or not the allegedly lost, stolen or destroyed
Warrant Certificates shall be at any time enforceable by anyone and shall be
entitled to the benefits of this Agreement equally and proportionately with any
and all other Warrant Certificates duly executed and delivered hereunder. The
provisions of this Article VI are exclusive and shall preclude (to the extent
lawful) all other rights or remedies with respect to the replacement of
mutilated, lost, stolen, or destroyed Warrant Certificates.
ARTICLE VII
RESERVATION AND AUTHORIZATION OF PREFERRED STOCK
The Company shall at all times reserve and keep available such
number of its authorized but unissued Preferred Stock deliverable upon exercise
of the Warrants as will be sufficient to permit the exercise in full of all
outstanding Warrants and will cause appropriate evidence of ownership of such
Preferred Stock to be delivered to the Warrant Agent upon its request for
delivery thereof upon the exercise of the Warrants. The Company covenants that
all shares of Preferred Stock of the Company that may be issued upon the
exercise of the Warrants will, upon issuance, be duly authorized, validly
issued, fully paid and not subject to any calls for funds and free from
preemptive rights and all taxes, liens, charges and security interests with
respect to the issue thereof.
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ARTICLE VIII
WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER
Section 8.1. Transfer and Exchange. The Warrant Certificates
shall be issued in registered form only. The Warrant Agent shall keep at its
office a register for the registration of Warrant Certificates and transfers or
exchanges of Warrant Certificates as herein provided and other appropriate data
as determined by the Warrant Agent. The Company shall, upon reasonable notice to
the Warrant Agent, have access to such register during the Warrant Agent's
regular business hours. All Warrant Certificates issued upon any registration of
transfer or exchange of Warrant Certificates shall be the valid obligations of
the Company, evidencing the same obligations, and entitled to the same benefits
under this Agreement, as the Warrant Certificates surrendered for such
registration of transfer or exchange.
A Holder may transfer its Warrants only by written application
to the Warrant Agent stating the name of the proposed transferee and otherwise
complying with the terms of this Agreement. No such transfer shall be effected
until, and such transferee shall succeed to the rights of a Holder only upon,
final acceptance and registration of the transfer by the Warrant Agent in the
register. Prior to the registration of any transfer of Warrants by a Holder as
provided herein, the Company, the Warrant Agent, and any agent of the Company
may treat the person in whose name the Warrants are registered as the owner
thereof for all purposes and as the person entitled to exercise the rights
represented thereby, any notice to the contrary notwithstanding. Furthermore,
any holder of a Global Warrant shall, by acceptance of such Global Warrant,
agree that transfers of beneficial interests in such Global Warrant may be
effected only through a book-entry system maintained by the holder of such
Global Warrant (or its agent), and that ownership of a beneficial interest in
the Warrants represented thereby shall be required to be reflected in a
bookentry. When Warrant Certificates are presented to the Warrant Agent with a
request to register the transfer or to exchange them for an equal amount of
Warrants, the Warrant Agent shall register such transfer or make such exchange
as requested if its requirements for such transactions are met. To permit
registrations of transfers and exchanges, the Company shall execute Warrant
Certificates at the Warrant Agent's request. No service charge shall be made for
any registration of transfer or exchange of Warrants, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer of
Warrants.
Section 8.2. Book-Entry Provisions for the Global Warrants.
(a) The Global Warrants initially shall (i) be registered in the name of the
Depositary for such Global Warrant or the nominee of such Depositary, (ii) be
delivered to the Warrant Agent as custodian for such Depositary and (iii) bear
legends as set forth in Section 2.2 hereof.
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<PAGE> 33
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights under this Agreement with respect to the Global
Warrants held on their behalf by the Depositary or the Warrant Agent as its
custodian, and the Depositary may be treated by the Company, the Warrant Agent
and any agent of the Company or the Warrant Agent as the absolute owner of such
Global Warrant for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Warrant Agent or any agent of the
Company or the Warrant Agent, from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Agent Members, the operation of customary practices
governing the exercise of the rights of a Holder of any Warrants.
(b) Transfers of a Global Warrant shall be limited to
transfers of such Global Warrant in whole, but not in part, to the Depositary,
its successors or their respective nominees. Interests of beneficial owners in
the Global Warrants may be transferred in accordance with the rules and
procedures of the Depositary and the provisions of Section 8.3 hereof. U.S.
Certificated Warrants and Offshore Certificated Warrants shall be transferred to
beneficial owners in exchange for their beneficial interests in the Restricted
Global Warrant or the Regulation S Global Warrant, as the case may be, (i) if
the Depositary notifies the Company that it is unwilling or unable to continue
as Depositary for any such Global Warrant and a successor depositary is not
appointed by the Company within 90 days of such notice, (ii) if there is a
Default or (iii) upon the request of the beneficial owner in accordance with the
rules and procedures of the Depositary and the provisions of Section 8.3 hereof;
provided that Offshore Certificated Warrants shall not be transferred in
exchange for the Legended Regulation S Global Warrant prior to one year after
the date hereof.
(c) Any beneficial interest in one of the Global Warrants
that is transferred to a person who takes delivery in the form of an interest in
any other Global Warrant will, upon transfer, cease to be an interest in such
Global Warrant and become an interest in such other Global Warrant and,
accordingly, will thereafter be subject to all transfer restrictions, if any,
and other procedures applicable to beneficial interests in such other Global
Warrant for as long as it remains such an interest.
(d) In connection with the transfer of the entire
Restricted Global Warrant or Regulation S Global Warrant to beneficial owners
pursuant to paragraph (b) of this Section 8.2, the Restricted Global Warrant or
the Regulation S Global Warrant, as the case may be, shall be surrendered to the
Warrant Agent for cancellation, and the Company shall execute, and the Warrant
Agent shall countersign and deliver, to each beneficial owner identified by the
Depositary in exchange for its beneficial interest in the Restricted Global
Warrant or the
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Regulation S Global Warrant, as the case may be, U.S. Certificated Warrants or
Offshore Certificated Warrants, as the case may be, representing, in the
aggregate, the number of Warrants theretofore represented by the Restricted
Global Warrant or the Regulation S Global Warrant, as the case may be.
(e) In connection with the transfer of a portion of the
beneficial interests in the Restricted Global Warrant or the Unlegended
Regulation S Global Warrant to beneficial owners pursuant to paragraph (b) of
this Section 8.2, the Warrant Agent shall reflect on its books and records the
date and a decrease in the amount of Warrants represented by the Restricted
Global Warrant or Unlegended Regulation S Global Warrant in an amount equal to
the amount of Warrants represented by the beneficial interest in the Restricted
Global Warrant or Unlegended Regulation S Global Warrant to be transferred, and
the Company shall execute, and the Warrant Agent shall countersign and deliver,
to each beneficial owner identified by the Depositary in exchange for its
beneficial interest in the Restricted Global Warrant or the Unlegended
Regulation S Global Warrant, as the case may be, U.S. Certificated Warrants or
Offshore Certificated Warrants, as the case may be, of like tenor and amount.
(f) Any Certificated Warrant delivered in exchange for an
interest in a Global Warrant pursuant to paragraph (b), (d) or (e) of this
Section shall, except as otherwise provided by paragraph (d) of Section 8.3
hereof, bear the legend regarding transfer restrictions set forth in Section 2.2
hereof.
(g) The registered holder of a Global Warrant may grant
proxies and otherwise authorize any person, including Agent Members and persons
that may hold interests through Agent Members, to take any action which a Holder
is entitled to take under this Agreement or the Warrants.
Section 8.3. Special Transfer Provisions. The following
provisions shall apply:
(a) Transfers to QIBs. The following provisions shall
apply with respect to the registration of any proposed transfer of Warrants to a
QIB (excluding non-U.S. Persons):
(i) If the Warrants to be transferred are represented by
Certificated Warrants or by an interest in the Legended Regulation S
Global Warrant, the Warrant Agent shall register the transfer if such
transfer is being made by a proposed transferor who has checked the box
provided for on the form of Warrant Certificate stating, or has
otherwise advised the Company and the Warrant Agent in writing, that
the sale has been made in compliance with the provisions of Rule 144A
to a transferee who has signed the certification provided for on the
form of Warrant Certificate stating, or has otherwise advised the
Company and the Warrant Agent in writing, that it is purchasing
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the Warrants for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account
is a QIB within the meaning of Rule 144A, and is aware that the sale to
it is being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as it has requested
pursuant to Rule 144A or has determined not to request such information
and that it is aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, and the
Warrants to be transferred are represented by Certificated Warrants or
an interest in the Legended Regulation S Global Warrant, upon receipt
by the Warrant Agent of the documents referred to in clause (i) above
and instructions given in accordance with the Depositary's and the
Warrant Agent's procedures, the Warrant Agent shall reflect on its
books and records the date and an increase in the amount of Warrants
represented by the Restricted Global Warrant in an amount equal to the
amount of Warrants represented by the Certificated Warrants or the
interest in the Legended Regulation S Global Warrant, as the case may
be, to be transferred, and the Warrant Agent shall cancel the
Certificated Warrants or decrease the amount of the Legended Regulation
S Global Warrant so transferred.
(b) Transfers to Non-U.S. Persons at Any Time. The
following provisions shall apply with respect to the registration of any
proposed transfer of Warrants (other than transfer of the Regulation S Global
Warrant) to a Non-U.S. Person:
(i) The Warrant Agent shall register any proposed transfer
of Warrants to a Non-U.S. Person only upon receipt of a certificate
substantially in the form of Exhibit B from the proposed transferor.
(ii) If the proposed transferee is an Agent Member and the
Warrants to be transferred are represented by Certificated Warrants or
an interest in the Restricted Global Warrant, upon receipt by the
Warrant Agent of the documents referred to in clause (i) above and
instructions given in accordance with the Depositary's and the Warrant
Agent's procedures, the Warrant Agent shall reflect on its books and
records the date and an increase in the number of Warrants represented
by the Regulation S Global Warrant in an amount equal to the number of
Warrants represented by the Certificated Warrants or the Restricted
Global Warrant, as the case may be, to be transferred, and the Warrant
Agent shall cancel the Certificated Warrant or decrease the amount of
Warrants represented by the Restricted Global Warrant so transferred.
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(c) Transfers to Any Other Person. The following
provisions shall apply with respect to the registration of any proposed transfer
of Warrants (other than transfers of the Regulation S Global Warrant) to any
Person not specified in paragraphs (a) and (b) above (including any
Institutional Accredited Investor which is not a QIB).
(i) The Warrant Agent shall register any proposed transfer
of Warrants to any such Person if (x) the transferor has delivered to
the Warrant Agent and the Company a certificate substantially in the
form of Exhibit C-1 hereto and, if required by paragraph (d) thereof,
an Opinion of Counsel to the effect set forth therein and (y) the
proposed transferee has delivered to the Warrant Agent and the Company
a certificate substantially in the form of Exhibit C-2 hereto if such
transferee is an Institutional Accredited Investor that is not a QIB.
(ii) If the proposed transferor is an Agent Member holding
a beneficial interest in the Restricted Global Warrant or the
Regulation S Global Warrant, upon receipt by the Warrant Agent and the
Company of the documents referred to in clause (i) above and
instructions given in accordance with the Depositary's and the Warrant
Agent's procedures, the Company shall execute and the Warrant Agent
shall countersign Certificated Warrants in an amount equal to the
number of Warrants represented by the Restricted Global Warrant or the
Regulation S Global Warrant, if any, as the case may be, to be
transferred and the Warrant Agent shall decrease the number of Warrants
represented by the Restricted Global Warrant or the Regulation S Global
Warrant so transferred.
(d) Private Placement Legend. Upon the transfer, exchange
or replacement of Warrant Certificates not bearing the Private Placement Legend,
the Warrant Agent shall deliver Warrant Certificates that do not bear the
Private Placement Legend. Upon the transfer, exchange or replacement of Warrant
Certificates bearing the Private Placement Legend, the Warrant Agent shall
deliver only Warrant Certificates that bear the Private Placement Legend unless
either (i) the circumstances contemplated by the third sentence of the third
paragraph of Section 2.1 exist or (ii) there is delivered to the Warrant Agent
an Opinion of Counsel reasonably satisfactory to the Company and its counsel and
the Warrant Agent to the effect that neither such legend nor the related
restrictions on transfer are required in order to maintain compliance with the
provisions of the Securities Act.
(e) Transfers of Interests in the Legended Regulation S
Global Warrant. The following provisions shall apply with respect to
registration of any proposed transfer of interests in the Legended Regulation S
Global Warrant:
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(i) The Registrar shall register the transfer of any
Warrant (x) if the proposed transferee is a Non-U.S. Person and the
proposed transferor has delivered to the Registrar a certificate
substantially in the form of Exhibit B hereto or (y) if the proposed
transferee is a QIB and the proposed transferor has checked the box
provided for on the form of Warrant stating, or has otherwise advised
the Company and the Warrant Agent in writing, that the sale has been
made in compliance with the provisions of Rule 144A to a transferee who
has signed the certification provided for on the form of Warrant
stating, or has otherwise advised the Company and the Warrant Agent in
writing, that it is purchasing the Warrant for its own account or an
account with respect to which it exercises sole investment discretion
and that it and any such account is a QIB within the meaning of Rule
144A, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information
regarding the Company as it has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that
the transferor is relying upon its foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Warrant Agent of the documents referred to in clause
(i)(y) above and instructions given in accordance with the Depositary's
and the Warrant Agent's procedures, the Warrant Agent shall reflect on
its books and records the date and an increase in the number of
Warrants represented by the Restricted Global Warrant, in an amount
equal to the number of Warrants represented by the Legended Regulation
S Global Warrant to be transferred, and the Warrant Agent shall
decrease the number of Warrants represented by the Legended Regulation
S Global Warrant.
(f) Transfers of Interests in the Unlegended Regulation S
Global Warrant or Unlegended Offshore Certificated Warrants. The Warrant Agent
shall register any transfer of interests in the Unlegended Regulation S Global
Warrant or unlegended Offshore Certificated Warrants without requiring any
additional certification.
(g) General. (i) By its acceptance of any Warrants
represented by a Warrant Certificate bearing the Private Placement Legend, each
Holder of such Warrants acknowledges the restrictions on transfer of such
Warrants set forth in this Agreement and in the Private Placement Legend and
agrees that it will transfer such Warrants only as provided in this Agreement.
The Warrant Agent shall not register a transfer of any Warrants unless such
transfer complies with the restrictions on transfer of such Warrants set forth
in this Agreement. In connection with any transfer of Warrants, each Holder
agrees by its acceptance of Warrants to furnish the Warrant Agent or the Company
such certifications, legal opinions or other information as either of them may
reasonably require to confirm that such
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transfer is being made pursuant to an exemption from, or a transaction not
subject to, the registration requirements of the Securities Act; provided that
the Warrant Agent shall not be required to determine (but may rely on a
determination made by the Company with respect to) the sufficiency of any such
certifications, legal opinions or other information.
(ii) The Warrant Agent shall retain copies of all letters,
notices and other written communications received pursuant to Section
8.2 hereof or this Section 8.3. The Company shall have the right to
inspect and make copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable
written notice to the Warrant Agent.
Section 8.4. Surrender of Warrant Certificates. Any Warrant
Certificate surrendered for registration of transfer, exchange or exercise of
the Warrants represented thereby shall, if surrendered to the Company, be
delivered to the Warrant Agent, and all Warrant Certificates surrendered or so
delivered to the Warrant Agent shall be promptly cancelled by the Warrant Agent
and shall not be reissued by the Company and, except as provided in this Article
VIII in case of an exchange, Article III hereof in case of the exercise of less
than all the Warrants represented thereby or Article VI in case of a mutilated
Warrant Certificate, no Warrant Certificate shall be issued hereunder in lieu
thereof. The Warrant Agent shall deliver to the Company from time to time or
otherwise dispose of such cancelled Warrant Certificates as the Company may
direct in writing.
ARTICLE IX
WARRANT HOLDERS
Section 9.1. Warrant Holder Deemed Not a Shareholder. The
Company and the Warrant Agent may deem and treat the registered Holder(s) of the
Warrant Certificates as the absolute owner(s) thereof (notwithstanding any
notation of ownership or other writing thereon made by anyone), for the purpose
of any exercise thereof and for all other purposes, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary. Accordingly,
the Company and/or the Warrant Agent shall not, except as ordered by a court of
competent jurisdiction as required by law, be bound to recognize any equitable
or other claim to or interest in the Warrants on the part of any person other
than such registered Holder, whether or not it shall have express or other
notice thereof. Prior to the exercise of the Warrants, no Holder of a Warrant
Certificate, as such, shall be entitled to any rights of a shareholder of the
Company, including, without limitation, the right to vote or to consent to any
action of the shareholders, to receive dividends or other distributions, to
exercise any preemptive right or to receive any notice of meetings of
shareholders and, except as otherwise provided in this Agreement, shall not be
entitled to receive any notice of any proceedings of the Company.
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Section 9.2. Right of Action. All rights of action with
respect to this Agreement are vested in the Holders of the Warrants, and any
Holder of any Warrant, without the consent of the Warrant Agent or the Holders
of any other Warrant, may, on such Holder's own behalf and for such Holder's own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company suitable to enforce, or otherwise in respect of, such
Holder's right to exercise such Warrants in the manner provided in the Warrant
Certificate representing such Warrants and in this Agreement.
ARTICLE X
REMEDIES
Section 10.1. Defaults. It shall be deemed to be a "Default"
with respect to the Company's (or its successor's) obligations under this
Agreement if:
(a) a Repurchase Event occurs and the Company (or its
successor) shall fail to make a Repurchase Offer pursuant to Section
3.4 hereof; or
(b) the Company (or its successor) shall fail to purchase
the Warrants pursuant to the Repurchase Offer in accordance with the
provisions of Section 3.4 hereof.
Section 10.2. Payment Obligations. Upon the happening of a
Default under this Agreement, the Company shall be obligated to increase the
amount otherwise payable pursuant to Section 3.4(d) hereof in respect of the
Repurchase Offer to which such Default relates by an amount equal to interest
thereon at a rate per annum equal to 11-7/8% from the date of the Default to the
date of payment, which interest shall compound quarterly (all such payment
obligations in respect of such Repurchase Offer, together with all such
increased amounts, being the "Repurchase Obligation").
Section 10.3. Remedies; No Waiver. Notwithstanding any other
provision of this Agreement, if a Default occurs and is continuing, the Holders
of the Warrants may pursue any available remedy to collect the Repurchase
Obligation or to enforce the performance of any provision of this Agreement. A
delay or omission by any Holder of a Warrant in exercising, or a failure to
exercise, any right or remedy arising out of a Default shall not impair the
right or remedy or constitute a waiver of or acquiescence in the Default. All
remedies are cumulative to the extent permitted by law.
ARTICLE XI
THE WARRANT AGENT
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Section 11.1. Duties and Liabilities. The Warrant Agent hereby
accepts the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth, by all of which the Company and
the Holders of Warrants, by their acceptance thereof, shall be bound. The
Warrant Agent shall not, by countersigning Warrant Certificates or by any other
act hereunder, be deemed to make any representations as to the validity or
authorization of the Warrants or the Warrant Certificates (except as to its
countersignature thereon) or of any Preferred Stock issued upon exercise of any
Warrant, or as to the accuracy of the computation of the Exercise Price or the
number or kind or amount of Preferred Stock deliverable upon exercise of any
Warrant or the correctness of the representations of the Company made in the
certificates that the Warrant Agent receives. The Warrant Agent shall not be
accountable for the use or application by the Company of the proceeds of the
exercise of any Warrant. The Warrant Agent shall not have any duty to calculate
or determine any adjustments with respect to either the Exercise Price or the
kind and amount of Preferred Stock receivable by Holders upon the exercise of
Warrants required from time to time and the Warrant Agent shall have no duty or
responsibility in determining the accuracy or correctness of such calculation.
The Warrant Agent shall not be (a) liable for any recital or statement of fact
contained herein or in the Warrant Certificates or for any action taken,
suffered or omitted by it in good faith in the belief that any Warrant
Certificate or any other documents or any signatures are genuine or properly
authorized, (b) responsible for any failure on the part of the Company to comply
with any of its covenants and obligations contained in this Agreement or in the
Warrant Certificates or (c) liable for any act or omission in connection with
this Agreement except for its own negligence, bad faith or willful misconduct.
The Warrant Agent is hereby authorized to accept instructions with respect to
the performance of its duties hereunder from the Chairman of the Board, Chief
Executive Officer, Chief Financial Officer any Vice President or other executive
officer of the Company and to apply to any such officer for instructions (which
instructions will be promptly given in writing when requested) and the Warrant
Agent shall not be liable for any action taken or suffered to be taken by it in
good faith in accordance with the instructions of any such officer; provided,
however, that, in its discretion, the Warrant Agent may, in lieu thereof, accept
other evidence of such or may require such further or additional evidence as it
may deem reasonable. The Warrant Agent shall not be liable for any action taken
with respect to any matter in the event it requests instructions from the
Company as to that matter and does not receive such instructions within a
reasonable period of time after the request therefor.
The Warrant Agent may execute and exercise any of the rights
and powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys, agents or employees, and the Warrant Agent shall not
be answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents or employees; provided that reasonable care has been
exercised
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with respect to the retention of any such attorney, agent or employee. The
Warrant Agent shall not be under any obligation or duty to institute, appear in
or defend any action, suit or legal proceeding in respect hereof, unless first
indemnified to its reasonable satisfaction. The Warrant Agent shall promptly
notify the Company in writing of any claim made or action, suit or proceeding
instituted against it arising out of or in connection with this Agreement.
The Company will perform, execute, acknowledge and deliver or
cause to be delivered all such further acts, instruments and assurances as are
consistent with this Agreement and as may reasonably be required by the Warrant
Agent in order to enable it to carry out or perform its duties under this
Agreement.
In acting under this Agreement and in connection with the
Warrant Certificates, the Warrant Agent is acting solely as agent of the Company
and does not assume any obligation or relationship or agency or trust for or
with any Holders of Warrant Certificates or beneficial owners of Warrants. The
Warrant Agent shall not be liable except for the failure to perform such duties
as are specifically set forth herein, and no implied covenants or obligations
shall be read into this Agreement against the Warrant Agent, whose duties and
obligations shall be determined solely by the express provisions hereof.
Section 11.2. Right to Consult Counsel. The Warrant Agent may
at any time consult with legal counsel (who may be legal counsel for the
Company), and the opinion or advice of such counsel shall be full and complete
authorization and protection to the Warrant Agent and the Warrant Agent shall
incur no liability or responsibility to the Company or to any Holder for any
action taken, suffered or omitted by it in good faith in accordance with the
opinion or advice of such counsel.
Section 11.3. Compensation; Indemnification. The Company
agrees promptly to pay the Warrant Agent from time to time and in any case
within 30 days of receipt of an invoice, compensation for its services hereunder
as the Company and the Warrant Agent may agree from time to time, and to
reimburse it upon its request for reasonable fees or expenses and reasonable
counsel fees and expenses incurred in connection with the execution and
administration of this Agreement, and further agrees to indemnify the Warrant
Agent and save it harmless against any losses, liabilities or expenses arising
out of or in connection with the acceptance and administration of this
Agreement, including, without limitation, the reasonable costs and expenses of
investigating or defending any claim of such liability, except that the Company
shall have no liability hereunder to the extent that any such loss, liability or
expense results from the Warrant Agent's own negligence, bad faith or willful
misconduct. The obligations of the Company under this Section 11.3 shall survive
the exercise and the expiration of the Warrants, the termination of this
Agreement and the resignation or removal of the Warrant Agent in respect of
services or expenses incurred in connection with the Warrants or this Agreement.
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Section 11.4. No Restrictions on Actions. Nothing in this
Agreement shall be deemed to prevent the Warrant Agent and any shareholder,
director, officer or employee of the Warrant Agent from buying, selling or
dealing in any of the Warrants or other securities of the Company or becoming
pecuniarily interested in transactions in which the Company may be interested,
or contracting with or lending money to the Company or otherwise acting as fully
and freely as though it were not the Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
Section 11.5. Discharge or Removal; Replacement Warrant Agent.
The Warrant Agent may resign from its position as such and be discharged from
all further duties and liabilities hereunder (except liability arising as a
result of the Warrant Agent's own gross negligence, bad faith or willful
misconduct), after giving one month's prior written notice to the Company. The
Company may at any time remove the Warrant Agent upon one month's written notice
specifying the date when such discharge shall take effect, and the Warrant Agent
shall thereupon in like manner be discharged from all further duties and
liabilities hereunder, except as aforesaid. The Warrant Agent shall mail to each
Holder of a Warrant, at the Company's expense, a copy of said notice of
resignation or notice of removal, as the case may be. Upon such resignation or
removal the Company shall appoint in writing a new warrant agent. If the Company
shall fail to make such appointment within a period of 30 days after it has been
notified in writing of such resignation by the resigning Warrant Agent or after
such removal, then the resigning or removed Warrant Agent or the Holder of any
Warrant may apply to any court of competent jurisdiction for the appointment of
a new warrant agent. After 30 days from receipt of, or giving, notice, as the
case may be, and pending appointment of a successor to the original Warrant
Agent, either by the Company or by such a court, the duties of the Warrant Agent
shall be carried out by the Company. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company doing business
under the laws of the United States or any state thereof, in good standing and
having a combined capital and surplus of not less than $25,000,000. The combined
capital and surplus of any such new warrant agent shall be deemed to be the
combined capital and surplus as set forth in the most recent annual report of
its condition published by such warrant agent prior to its appointment, provided
that such reports are published at least annually pursuant to law or to the
requirements of a federal or state supervising or examining authority. After
acceptance in writing of such appointment by the new warrant agent, it shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; however, the original Warrant Agent shall in
all events deliver and transfer to the successor Warrant Agent all property
(including, without limitation, documents and recorded information), if any, at
the time held
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hereunder by the original Warrant Agent and if for any reason it shall be
necessary or expedient to execute and deliver any further assurance, conveyance,
act or deed, the same shall be done at the expense of the Company and shall be
legally and validly executed and delivered by the resigning or removed Warrant
Agent. Not later than the effective date of any such appointment, the Company
shall file notice thereof with the resigning or removed Warrant Agent and shall
forthwith cause a copy of such notice to be mailed by the successor Warrant
Agent to each Holder of a Warrant. Failure to give any notice provided for in
this Section 11.5, however, or any defect therein, shall not affect the legality
or validity of the resignation of the Warrant Agent or the appointment of a new
warrant agent, as the case may be. No Warrant Agent hereunder shall be liable
for any acts or omissions of any successor Warrant Agent.
Section 11.6. Successor Warrant Agent. Any corporation into
which the Warrant Agent or any new warrant agent may be merged or converted, or
any corporation resulting from any consolidation to which the Warrant Agent or
any new warrant agent shall be a party or any corporation succeeding to all or
substantially all the corporate agency business of the Warrant Agent, shall be a
successor Warrant Agent under this Agreement without any further act, provided
that such corporation would be eligible for appointment as successor to the
Warrant Agent under the provisions of Section 11.5 hereof. Any such successor
Warrant Agent shall promptly cause notice of its succession as Warrant Agent to
be mailed to each Holder of a Warrant.
ARTICLE XII
MISCELLANEOUS
Section 12.1. Monies Deposited with the Warrant Agent. The
Warrant Agent shall not be required to pay interest on any monies deposited
pursuant to the provisions of this Agreement except such as it shall agree in
writing with the Company to pay thereon. Any monies, securities or other
property which at any time shall be deposited by the Company or on its behalf
with the Warrant Agent pursuant to this Agreement shall be and are hereby
assigned, transferred and set over to the Warrant Agent in trust for the purpose
for which such monies, securities or other property shall have been deposited;
but such monies, securities or other property need not be segregated from other
funds, securities or other property except to the extent required by law. Any
monies, securities or other property deposited with the Warrant Agent for
payment or distribution to the Holders that remains unclaimed for one year after
the date the monies, securities or other property was deposited with the Warrant
Agent shall be delivered to the Company upon its request therefor.
Section 12.2. Payment of Taxes. Subject to Article VI hereof,
all Preferred Stock issuable upon the exercise of Warrants shall be validly
issued, fully
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paid and not subject to any calls for funds, and the Company shall pay any taxes
and other governmental charges that may be imposed under the laws of the United
States of America or any political subdivision or taxing authority thereof or
therein in respect of the issue or delivery thereof upon exercise of Warrants
(other than income taxes imposed on the Holders). The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer involved in the issue of any certificate for Preferred Stock (including
other securities or property issuable upon the exercise of the Warrants) or
payment of cash to any Person other than the Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant and in case of such transfer or
payment, the Warrant Agent and the Company shall not be required to issue any
share certificate or pay any cash until such tax or charge has been paid or it
has been established to the Warrant Agent's and the Company's satisfaction that
no such tax or charge is due.
Section 12.3. No Merger, Consolidation or Sale of Assets of
the Company. Except as otherwise provided herein, the Company will not merge
into or consolidate with any other Person, or sell or otherwise transfer its
property, assets and business substantially as an entirety to a successor of the
Company, unless the Person resulting from such merger or consolidation, or such
successor of the Company, shall expressly assume, by supplemental agreement
satisfactory in form to the Warrant Agent and executed and delivered to the
Warrant Agent, the due and punctual performance and observance of each and every
covenant and condition of this Agreement or contained in the Warrants to be
performed and observed by the Company.
Section 12.4. Reports to Holders. At all times from and after
the end of the first quarter ending after date hereof, 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 Holder 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 Holder upon request. In addition, at all times prior
to the registration of the Preferred Stock (or any capital stock issuable upon
conversion of the Preferred Stock) under the Securities Act, upon the request of
any Holder or any prospective purchaser of the Warrants designated by a Holder,
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 Holder or prospective purchaser upon
request.
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Section 12.5. Notices; Payment. (a) Except as otherwise
provided in Section 12.5(b) hereof, any notice, demand or delivery authorized by
this Agreement shall be sufficiently given or made when mailed, if sent by first
class mail, postage prepaid, addressed to any Holder of a Warrant at such
Holder's last known address appearing on the register of the Company maintained
by the Warrant Agent and to the Company or the Warrant Agent as follows:
To the Company:
KNOLOGY Holdings, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attention: Chief Financial Officer
To the Warrant Agent:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
or such other address as shall have been furnished to the party giving or making
such notice, demand or delivery. Any notice that is mailed in the manner herein
provided shall be conclusively presumed to have been duly given when mailed,
whether or not the Holder receives the notice.
(b) Payment of the Exercise Price shall be made in
accordance with the provisions of this Agreement at the office of the Warrant
Agent set forth above.
(c) Any notice required to be given by the Company to the
Holders shall be made by mailing by registered mail, return receipt requested,
to the Holders at their last known addresses appearing on the register
maintained by the Warrant Agent. The Company hereby irrevocably authorizes the
Warrant Agent, in the name and at the expense of the Company, to mail any such
notice upon receipt thereof from the Company. Any notice that is mailed in the
manner herein provided shall be conclusively presumed to have been duly given
when mailed, whether or not the Holder receives the notice.
Section 12.6. Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the Company and the Warrant Agent and their
respective successors and assigns, and the Holders from time to time of the
Warrants. Nothing in this Agreement is intended or shall be construed to confer
upon any Person, other than the Company, the Warrant Agent and the Holders of
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the Warrants, any right, remedy or claim under or by reason of this Agreement or
any part hereof.
Section 12.7. Counterparts. This Agreement may be executed
manually or by facsimile in any number of counterparts, each of which shall be
deemed an original, but all of which together constitute one and the same
instrument.
Section 12.8. Amendments. The Warrant Agent may, without the
consent or concurrence of the Holders of the Warrants, by supplemental agreement
or otherwise, join with the Company in making any changes or corrections in this
Agreement that (a) are required to cure any ambiguity or to correct any
defective or inconsistent provision or clerical omission or mistake or manifest
error herein contained or (b) add to the covenants and agreements of the Company
in this Agreement further covenants and agreements of the Company thereafter to
be observed, or surrender any rights or power reserved to or conferred upon the
Company in this Agreement; provided that in either case such changes or
corrections, in the good faith opinion of the Board as evidenced by a Board
resolution, do not and will not adversely affect, alter or change the rights,
privileges or immunities of the Holders of Warrants. Upon the Warrant Agent's
request, the Company shall promptly provide an Officer's Certificate and Opinion
of Counsel which provide all conditions precedent to adoption of an amendment
that have been satisfied.
Section 12.9. Headings. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 12.10. Preferred Stock Legend. Unless and until the
Preferred Stock issuable upon the exercise of the Warrants is registered under
the Securities Act, or unless otherwise agreed by the Company and the Holder
thereof, such shares of Preferred Stock will bear a legend substantially to the
following effect:
THE SHARES OF PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN
THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2),
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<PAGE> 47
(3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THESE SHARES OF PREFERRED STOCK IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT
IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) UNDER
THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS
SECURITY, RESELL OR OTHERWISE TRANSFER THIS THESE SHARES OF PREFERRED
STOCK EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE
TRANSFER AGENT AND REGISTRAR A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
TRANSFER AGENT AND REGISTRAR) AND AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES
ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES
ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER
TO EACH PERSON TO WHOM THESE SHARES OF PREFERRED STOCK IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH
ANY TRANSFER OF THESE SHARES OF PREFERRED STOCK WITHIN THE TIME PERIOD
REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH
ON THE CERTIFICATE OF TRANSFER (THE FORM OF WHICH CERTIFICATE CAN BE
OBTAINED FROM THE TRANSFER AGENT AND REGISTRAR) RELATING TO THE MANNER
OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRANSFER AGENT AND
REGISTRAR. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED
INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
TRANSFER AGENT AND REGISTRAR AND THE COMPANY SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS EITHER OF
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THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
THE TRANSFER AGENT AND REGISTRAR HAVE BEEN INSTRUCTED TO REFUSE TO
REGISTER ANY TRANSFER OF THESE SHARES OF PREFERRED STOCK IN VIOLATION
OF THE FOREGOING RESTRICTIONS.
Section 12.11. Third Party Beneficiaries. The Holders shall be
third party beneficiaries to the agreements made hereunder between the Company,
on the one hand, and the Warrant Agent, on the other hand, and each Holder shall
have the right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder. By acquiring Warrants, each Holder agrees to be bound by the
obligations of Holders generally as set forth herein and as such obligations may
be applicable to such Holder.
Section 12.12. Termination. Except as otherwise specified
herein, this Agreement shall terminate at 5:00 p.m. (New York City time) on
October 22, 2007. Notwithstanding the foregoing, this Agreement shall terminate
on any earlier date as of which all Warrants have been exercised.
Section 12.13. Governing Law. The laws of the State of New
York shall govern this Agreement. The Warrant Agent, the Company and the Holders
agree to submit to the jurisdiction of the courts of the State of New York in
any action or proceeding arising out of or relating to this Agreement.
- 45 -
<PAGE> 49
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed, as of the day and year first above written.
KNOLOGY, INC.
By: Robert K. Mills
-------------------------------
Name: Robert K. Mills
Title: Chief Financial Officer
UNITED STATES TRUST COMPANY OF NEW
YORK
By: Lou Young
-------------------------------
Name: Lou Young
Title:
- 46 -
<PAGE> 50
EXHIBIT A
FORM OF WARRANT CERTIFICATE
KNOLOGY, INC.
[CUSIP] [CINS] [ISIN] No. _____
No. _____
WARRANTS TO PURCHASE PREFERRED STOCK
This certifies that ______________, or its registered assigns,
is the owner of ___________ Warrants, each of which represents the right to
purchase, from KNOLOGY, INC., a Delaware corporation (the "Company"), _______
shares of the Series A Preferred Stock, par value $0.01, of the Company (the
"Preferred Stock") at an exercise price (the "Exercise Price") of $.01 per share
(subject to adjustment as provided in the Warrant Agreement hereinafter referred
to below), upon surrender hereof at the office of United States Trust Company of
New York, or to its successor, as the warrant agent under the Warrant Agreement
(any such warrant agent being herein called the "Warrant Agent"), with the
Subscription Form on the reverse hereof duly executed, with signature guaranteed
as therein specified and simultaneous payment in full in cash or by certified or
official bank or bank cashier's check payable to the order of the Company.
Notwithstanding the foregoing, the Exercise Price may be paid by surrendering
additional Warrants to the Warrant Agent having an aggregate Spread equal to the
aggregate Exercise Price of the Warrants being exercised. At any time on or
before the Expiration Date, any outstanding Warrants may be exercised on any
Business Day; provided that the Warrant Registration Statement is, at the time
of exercise, effective and available for the exercise of Warrants or the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act.
This Warrant Certificate is issued under and in accordance
with a Warrant Agreement dated as of November __, 1999 (the "Warrant
Agreement"), between the Company and United States Trust Company of New York, as
Warrant Agent, and a Warrant Registration Rights Agreement dated as of November
__, 1999 (the "Warrant Registration Rights Agreement"), between the Company and
United States Trust Company of New York, as Warrant Agent, and is subject to the
Certificate of Incorporation and Bylaws of the Company and to the terms and
provisions contained therein, to all of which terms and provisions the holder of
this Warrant Certificate consents by acceptance hereof. The terms of the Warrant
Agreement and the Warrant Registration Rights Agreement are hereby incorporated
herein by reference and made a part hereof. Reference is hereby made to the
Warrant Agreement and the Warrant Registration Rights Agreement for a
A-1
<PAGE> 51
full description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Company and the Holders of the Warrants. The
summary of the terms of the Warrant Agreement and the Warrant Registration
Rights Agreement contained in this Warrant Certificate is qualified in its
entirety by express reference to the Warrant Agreement and the Warrant
Registration Rights Agreement. All terms used in this Warrant Certificate that
are defined in the Warrant Agreement and the Warrant Registration Rights
Agreement shall have the meanings assigned to them in such agreements.
Copies of the Warrant Agreement and the Warrant Registration
Rights Agreement are on file at the office of the Warrant Agent and may be
obtained by writing to the Warrant Agent at the following address:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
A "Repurchase Event", as defined in the Warrant Agreement,
means and shall be deemed 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.
Following a Repurchase Event, the Company must make an offer
to repurchase for cash all outstanding Warrants (a "Repurchase Offer"). If the
Company makes a Repurchase Offer, Holders may, until the expiration date of such
offer, surrender all or part of their Warrants for repurchase by the Company.
Warrants received by the Warrant Agent in proper form during a
Repurchase Offer will, except as otherwise provided in the Warrant Agreement, be
repurchased by the Company at a price in cash (the "Repurchase Price") equal to
the value on the Valuation Date relating thereto of the Preferred Stock and
other securities or property of the Company which would have been delivered upon
exercise of the Warrants had the Warrants been exercised, less the Exercise
Price (whether or not the Warrants are then exercisable). The value of such
Preferred Stock and other securities will be, to the extent not otherwise
provided in the
A-2
<PAGE> 52
Agreement (i) if the Preferred Stock (or other securities) are registered under
the Exchange Act, determined based upon the average of the daily market prices
(as determined pursuant to Section 3.4(d)(ii)(1) of the Warrant Agreement) of
the Preferred Stock (or other securities) for the 20 consecutive trading days
immediately preceding such Valuation Date or (ii) if the Preferred Stock (or
other securities) are not registered under the Exchange Act or if the value
cannot be computed under clause (i) above, determined by the Independent
Financial Expert (as defined in the Warrant Agreement), in each case as set
forth in the Warrant Agreement.
The "Valuation Date" as defined in the Warrant Agreement shall
be deemed to occur on the date five Business Days prior to the date notice of
the Repurchase Offer is first given.
If the Company fails to make or complete a Repurchase Offer (a
"Default") as required by the Warrant Agreement, it shall be obligated to
increase the amount otherwise payable pursuant to the Warrant Agreement in
respect of the Repurchase Offer by an amount equal to interest thereon at a rate
per annum of 11-7/8% from the date of the Default to the date of payment, which
interest shall compound quarterly.
If the Company merges or consolidates with or into, or sells
all or substantially all of its property and assets to, another Person and the
consideration received by holders of Preferred Stock (or any capital stock
issuable upon conversion of the Preferred Stock) consists solely of cash, the
Holders of Warrants shall be entitled to receive distributions on the date of
such event on an equal basis with holders of Preferred Stock (or any capital
stock issuable upon conversion of the Preferred Stock) as if the Warrants had
been exercised immediately prior to such event (less the Exercise Price). Upon
receipt of such payment, if any, the rights of a Holder shall terminate and
cease and such Holder's Warrants shall expire.
The number of shares of Preferred Stock issuable upon the
exercise of each Warrant and the price per share are subject to adjustment as
provided in the Warrant Agreement. Except as stated in the immediately preceding
paragraph and in the Warrant Agreement, in the event the Company merges or
consolidates with, or sells all or substantially all of its assets to, another
Person, each Warrant will, upon exercise, entitle the Holder thereof to receive
the number of shares of capital stock or other securities or the amount of money
and other property which the holder of Preferred Stock (or other securities or
property issuable upon exercise of a Warrant) is entitled to receive upon
completion of such merger, consolidation or sale.
As to any final fraction of a share which the same Holder of
one or more Warrant Certificates would otherwise be entitled to purchase upon
exercise
A-3
<PAGE> 53
thereof in the same transaction, the Company may pay the cash value thereof
determined as provided in the Warrant Agreement.
Subject to Article VI of the Warrant Agreement, all Preferred
Stock issuable by the Company upon the exercise of Warrants shall be validly
issued, fully paid and not subject to any calls for funds, and the Company shall
pay any taxes and other governmental charges that may be imposed under the laws
of the United States of America or any political subdivision or taxing authority
thereof or therein in respect of the issue or delivery thereof upon exercise of
Warrants (other than income taxes imposed on the Holders). The Company shall not
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for Preferred Stock
(including other securities or property issuable upon the exercise of the
Warrants) or payment of cash to any Person other than the Holder of a Warrant
Certificate surrendered upon the exercise of a Warrant and in case of such
transfer or payment, the Warrant Agent and the Company shall not be required to
issue any share certificate or pay any cash until such tax or charge has been
paid or it has been established to the Warrant Agent's and the Company's
satisfaction that no such tax or charge is due.
Subject to the restrictions on and conditions to transfer set
forth in Articles II and VIII of the Warrant Agreement, this Warrant Certificate
and all rights hereunder are transferable by the registered Holder hereof, in
whole or in part, on the register of the Company maintained by the Warrant Agent
for such purpose at the Warrant Agent's office in New York, New York, upon
surrender of this Warrant Certificate duly endorsed, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Warrant Agent
duly executed, with signatures guaranteed as specified in the attached Form of
Assignment, by the registered Holder hereof or his attorney duly authorized in
writing and by such other documentation required pursuant to the Warrant
Agreement and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer. Upon any partial transfer, the Company will
sign and issue and the Warrant Agent will countersign and deliver to such Holder
a new Warrant Certificate or Certificates with respect to any portion not so
transferred. Each taker and Holder of this Warrant Certificate, by taking and
holding the same, consents and agrees that prior to the registration of transfer
as provided in the Warrant Agreement, the Company and the Warrant Agent may
treat the person in whose name the Warrants are registered as the absolute owner
hereof for any purpose and as the Person entitled to exercise the rights
represented hereby, any notice to the contrary notwithstanding. Accordingly, the
Company and/or the Warrant Agent shall not, except as ordered by a court of
competent jurisdiction as required by law, be bound to recognize any equitable
or other claim to or interest in the Warrants on the part of any person other
than such registered Holder, whether or not it shall have express or other
notice thereof.
A-4
<PAGE> 54
This Warrant Certificate may be exchanged at the office of the
Warrant Agent maintained for such purpose in New York, New York, for Warrant
Certificates representing the same aggregate number of Warrants, each new
Warrant Certificate to represent such number of Warrants as the Holder hereof
shall designate at the time of such exchange.
Prior to the exercise of the Warrants represented hereby, the
Holder of this Warrant Certificate, as such, shall not be entitled to any rights
of a shareholder of the Company, including, without limitation, the right to
vote or to consent to any action of the shareholders, to receive any
distributions, to exercise any pre-emptive right or to receive any notice of
meetings of shareholders, and shall not be entitled to receive any notice of any
proceedings of the Company except as provided in the Warrant Agreement.
This Warrant Certificate shall be void and all rights
evidenced hereby shall cease on October 22, 2007, unless sooner terminated by
the liquidation, dissolution or winding-up of the Company or as otherwise
provided in the Warrant Agreement upon the consolidation or merger of the
Company with, or sale of the Company to, another Person or unless such date is
extended as provided in the Warrant Agreement.
A-5
<PAGE> 55
This Warrant Certificate shall not be valid for any purpose
until it shall have been countersigned by the Warrant Agent.
KNOLOGY, INC.
By:
-----------------------
Name:
Title:
Dated:
Countersigned:
UNITED STATES TRUST COMPANY OF NEW YORK,
as Warrant Agent
By: -------------------------
Authorized Signatory
A-6
<PAGE> 56
FORM OF REVERSE OF WARRANT CERTIFICATE
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
To: United States Trust Company of New York,
as Warrant Agent
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
The undersigned irrevocably exercises ________ of the Warrants
represented by this Warrant Certificate and herewith makes payment of $ _______
(such payment being by wire transfer or by certified or official bank or bank
cashier's check payable to the order or at the direction of KNOLOGY, Inc. or the
exercise price may be paid by surrendering additional Warrants to the Warrant
Agent having an aggregate Spread equal to the aggregate exercise price of the
Warrants being exercised) all at the exercise price and on the terms and
conditions specified in this Warrant Certificate and in the Warrant Agreement
and the Warrant Registration Rights Agreement referred to herein and surrenders
this Warrant Certificate and all right, title and interest therein to and
directs that the Preferred Stock, par value $0.01, of KNOLOGY, Inc. (the
"Preferred Stock") deliverable upon the exercise of such Warrants be registered
or placed in the name and at the address specified below and delivered thereto.
[THE FOLLOWING PROVISION TO BE INCLUDED ONLY
ON OFFSHORE CERTIFICATED WARRANTS]
The undersigned certifies that:
Check One
o (a) (i) it is not a U.S. person (as defined in Rule
902 of Regulation S under the U.S. Securities Act of
1933, as amended) and the Warrants are not being
exercised on behalf of a U.S. person.
or
o (ii) it is furnishing to the Warrant Agent a written
opinion of counsel to the effect that the Warrants and
the Preferred Stock issuable upon exercise of the
Warrants have been registered under the U.S.
Securities Act of 1933, as amended, or are exempt from
registration thereunder.
A-7
<PAGE> 57
and (b) if an opinion is not being furnished, the undersigned is located outside
the United States at the time of the exercise hereof.
Dated: --------------------------------
(Signature of Owner)
--------------------------------
(Street Address)
--------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
--------------------------------
Securities and/or check or other property to be issued or delivered to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
A-8
<PAGE> 58
FORM OF CERTIFICATE FOR REPURCHASE OFFER
(To be executed only upon repurchase
of Warrant by KNOLOGY, Inc.)
To:
The undersigned, having received prior notice of the
consideration for which KNOLOGY, INC. will repurchase the Warrants represented
by the within Warrant Certificate, hereby surrenders this Warrant Certificate
for repurchase by KNOLOGY, INC. of the number of Warrants specified below for
the consideration set forth in such notice.
Dated:
-----------------------------
(Number of Warrants)
-----------------------------
(Signature of Owner)
-----------------------------
(Street Address)
-----------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
-----------------------------
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
A-9
<PAGE> 59
FORM OF ASSIGNMENT
In consideration of monies or other valuable consideration
received from the Assignee(s) named below, the undersigned registered Holder of
this Warrant Certificate hereby sells, assigns, and transfers unto the
Assignee(s) named below (including the undersigned with respect to any Warrants
constituting a part of the Warrants evidenced by this Warrant Certificate not
being assigned hereby) all of the right of the undersigned under this Warrant
Certificate, with respect to the number of Warrants set forth below:
Name(s) of Assignee(s):
---------------------------------------
Address:
------------------------------------------------------
No. of Warrants:
----------------------------------------------
Please insert social security or other identifying number of assignee(s):
and does hereby irrevocably constitute and appoint ________________________ the
undersigned's attorney to make such transfer on the books of __________________
maintained for the purposes, with full power of substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES EXCEPT UNLEGENDED
REGULATION S GLOBAL WARRANTS AND UNLEGENDED OFFSHORE CERTIFICATED WARRANTS]
In connection with any transfer of Warrants, the undersigned
confirms that without utilizing any general solicitation or general advertising
that:
Check One
(a) these Warrants are being transferred in compliance with the
exemption from registration under the U.S. Securities Act of 1933,
as amended, provided by Rule 144A thereunder.
or
(b) these Warrants are being transferred other than in accordance with
(a) above and documents are being furnished which comply with the
conditions of transfer set forth in this Warrant Certificate and
the Warrant Agreement.
or
(c) these Warrants are being transferred pursuant to an effective
registration statement under the U.S. Securities Act of 1933, as
amended.
A-10
<PAGE> 60
If none of the foregoing boxes is checked, the Warrant Agent shall not be
obligated to register the Warrants in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Article VIII of the Warrant Agreement shall
have been satisfied.
Dated:
--------------------------------
(Signature of Owner)
--------------------------------
(Street Address)
--------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
--------------------------------
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
the Warrant(s) for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the U.S.
Securities Act of 1933, as amended, and is aware that the sale to it is being
made in reliance on Rule 144A and acknowledges that it has received such
information regarding KNOLOGY, Inc. as the undersigned has requested pursuant to
Rule 144A or has determined not to request such information and that it is aware
that the transferor is relying upon the undersigned's foregoing representations
in order to claim the exemption from registration provided by Rule 144A.
Dated:
--------------------
-----------------------------------------------
[NOTE: To be executed by an executive officer]
A-11
<PAGE> 61
EXHIBIT B
Form of Certificate to be Delivered
in Connection with
Transfers Pursuant to Regulation S
[Date]
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attention:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
Re: Warrants (the "Warrants") to Purchase
Preferred Stock of KNOLOGY, Inc. (the "Company")
Ladies and Gentlemen:
In connection with our proposed sale of _______________ Warrants,
we hereby certify that such sale has been effected pursuant to and in accordance
with Regulation S under the U.S. Securities Act of 1933, as amended (the
"Securities Act"), and, accordingly, we represent that:
(1) the offer of the Warrants was not made to a person in the
United States and not to a U.S. Person (as defined in Regulation S
under the Securities Act);
(2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United
States;
(3) no directed selling efforts (as such term is defined in Rule
902(b) of Regulation S under the Securities Act) have been made by
us, any of our affiliates or any persons acting on our behalf in
the United States in contravention of the requirements of Rule
903(b) or Rule 904(b) of Regulation S under the Securities Act, as
applicable; and
B-1
<PAGE> 62
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
--------------------------
Authorized Signature
B-2
<PAGE> 63
EXHIBIT C-1
Form of Certificate to be
Delivered by Transferor in Connection with
Transfers to Institutional Accredited Investors
[Date]
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attention:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
Re: Warrants (the "Warrants") to Purchase
Preferred Stock of KNOLOGY, Inc. (the "Company")
Ladies and Gentlemen:
We hereby certify that such transfer is being effected in
compliance with the transfer restrictions applicable to the Warrants or
interests therein transferred pursuant to and in accordance with the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and accordingly we
hereby further certify that (check one):
(a) such transfer is being effected pursuant to and in
accordance with Rule 144 under the Securities Act;
or
(b) such transfer is being effected to the Company or a
subsidiary thereof;
or
(c) such transfer is being effected pursuant to an effective
registration statement under the Securities Act;
or
C1-1
<PAGE> 64
(d) such transfer is being effected pursuant to an exemption
from the registration requirements of the Securities Act other than Rule 144A,
Rule 144 or Rule 904 thereunder, and we hereby further certify that such
transfer complies with the transfer restrictions applicable to the Warrants or
interests therein transferred to Institutional Accredited Investors and in
accordance with the requirements of the exemption claimed, which certification
is supported by an Opinion of Counsel provided by us or the transferee (a copy
of which we have attached to this certification), to the effect that such
transfer is in compliance with the Securities Act. Upon consummation of the
proposed transfer in accordance with the terms of the Warrant Agreement, the
transferred Warrants or interests therein will be subject to the restrictions on
transfer enumerated in the Private Placement Legend printed on the IAI
Certificated Warrant and in the Warrant Agreement and the Securities Act.
Very truly yours,
[Name of Transferor]
By:
---------------------------
Authorized
Signatory
C1-2
<PAGE> 65
EXHIBIT C-2
Form of Certificate to be
Delivered By Transferees in Connection with
Transfers to Institutional Accredited Investors
[Date]
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attention:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
Re: Warrants (the "Warrants") to Purchase
Preferred Stock of KNOLOGY, Inc. (the "Company")
Dear Sirs:
In connection with our proposed purchase of ___________
aggregate number of Warrants, we confirm that:
1. We understand that any subsequent transfer of the Warrants,
any interest therein or the Preferred Stock (or other securities)
issuable upon exercise of any Warrant (the "Warrant Shares") is subject
to certain restrictions and conditions set forth in the Warrant
Agreement dated as of November ___, 1999 relating to the Warrants (the
"Warrant Agreement") and the Warrant Registration Rights Agreement dated
November ___, 1999 relating to the Warrants (the "Warrant Registration
Rights Agreement") and the undersigned agrees to be bound by, and not to
resell, pledge or otherwise transfer the Warrants or Warrant Shares
except in compliance with, such restrictions and conditions and the U.S.
Securities Act of 1933, as amended (the "Securities Act").
2. We understand that the Warrants represented by this Warrant
Certificate and, as of the date this Warrant Certificate was originally
issued, the Warrant Shares have not been registered under the Securities
Act, and accordingly may not be offered, sold, pledged or otherwise
transferred within the United States or to, or for the account or
benefit of, U.S. Persons except as
C2-1
<PAGE> 66
set forth in the following sentence. We agree that we will not, within
the time period referred to under Rule 144(k) of the Securities Act
(taking into account the provisions of Rule 144(d) under the Securities
Act, if applicable) under the Securities Act as in effect on the date of
the transfer of this Warrant, resell or otherwise transfer the Warrants
represented by this Warrant Certificate except (a) to KNOLOGY, Inc. or
any subsidiary thereof, (b) to a qualified institutional buyer in
compliance with Rule 144A under the Securities Act, (c) outside the
United States in an offshore transaction in compliance with Rule 904
under the Securities Act, (d) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if
available), (e) to an institutional accredited investor that, prior to
such transfer, furnishes to you, to the Company and, in the case of the
Warrant Shares, to the transfer agent and registrar therefor, a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Warrants represented by this Warrant
Certificate (the form of which letter can be obtained from the Warrant
Agent) and an opinion of counsel acceptable to the Company and its
counsel that such transfer is in compliance with the Securities Act or
(f) pursuant to an effective registration statement under the Securities
Act and, in each case, in accordance with applicable state securities
laws.
3. We understand that, on any proposed resale of any Warrants,
any interest therein or Warrant Shares, we will be required to furnish
to you and the Company such certifications, legal opinions and other
information as you and the Company may reasonably require to confirm
that the proposed sale complies with the foregoing restrictions. We
further understand that the Warrants purchased by us will bear a legend
to the foregoing effect.
4. We are an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act) and have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our
investment in the Warrants, and we and any accounts for which we are
acting are each able to bear the economic risk of our or its investment
for an indefinite period of time.
5. We are acquiring the Warrants purchased by us for our own
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
C2-2
<PAGE> 67
You, the Company and, if applicable, the transfer agent and
registrar for the Warrant Shares are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By:
-------------------------------
Authorized
Signature
C2-3
<PAGE> 68
EXHIBIT D
Form of Certificate
[Date]
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attention:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
Attention: Corporate Trust Department
Re: Warrants (the "Warrants") to Purchase
Preferred Stock of KNOLOGY, Inc. (the "Company")
Dear Sirs:
This letter relates to __________ Warrants (the "Legended Warrants")
represented by a Warrant Certificate which bears a legend outlining restrictions
upon transfer of such Legended Warrants. Pursuant to Section 2.1 of the Warrant
Agreement dated as of November ___, 1999 (the "Warrant Agreement") relating to
the Warrants, we hereby certify that we are (or we will hold such securities on
behalf of) a person outside the United States to whom the Warrants could be
transferred in accordance with Rule 904 of Regulation S promulgated under the
U.S. Securities Act of 1933, as amended. Accordingly, you are hereby requested
to exchange the legended certificate for an unlegended certificate representing
an identical number of Warrants, all in the manner provided for in the Warrant
Agreement.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
------------------------
Authorized Signature
D-1
<PAGE> 69
APPENDIX A
LIST OF FINANCIAL EXPERTS
Alex. Brown & Sons
Bear, Stearns & Co., Inc.
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Lazard Freres & Co.
Lehman Brothers
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Prudential Securities Inc.
Salomon Brothers Inc
Smith Barney Inc.
<PAGE> 1
EXHIBIT 10.66
- --------------------------------------------------------------------------------
WARRANT REGISTRATION RIGHTS AGREEMENT
between
KNOLOGY, INC.
and
UNITED STATES TRUST COMPANY
OF NEW YORK,
as Warrant Agent
Dated as of December 3, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
WARRANT REGISTRATION RIGHTS AGREEMENT
WARRANT REGISTRATION RIGHTS AGREEMENT, dated as of December 3, 1999 (this
"Agreement"), between KNOLOGY Inc., a Delaware corporation (the "Company"), and
United States Trust Company of New York, as warrant agent (in such capacity, the
"Warrant Agent").
KNOLOGY HOLDINGS, INC., a Delaware corporation ("KHI") issued and sold a
total of 444,100 units (the "KHI Units") each of which consisted of one 11-7/8%
Senior Discount Note due 2007 of KHI (each a "KHI Note") issued pursuant to the
provisions of an Indenture dated as of October 22, 1997 (the "Indenture")
between KHI, as issuer, and United States Trust Company of New York, as trustee,
and one warrant (each, a "KHI Warrant"), each KHI Warrant initially entitling
the holder thereof to purchase .003734 shares of KHI Preferred Stock, par value
$.01 per share ("KHI Preferred Stock"), of KHI at an exercise price of $.01 per
share, of which 373,050 KHI Units were purchased by the Placement Agents and
71,050 KHI Units were purchased by SCANA Communications, Inc.
Pursuant to the terms of a Placement Agreement dated October 16, 1997 (the
"Placement Agreement"), among KHI and Morgan Stanley & Co. Incorporated, J.P.
Morgan Securities Inc. and First Union Capital Markets Corp., as placement
agents (the "Placement Agents"), KHI issued and sold to the Placement Agents an
aggregate of 373,050 KHI Warrants as part of 373,050 KHI Units.
The KHI Note and the KHI Warrant included in each Unit became separately
transferable in February 1998, upon the commencement of an exchange offer with
respect to the KHI Notes; and
As part of a reorganization (the "Reorganization") in which the Company
will become (either directly or indirectly) the parent company of KHI and four
other corporations referred to as the TELCOs, the Company has made an offer to
the KHI stockholders and warrant holders (including holders of the KHI Warrants)
to exchange their KHI securities for securities of the Company, as described
more fully in a Confidential Information Statement of the Company dated November
3, 1999.
In the Reorganization the Company has offered to exchange 600 shares of
Preferred Stock (as defined below) for each share of KHI Preferred Stock, and
based on the same exchange ratio has offered to issue Warrants (as defined
below), each Warrant initially entitling the holder to purchase 2.2404 shares of
Preferred Stock at an exercise price of $.01 per share, in exchange for the KHI
Warrants;
In consideration of the foregoing and of the mutual agreements contained
herein and in the Placement Agreement, the Company and the Warrant Agent hereby
agree as follows:
<PAGE> 3
1. Definitions.
As used in this Agreement, the following capitalized defined terms shall
have the following meanings:
"Auditors" means, at any time, the independent auditors of the Company at
such time.
"Board" means the board of directors of the Company from time to time.
"Closing Date" means the date hereof.
"Comfort Letter" has the meaning specified in Section 3 hereof.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $0.01 per share, of the
Company.
"Company" has the meaning specified in the preamble to this Agreement.
"Company Shares" has the meaning specified in Section 2 hereof.
"Cutback Notice" has the meaning specified in Section 2 hereof.
"Expiration Date" means the second anniversary of the Closing Date.
"Holders" means the record holders of the Warrants and the holders of
Warrant Shares.
"Includible Secondary Shares" has the meaning specified in Section 2
hereof.
"Indenture" has the meaning specified in the recitals to this Agreement.
"managing underwriter" has the meaning specified in Section 2 hereof.
"Notes" has the meaning specified in the recitals to this Agreement.
"Opinion" has the meaning specified in Section 3 hereof.
"Other Shares" has the meaning specified in Section 2 hereof.
"Piggy-back Registration Rights" has the meaning specified in Section 2
hereof.
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<PAGE> 4
"Preferred Stock" means the Series A Preferred Stock, par value $0.01 per
share, of the Company and any other capital stock of the Company into which such
Preferred Stock may be converted, or reclassified or that may be issued in
respect of, in exchange for or in substitution of, such Preferred Stock by
reason of any stock splits, stock dividends, distributions, mergers,
consolidations or other like events.
"Registration Statement" has the meaning specified in Section 2 hereof.
"Resale Shelf" has the meaning specified in Section 3 hereof.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Shelf Expiration Date" has the meaning specified in Section 3 hereof.
"Underlying Securities" means the Preferred Stock issuable upon exercise of
the Warrants or such other securities as shall be issuable upon the exercise of
the Warrants, pursuant to the Warrant Agreement.
"Warrant" has the meaning specified in the recitals to this Agreement.
"Warrant Agent" has the meaning specified in the preamble to this
Agreement.
"Warrant Agreement" means the Warrant Agreement dated as of the Closing
Date between the Company and the Warrant Agent.
"Warrant Registration Statement" has the meaning specified in Section 3
hereof.
"Warrant Shares" means the Preferred Stock (or other securities issued or
issuable upon exercise of the Warrants) and shall include any capital stock
issuable upon conversion of the Preferred Stock (or such other securities).
2. Piggy-Back Registration Rights.
(a) If the Company proposes to file a registration statement with the
Commission with respect to an offering of any shares of Preferred Stock (or
other securities issuable upon exercise of the Warrants) (or any capital stock
issuable upon conversion of the Preferred Stock (or such other securities)) for
cash (other than an offering registered solely on Form S-4 or S-8 or any
successor form thereto and other than the initial public offering 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 (or such other
securities) if no shareholder of the Company offers securities for sale pursuant
to such registration statement), the Company shall give
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<PAGE> 5
prompt written notice to all the Holders of Warrants and Warrant Shares, at
least 30 days prior to the initial filing of the registration statement relating
to such offering (the "Registration Statement"). Each such Holder shall have the
right, within 20 days after delivery of such notice, to request in writing that
the Company include all or a portion of such Holder's Warrant Shares in each
case to the extent that such Preferred Stock (or other securities) would be
(upon issuance) or are, as the case may be, subject to restrictions on transfer,
in such Registration Statement ("Piggy-back Registration Rights"). The Company
shall include in the public offering all of the Warrant Shares that a Holder has
requested be included, unless the underwriter for the public offering or the
underwriter managing the public offering (in either case, the "managing
underwriter") delivers a notice (a "Cutback Notice") pursuant to Section 2(b) or
2(c) hereof. The managing underwriter may deliver one or more Cutback Notices at
any time prior to the execution of the underwriting agreement for the public
offering.
(b) If a proposed public offering includes both securities to be offered
for the account of the Company ("Company Shares") and shares to be sold by
shareholders, the provisions of this Section 2(b) shall be applicable if the
managing underwriter delivers a Cutback Notice stating that, in its opinion, the
number of shares (other than Warrant Shares to be sold by the Holders) that
selling shareholders propose to sell therein, whether or not such selling
shareholders have the right to include shares therein (the "Other Shares"), plus
the number of Warrant Shares that the Holders have requested to be sold therein,
plus the Company Shares, exceeds the maximum number of shares specified by the
managing underwriter in such Cutback Notice that may be distributed without
adversely affecting the price, timing or distribution of the Company Shares.
Such maximum number of shares that may be so sold, excluding the Company Shares,
are referred to as the "Includible Shares."
If the managing underwriter delivers such Cutback Notice, the Company shall
be entitled to include all of the Company Shares in the public offering and each
requesting Holder shall be entitled to include in the public offering up to its
pro rata portion of the Includible Shares and in priority to the inclusion of
any Other Shares that are proposed to be sold in such public offering. No
shareholder that proposes to sell Other Shares in the proposed initial public
offering may sell any such shares therein unless all Warrant Shares requested by
the Holders to be sold therein are so included.
(c) If a proposed public offering is entirely a secondary offering, the
provisions of this Section 2(c) shall be applicable if the managing underwriter
delivers a Cutback Notice stating that, in its opinion, the aggregate number of
Warrant Shares and Other Shares proposed to be sold therein exceeds the maximum
number of shares (the "Includible Secondary Shares") specified by the managing
underwriter in such Cutback Notice that may be distributed without adversely
affecting the price, timing or distribution of the shares being distributed. If
the managing underwriter delivers such Cutback Notice, each requesting Holder
shall be entitled to include in the public offering up to its pro rata portion
of the Includible Secondary Shares and in priority to the inclusion of any Other
Shares that are proposed to be sold in such public offering.
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<PAGE> 6
No shareholder that proposes to sell Other Shares in such public offering may
sell any such shares therein unless all Warrant Shares requested by the Holders
to be sold therein are so included.
(d) The underwriting agreement for such public offering shall provide that
each requesting Holder shall have the right to sell its Warrant Shares (other
than Warrant Shares excluded from such public offering pursuant to a Cutback
Notice and the terms of Sections 2(b) and 2(c)) to the underwriters and that the
underwriters shall purchase the Warrant Shares at the price paid by the
underwriters for the Preferred Stock (or other securities) sold by the Company
and/or other selling shareholders, as the case may be, (less in the case of
unexercised Warrants, the exercise price).
3. Shelf Registration.
(a) If only the Company sells stock in an initial public offering or all of
the Warrant Shares have not been sold in a public offering, the Company shall
use its best efforts to cause to be filed pursuant to Rule 415 under the
Securities Act a shelf registration statement on the appropriate form (the
"Warrant Registration Statement") covering the issuance of the Warrant Shares
upon exercise of the Warrants and shall use its best efforts to cause the
Warrant Registration Statement to become effective under the Securities Act
within 180 days after the closing date of the Company's initial public offering
(except as provided in Section 4 below); provided, however, that if the
Commission shall request that the Company register the resale of the Warrant
Shares instead of the issuance thereof, the Warrant Registration Statement shall
register such resale as opposed to such issuance. The Company shall use
reasonable efforts to keep the Warrant Registration Statement continuously
effective until such time as all Warrants have been exercised, or in the event
the Company registers the resale of the Warrant Shares, such time as all Warrant
Shares have been resold (the "Shelf Expiration Date"). Prior to filing the
Warrant Registration Statement or any amendment thereto, the Company shall
provide a copy thereof to the Placement Agents and their counsel and afford them
a reasonable time to comment thereon.
(b) If the Warrant Registration Statement shall register the resale of the
Warrant Shares (a "Resale Shelf") as provided in the proviso to the first
sentence of Section 3(a) above, the Company agrees to:
(i) make available for inspection by a representative of the Holders, any
underwriter participating in any disposition pursuant to such Resale Shelf and
attorneys and accountants designated by the Holders, at reasonable times and in
a reasonable manner, financial and other records, documents and properties of
the Company that are pertinent to the conduct of due diligence customary for an
underwritten offering, and cause the officers, directors and employees of the
Company to supply all information reasonably requested by any such
representative, underwriter, attorney or accountant in connection with a Resale
Shelf; provided, however, that such persons shall first agree in writing with
the Company to use such information only in connection with the transaction for
which such information was
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<PAGE> 7
obtained and that any information that is reasonably and in good faith
designated by the Company in writing as confidential at the time of delivery of
such information shall be kept confidential by such persons, unless and to the
extent that disclosure of such information is required by law or such
information becomes generally available to the public other than as a result of
a disclosure or failure to safeguard such information by such person;
(ii) use its best efforts to cause all Warrant Shares sold under a Resale
Shelf to be listed on any securities exchange or any automated quotation system
on which similar securities issued by the Company are then listed if requested
by the Holders of Warrant Shares representing a majority of the Warrants
originally issued, to the extent such Warrant Shares satisfy applicable listing
requirements;
(iii) provide a reasonable number of copies of the prospectus included in
such Resale Shelf to Holders that are selling Warrant Shares pursuant to such
Resale Shelf;
(iv) cause to be provided to the Warrant Agent, on behalf of the Holders
and beneficial owners of Warrant Shares, upon the effectiveness of such Resale
Shelf, a customary "10b-5" opinion of independent counsel (an "Opinion") and a
customary "cold comfort" letter of independent auditors (a "Comfort Letter");
(v) in connection with any underwritten offering, cause to be provided to
the Warrant Agent, on behalf of the Holders and beneficial owners of Warrant
Shares an Opinion and Comfort Letter with respect to each Form 10-K and Form
10-Q, including any amendments thereto, that is incorporated by reference in
such Resale Shelf upon the initial filing with the Commission of such documents;
and
(vi) notify the Warrant Agent, for distribution to the Holders, (A) when
the Resale Shelf has become effective and when any post-effective amendment
thereto has been filed and becomes effective, (B) of any request by the
Commission or any state securities authority for amendments and supplements to
the Resale Shelf or of any material request by the Commission or any state
securities authority for additional information after the Resale Shelf has
become effective, (C) of the issuance by the Commission or any state securities
authority of any stop order suspending the effectiveness of the Resale Shelf or
the initiation of any proceedings for that purpose, (D) if, between the
effective date of the Resale Shelf and the closing of any sale of Warrant Shares
covered thereby, the representations and warranties of the Company contained in
any underwriting agreement, securities sales agreement or other similar
agreement, including this Agreement, relating to disclosure cease to be true and
correct in all material respects or if the Company receives any notification
with respect to the suspension of the qualification of the Warrant Shares for
sale in any jurisdiction or the initiation of any proceeding for such purpose,
(E) of the happening of any event during the period the Resale Shelf is
effective such that such Resale Shelf or the related prospectus contains an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make statements therein not
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<PAGE> 8
misleading and (F) of any determination by the Company that a post-effective
amendment to a Registration Statement would be appropriate. The Holders hereby
agree to suspend use of the prospectus contained in a Resale Shelf upon receipt
of such notice under clause (C) (but only to the extent of the issuance of any
stop order), (E) or (F) above until, in the case of clause (C) above, such stop
order is removed or rescinded, or, in the case of clause (E) and (F) above, the
Company has amended or supplemented such prospectus to correct such misstatement
or omission.
4. Suspension.
Notwithstanding the foregoing, during any consecutive 365-day period, the
Company shall have the privilege to suspend availability of the Warrant
Registration Statement (or its obligations to file the Warrant Registration
Statement or cause it to become effective, as applicable) and the related
prospectus for up to 60 days, except during the 60 days immediately prior to the
Expiration Date, if the Board determines in good faith that there is a valid
purpose for such suspension and provides notice of such determination (but not
the purpose) to the Holders at their addresses appearing in the register of
Warrants maintained by the Warrant Agent.
5. Blue Sky.
The Company shall use its reasonable best efforts to register or qualify
the Underlying Securities proposed to be sold or issued pursuant to the
Registration Statement or the Warrant Registration Statement under all
applicable securities or "blue sky" laws of all jurisdictions in the United
States in which any Holder of Warrants may or may be deemed to purchase
Underlying Securities upon the exercise of Warrants or resale of the Warrant
Shares, as the case may be, and shall use its reasonable best efforts to
maintain such registration or qualification through the earliest of (A) in the
case of the Registration Statement, the date upon which all of the Warrant
Shares have been sold or such other date as shall be required by applicable law,
(B) the date upon which all Warrants have been exercised or all Warrant Shares
have been resold, as the case may be, under the Warrant Shelf Registration
Statement and (C) the Expiration Date; provided, however, that the Company shall
not be required to (i) qualify as a foreign corporation or as a broker or a
dealer in securities in any jurisdiction where it would not otherwise be
required to qualify but for this Section 5, (ii) file any general consent to
service of process or (iii) subject itself to taxation in any jurisdiction if it
is not otherwise so subject.
6. Accuracy of Disclosure.
The Company (and its successors) represents and warrants to each Holder
(and each beneficial owner of a Warrant or Warrant Share) and agrees for the
benefit of each Holder (and each beneficial owner of a Warrant or Warrant Share)
that, except during any period in which the availability of the Warrant
Registration Statement has been suspended, (i) the Warrant Registration
Statement and the documents incorporated by reference therein will not contain
any untrue statement of a material
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<PAGE> 9
fact or omit to state a material fact necessary to make the statements therein
not misleading; and (ii) the prospectus contained in the Warrant Registration
Statement delivered to such Holder upon its exercise of Warrants or pursuant to
which such Holder sells its Warrant Shares, as the case may be, and the
documents incorporated by reference therein will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that the representations, warranties and agreements
set forth in this Section 6 do not apply to statements or omissions in the
Warrant Registration Statement or any such prospectus based upon information
relating to any Holder furnished to the Company in writing by such Holder
expressly for use therein.
7. Indemnity.
The Company hereby agrees to indemnify each beneficial owner of a Warrant
and each person, if any, who controls any beneficial owner of a Warrant within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act"), or is under common control
with, or is controlled by, any beneficial owner of a Warrant (whether or not it
is, at the time the indemnity provided for in this Section 7 is sought, such a
beneficial owner), from and against all losses, damages or liabilities which
such beneficial owner or any such controlling or affiliated person suffers as a
result of any breach, on the date of any exercise of a Warrant by such
beneficial owner or the resale of any Warrant Share by such Holder, in either
case pursuant to the Warrant Registration Statement, of the representations,
warranties or agreements contained in Section 6. Each beneficial owner of a
Warrant Share sold pursuant to a Resale Shelf, by accepting its beneficial
ownership of a Warrant, hereby (i) agrees to provide the Company with
information with respect to it that the Company reasonably requests in
connection with any Resale Shelf and (ii) agrees, severally and not jointly, to
indemnify the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act against any liability incurred by it or
such controlling person as a result of any misstatement of information provided
by such beneficial owner to the Company in writing expressly for inclusion in
the Resale Shelf.
8. Expenses.
All expenses incident to the Company's performance of or compliance with
its obligations under this Agreement will be borne by the Company, regardless of
whether a Registration Statement or Warrant Registration Statement becomes
effective, including without limitation (i) all Commission or National
Association of Securities Dealers, Inc. registration and filing fees, (ii) all
reasonable fees and expenses incurred in connection with compliance with state
securities or "blue sky" laws, (iii) all reasonable expenses of any persons
incurred by or on behalf of the Company in preparing or assisting in preparing,
word processing, printing and distributing any registration statement, any
prospectus, any amendments or supplements thereto and
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<PAGE> 10
other documents relating to the performance of and compliance with this
Agreement, (iv) the reasonable fees (including legal fees and expenses) and
disbursements of the Warrant Agent, (v) the reasonable fees and disbursements of
counsel for the Company and (vi) the fees and disbursements, if any, of the
Auditors but excluding any fees, expenses and disbursements of the Holders (not
included above), including, without limitation, (x) fees and disbursements of
counsel retained by the participating Holders and (y) the Holders' share of
underwriting discounts and commissions.
9. Resale Shelf Registration Statement
In the event that, after an initial public offering of Preferred Stock (or
other securities), any of the Placement Agents, or any successors thereto, in
its reasonable opinion, becomes an Affiliate (as such term is defined in Rule
144 under the Securities Act) of the Company, or any successor thereto, the
Company (or its successor) shall use its best efforts to cause to be filed as
soon as practicable after receiving notice thereof from the Placement Agents (or
its successor) a shelf registration statement (the "Resales Registration
Statement") under the Securities Act providing for the resale by the Placement
Agents (or its successor) of all Warrants and Preferred Stock (or other
securities) it acquires from time to time in connection with market-making
activities and to have such shelf registration statement declared effective by
the Commission. The provisions of this Agreement concerning the Warrant
Registration Statement shall apply to the Resales Registration Statement as if
such Resales Registration Statement were the Warrant Registration Statement
(except that the Company (or its successor) will use its best efforts to keep
the Resales Registration Statement effective until the earlier of (i) the tenth
anniversary of the Closing Date and (ii) such time as the relevant Placement
Agent shall, in its opinion, cease to be an Affiliate of the Company, as
evidenced by written notice sent promptly upon such event).
10. Miscellaneous.
(a) No Inconsistent Agreements. Each of the Company and the Warrant Agent
represent to the other that it has not entered into, and agrees that on or after
the date of this Agreement it will not enter into, any agreement which is
inconsistent with the rights granted to the Holders of Warrants or Warrant
Shares in this Agreement or otherwise conflicts with the provisions hereof. The
Company represents that the rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's other issued and outstanding securities under any
agreements.
(b) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company and the Warrant Agent have obtained the written consent of
Holders of at least a majority of the outstanding Warrants affected by such
amendment, modification, supplement, waiver or consent; provided that any
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<PAGE> 11
amendment, modification or supplement to this Agreement which, in the good faith
opinion of the Board of Directors of the Company (and evidenced by a resolution
of such board), does not adversely affect any Holder, shall not be subject to
such requirement for written consent.
(c) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if
to a Holder, at the most current address given by such Holder to the Company by
means of a notice given in accordance with the provisions of this Section 10(c);
(ii) if to the Company, initially at the Company's address set forth in the
Warrant Agreement and thereafter at such other address, notice of which is given
in accordance with the provisions of this Section 10(c); and (iii) if to the
Warrant Agent, initially at the Warrant Agent address set forth in the Warrant
Agreement and thereafter at such other address, notice of which is given in
accordance with the provisions of this Section 10(c).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation, subsequent Holders; provided that
nothing herein shall be deemed to permit any assignment, transfer or other
disposition of Warrants in violation of the terms of the Placement Agreement,
the Warrant Agreement or applicable law. If any transferee of any Holder shall
acquire Warrants, in any manner, whether by operation of law or otherwise, such
Warrants shall be held subject to all of the terms of this Agreement and the
Warrant Agreement, and by taking and holding such Warrants such person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement or the Warrant Agreement and such person
shall be entitled to receive the benefits hereof.
(e) Purchases and Sales of Warrants. The Company shall not, and shall use
its best efforts to cause its affiliates (as defined in Rule 405 under the
Securities Act) not to, purchase and then resell or otherwise transfer any
Warrants other than Warrants acquired and cancelled.
(f) Third Party Beneficiary. The Holders shall be third party beneficiaries
to the agreements made hereunder between the Company and the Warrant Agent, and
each Holder shall have the right to enforce such agreements directly to the
extent it deems such enforcement necessary or advisable to protect its rights or
the rights of Holders hereunder. Notwithstanding anything to the contrary
contained herein, the Placement Agents will be a third party beneficiary to the
agreements between the Company and the Warrant Agent contained in Section 9
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<PAGE> 12
hereof, such section shall not be amended, modified or supplemented without the
prior written consent of the Placement Agents and the Company's obligations
under Section 9 will survive the termination of this Agreement and the
performance of all other obligations under this Agreement.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. This Agreement shall be governed by the laws of the
State of New York.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Waiver of Immunity. To the extent that the Company has or hereafter may
acquire any immunity from jurisdiction of any court or from any legal process
(whether through service of notice, attachment prior to judgment, attachment in
aid of execution, execution or otherwise) with respect to itself or its
property, it hereby irrevocably waives such immunity in respect of its
obligations under this Agreement to the fullest extent permitted by law.
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<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
KNOLOGY, INC.
By Robert K. Mills
--------------------------------------------
Name: Robert K. Mills
Title: Chief Financial Officer
UNITED STATES TRUST COMPANY
OF NEW YORK
By Lou Young
--------------------------------------------
Name: Lou Young
Title:
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<PAGE> 1
EXHIBIT 10.67
SECTION 351 AGREEMENT
AMONG
KNOLOGY, INC.,
INTERCALL, INC.,
VALLEY TELEPHONE COMPANY, INC.,
AND GLOBE TELECOMMUNICATIONS, INC.
Dated as of November 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PRELIMINARY STATEMENT..............................................................1
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STATEMENT OF AGREEMENT.............................................................2
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1. DEFINITIONS................................................................2
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2. THE COMPANY TRANSFER.......................................................4
--------------------
2.1 Transfer of Equity Interests and KNOLOGY Holdings Note.........4
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2.2 Method of Transfer.............................................4
------------------
2.3 Issuance of Stock..............................................5
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3. THE GLOBE TRANSFER.........................................................5
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3.1 Transfer of ITC Globe Shares...................................5
----------------------------
3.2 Method of Transfer.............................................5
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4. THE VALLEY TRANSFER........................................................5
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4.1 Transfer of KNOLOGY Holdings Shares............................5
-----------------------------------
4.2 Method of Transfer.............................................5
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5. CLOSING....................................................................5
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5.1 Closing Date...................................................5
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5.2 Transactions at Closing........................................6
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5.3 Documentation..................................................7
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5.4 Transactions Subsequent to the Closing.........................7
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5.4.1 Books and Records..................................7
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5.4.2 Miscellaneous......................................7
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5.5 Other Actions..................................................7
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6. REPRESENTATIONS AND WARRANTIES BY INTERCALL................................7
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</TABLE>
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<TABLE>
<S> <C>
6.1 Organization and Good Standing of InterCall....................7
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6.2 Authority of InterCall.........................................8
----------------------
6.3 Consents.......................................................8
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6.4 Litigation.....................................................8
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6.5 Equity Interests, ClearSource Stock, ClearSource
------------------------------------------------
Subscription Funds and KNOLOGY Holdings Note...................8
--------------------------------------------
6.6 Accredited Investor Status.....................................9
--------------------------
6.7 Representations and Warranties at the Closing..................9
---------------------------------------------
7. REPRESENTATIONS AND WARRANTIES BY THE COMPANY..............................9
---------------------------------------------
7.1 Organization and Good Standing of the Company..................9
---------------------------------------------
7.2 Authority of the Company.......................................9
------------------------
7.3 Consents.......................................................10
--------
7.4 Litigation.....................................................10
----------
7.5 Capitalization.................................................10
--------------
7.6 Accredited Investor Status.....................................10
--------------------------
7.7 Representations and Warranties at the Closing..................10
---------------------------------------------
8. REPRESENTATIONS AND WARRANTIES BY VALLEY AND GLOBE TELECOM.................10
----------------------------------------------------------
8.1 Organization and Good Standing of Valley and Globe Telecom.....11
----------------------------------------------------------
8.2 Authority of Valley and Globe Telecom..........................11
-------------------------------------
8.3 Consents.......................................................11
--------
8.4 Litigation.....................................................11
----------
8.6 Representations and Warranties at the Closing..................12
---------------------------------------------
9. CONDITIONS PRECEDENT TO THE CLOSING OBLIGATIONS OF ALL PARTIES.............12
--------------------------------------------------------------
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
9.1 Representations and Warranties.................................12
------------------------------
9.2 Performance of this Agreement..................................12
-----------------------------
9.3 Litigation Affecting Closing...................................12
----------------------------
9.4 Approval and Consents..........................................12
---------------------
9.5 Stock Authorizations...........................................12
--------------------
9.6 Good Faith.....................................................13
----------
10. COST AND EXPENSES..........................................................13
-----------------
11. CONDUCT OF THE PARTIES PENDING THE CLOSING.................................13
------------------------------------------
11.1. Corporate Documents............................................13
-------------------
11.2 Capitalization, etc............................................13
-------------------
11.3 Conduct of Business............................................13
-------------------
11.4 Merger, etc....................................................13
-----------
11.5 Equity Interests...............................................13
----------------
12. SURVIVAL...................................................................13
--------
13. MISCELLANEOUS..............................................................14
-------------
13.1 Entire Agreement...............................................14
----------------
13.2 No Waiver......................................................14
---------
13.3 Amendment......................................................14
---------
13.4 Notices........................................................14
-------
13.5 Severability of Provisions.....................................15
--------------------------
13.6 Successors and Assigns.........................................15
----------------------
13.7 Counterparts...................................................15
------------
13.8 Governing Law..................................................16
-------------
13.9 Further Instruments and Acts...................................16
----------------------------
13.10 Assignment.....................................................16
----------
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
13.11 Enforcement....................................................16
-----------
13.12 Termination....................................................16
-----------
</TABLE>
<PAGE> 6
SECTION 351 AGREEMENT
THIS SECTION 351 AGREEMENT (THIS "AGREEMENT") is made as of November 1,
1999, by and among KNOLOGY, Inc., a Delaware corporation (THE "Company");
InterCall, Inc., a Delaware corporation ("INTERCALL"); Valley Telephone Company,
Inc., an Alabama corporation ("VALLEY"); and Globe Telecommunications, Inc., a
Georgia corporation ("GLOBE TELECOM").
PRELIMINARY STATEMENT
This Agreement is made and entered into under the following
circumstances:
A. InterCall, a wholly-owned subsidiary of ITC Holding Company, Inc.,
a Delaware corporation ("ITC"), is engaged in the business of providing
conference calling services to businesses on both a national and international
basis, and currently provides a portion of its international conference calling
services through a wholly-owned subsidiary. InterCall is the sole stockholder of
each of the Company, Valley, Globe Telecom, Interstate Telephone Company, Inc.,
a Georgia corporation ("INTERSTATE"), and ITC Globe, Inc., a Delaware
corporation ("ITC GLOBE"), and owns approximately 85% of the outstanding shares
of capital stock of KNOLOGY Holdings, Inc., a Delaware corporation ("KNOLOGY
HOLDINGS").
B. Interstate is engaged in the business of providing local telephone
service in western Georgia and a small part of eastern Alabama. Valley is
engaged in the business of providing local telephone service in eastern Alabama.
Globe Telecom is engaged in the business of providing non-regulated services to
customers of Valley and Interstate, and offers Competitive Local Exchange
Company (CLEC) data and long-distance telephone services to business and
residences in certain areas of Georgia. ITC Globe is engaged in the business of
constructing and operating a broadband services network that provides Internet
access and analog and digital cable television service to customers in the
geographic areas now served by Interstate and Valley.
C. KNOLOGY Holdings is engaged in the business of providing broadband
services, including cable television, telephony and Internet access, to
customers in Alabama, Florida, Georgia and South Carolina through various
subsidiaries, over new and upgraded fiber and coaxial cable networks.
D. The parties desire to have the Company become a holding company
with respect to Valley, Interstate, Globe Telecom, ITC Globe and KNOLOGY
Holdings and KNOLOGY Holdings' subsidiaries by having (i) InterCall transfer its
equity ownership interests in each of Interstate, Valley, Globe Telecom, ITC
Globe and KNOLOGY Holdings (together, the "EQUITY INTERESTS") to the Company,
(ii) the Company transfer its equity ownership interest in ITC Globe to Globe
Telecom,
<PAGE> 7
and (iii) the Company transfer its equity ownership interest in KNOLOGY Holdings
to Valley, all pursuant to Section 351 of the Internal Revenue Code of 1986, as
amended (the "CODE").
E. The parties wish the Company to acquire the Equity Interests as
set forth above, plus (i) 222,832 shares of Series A Preferred Stock and 50,000
shares of Series B Preferred Stock in ClearSource, Inc. (the "CLEARSOURCE
STOCK"), (ii) $5,663,000 in cash, to be used to make subscription payments to
ClearSource (the "CLEARSOURCE SUBSCRIPTION FUNDS") and (iii) a note of KNOLOGY
Holdings in the principal amount of up to $13 million, plus accrued interest
(the "KNOLOGY HOLDINGS NOTE"). The Company has offered to issue 43,918,649
shares of Series A Preferred Stock of the Company in exchange for the transfer
by InterCall to the Company of the Equity Interests, the ClearSource Stock, the
ClearSource Subscription Funds and the KNOLOGY Holdings Note (the "COMPANY
TRANSFER").
F. Following the completion of the Company Transfer (i) the Company
proposes to transfer to Valley, as a capital contribution, the equity ownership
interests in KNOLOGY Holdings, the ClearSource Stock and the ClearSource
Subscription Funds then held by the Company (the "VALLEY Transfer"), and (ii)
the Company proposes to transfer to Globe Telecom, as a capital contribution,
the equity ownership interests in ITC Globe then held by the Company (the "GLOBE
TRANSFER"). The Company Transfer, the Valley Transfer and the Globe Transfer are
sometimes referred to herein collectively as the "CORPORATE TRANSFERS."
NOW THEREFORE, intending to be legally bound, and in consideration of
these premises and the mutual covenants hereinafter set forth, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
STATEMENT OF AGREEMENT
1. Definitions. The following terms used in this Agreement shall have
the following meanings ascribed to them:
"Agreement" shall mean this Section 351 Agreement in its entirety,
together with all documents incorporated herein by reference.
"ClearSource" shall mean ClearSource, Inc., a Delaware
corporation.
"ClearSource Stock" shall mean the 222,832 shares of Series A
Preferred Stock and 50,000 shares of Series B Preferred Stock of ClearSource
held by InterCall as of the date hereof.
2
<PAGE> 8
"ClearSource Subscription Funds" shall mean $5,663,000 in cash
held by InterCall as of the date hereof and to be contributed to the Company to
be used to make subscription payments to ClearSource.
"Closing" shall have the meaning assigned to such term in Section
6 hereto.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the Company's Common Stock, $.01 par
value.
"Company" shall mean KNOLOGY, Inc., a Delaware corporation.
"Company Transfer" shall mean the transfer by InterCall of the
Equity Interests, the ClearSource Stock, the ClearSource Subscription Funds and
the Knology Holdings Note to the Company, in exchange for the issuance of the
Series A Preferred Stock by the Company to InterCall, as described in Section 2.
"Corporate Transfers" shall mean, collectively, the Company
Transfer, the Globe Transfer and the Valley Transfer.
"Equity Interests" shall mean the equity ownership interests held
by InterCall in each of Interstate, Valley, Globe Telecom, ITC Globe and KNOLOGY
Holdings as of the date of this Agreement.
"Globe Telecom" shall mean Globe Telecommunications, Inc., a
Georgia corporation.
"Globe Transfer" shall mean the transfer by the Company of its
equity ownership interest in ITC Globe to Globe Telecom, as described in Section
3 hereto.
"InterCall" shall mean InterCall, Inc., a Delaware corporation.
"Interstate" shall mean Interstate Telephone Company, Inc., a
Georgia corporation.
"ITC" shall mean ITC Holding Company, Inc., a Delaware
corporation.
"ITC Globe" shall mean ITC Globe, Inc., a Delaware corporation.
3
<PAGE> 9
"ITC Globe Shares" shall mean all of the issued and outstanding
shares of ITC Globe, Inc.
"KNOLOGY Holdings" shall mean KNOLOGY Holdings, Inc., a Delaware
corporation.
"KNOLOGY Holdings Note" shall mean the Promissory Note dated
October 27, 1999 of KNOLOGY Holdings in the principal amount of up to $13
million plus accrued interest.
"KNOLOGY Holdings Shares" shall mean the 42,565 shares of
preferred stock of KNOLOGY Holdings, Inc. held by InterCall, Inc. as of the date
of this Agreement.
"Parties" shall mean collectively the Company, InterCall, Valley
and Globe Telecom, and "Party" shall mean any one of them.
"Series A Preferred Stock" shall mean the Company's Series A
Preferred Stock, $.01 par value.
"Valley" shall mean Valley Telephone Company, Inc., an Alabama
corporation.
"Valley Transfer" shall mean the transfer by the Company of its
equity ownership interests in KNOLOGY Holdings, the ClearSource Stock and the
ClearSource Subscription Funds to Valley, as described in Section 4 hereto.
2. The Company Transfer.
2.1 Transfer of Equity Interests, the ClearSource Stock,
ClearSource Subscription Funds and KNOLOGY Holdings Note. At the Closing, in
exchange for the issuance of the Series A Preferred Stock provided in Section
2.3, InterCall shall transfer, or cause to be transferred, to the Company, and
the Company shall acquire and accept from InterCall, all of the Equity
Interests, the ClearSource Stock, the ClearSource Subscription Funds and the
KNOLOGY Holdings Note, free and clear of liens and encumbrances. All of the
shares representing the Equity Interests shall be duly authorized, validly
issued, fully-paid and non-assessable. The ClearSource Stock and the Knology
Holdings Note shall be free and clear of liens and encumbrances.
2.2 Method of Transfer. The transfer of the Equity Interests,
the ClearSource Stock, the ClearSource Subscription Funds and the KNOLOGY
Holdings Note to the Company will be evidenced by appropriate stock certificates
and stock powers, assignments and other instruments (in recordable form as
required) executed and delivered by InterCall to the Company at the Closing, as
set forth in this Agreement.
4
<PAGE> 10
2.3 Issuance of Stock. At the Closing, in exchange for the
transfer of the Equity Interests, the ClearSource Stock, the ClearSource
Subscription Funds and the KNOLOGY Holdings Note provided in Section 2.1, the
Company shall issue to InterCall 43,918,649 shares of Series A Preferred Stock.
The shares of Series A Preferred Stock to be so issued shall be represented by
stock certificates, the denominations of which shall be designated by InterCall,
shall be duly authorized, validly issued, fully-paid and non-assessable and
shall contain such restrictive legends as the Company reasonably determines are
necessary for compliance with applicable securities laws.
3. The Globe Transfer.
3.1 Transfer of ITC Globe Shares. Immediately following the
Company Transfer described in Section 2 above, as a capital contribution to
Globe Telecom, the Company shall transfer, or cause to be transferred, to Globe
Telecom, and Globe Telecom shall acquire and accept from the Company, the ITC
Globe Shares, free and clear of liens and encumbrances. All of the ITC Globe
Shares shall be duly authorized, validly issued, fully-paid and non-assessable.
3.2 Method of Transfer. The transfer of the ITC Globe Shares to
Globe Telecom will be evidenced by appropriate stock certificates and stock
powers, assignments and other instruments (in recordable form as required)
executed and delivered by the Company to Globe Telecom at the Closing, as set
forth in this Agreement.
4. The Valley Transfer.
4.1 Transfer of KNOLOGY Holdings Shares. Immediately following
the Company Transfer described in Section 2 above, as a capital contribution to
Valley, the Company shall transfer, or cause to be transferred, to Valley, and
Valley shall acquire and accept from the Company, the KNOLOGY Holdings Shares,
the ClearSource Stock and ClearSource Subscription Funds, free and clear of
liens and encumbrances. All of the KNOLOGY Holdings Shares shall be duly
authorized, validly issued, fully-paid and non-assessable. The ClearSource Stock
shall be free and clear of liens and encumbrances.
4.2 Method of Transfer. The transfer of the KNOLOGY Holdings
Shares and the ClearSource Stock to Valley will be evidenced by appropriate
stock certificates and stock powers, assignments and other instruments (in
recordable form as required) executed and delivered by the Company to Valley at
the Closing, as set forth in this Agreement.
5. Closing.
5
<PAGE> 11
5.1 Closing Date. The closing and consummation of the Company
Transfer and related transactions provided for herein shall occur and become
effective as soon as practicable, and shall occur simultaneously with transfers
by other holders of shares of capital stock and other ownership interests of
KNOLOGY Holdings to the Company, all pursuant to Section 351 of the Code, upon
the receipt of all necessary approvals and following the execution of this
Agreement, and the closing and consummation of each of the Globe Transfer and
the Valley Transfer and related transactions provided for herein shall occur and
become effective immediately thereafter (such closings being referred to herein
collectively as the "CLOSING"); provided, however, that the Closing shall not
occur prior to satisfaction of the conditions precedent set forth in Section 9
(or in the case of any unsatisfied conditions precedent, the waiver thereof by
the Party entitled to the benefit thereof). The date, time and place of the
Closing may be modified as mutually agreed by the Parties. In the event the
Closing is changed to a different time or date, all references in this Agreement
to the Closing shall be deemed to refer to the time and date agreed upon by the
Parties, in the manner set forth herein.
5.2 Transactions at Closing. At the Closing, the Company
Transfer, the Globe Transfer, the Valley Transfer and related transactions
provided for herein shall be closed and consummated as follows:
5.2.1 InterCall shall deliver to the Company stock
certificates and stock powers, assignments, officer certificates, consents, and
other documents, agreements, and instruments in form and substance required by
this Agreement for the Company Transfer. The Company shall deliver to InterCall
the stock certificates, officer certificates, consents, and other documents,
agreements, and instruments in form and substance required by this Agreement for
the Company Transfer.
5.2.2 The Company shall deliver to Globe Telecom the stock
certificates and stock powers, assignments, officer certificates, consents and
other documents, agreements, and instruments in form and substance required by
this Agreement for the Globe Transfer. Globe Telecom shall deliver to the
Company the stock certificates, officer certificates, and other documents,
agreements, and instruments in form and substance required by this Agreement for
the Globe Transfer.
5.2.3 The Company shall deliver to Valley the stock
certificates and stock powers, assignments, officer certificates, consents and
other documents, agreements, and instruments in form and substance required by
this Agreement for the Valley Transfer. Valley shall deliver to the Company the
stock certificates, officer certificates, and other documents, agreements, and
instruments in form and substance required by this Agreement for the Valley
Transfer.
6
<PAGE> 12
5.2.4 The Parties shall deliver any other consents,
amendments, or other documentation, if any is required, from any third party
necessary to permit completion of the Corporate Transfers and related
transactions provided for herein as contemplated in this Agreement.
5.2.5 The Parties shall execute and deliver to each other
a certificate setting forth the effective time and date of the completion of the
Closing.
5.2.6 The Parties will take such other actions at the
Closing as are contemplated by this Agreement.
5.3 Documentation. All the Closing documentation shall be in
customary form (except as otherwise provided herein) for transactions of this
nature and magnitude, shall be in recordable form as necessary, and shall be
duly executed, lawful, and effective as of the time of delivery at the Closing.
5.4 Transactions Subsequent to the Closing.
5.4.1 Books and Records. Since the Parties hereto may need
to have access to the books, records, and documents held by other Parties after
the Closing, each Party agrees that it shall maintain (in accordance with such
Party's normal procedures for its own books and records) for at least three (3)
years after the Closing (or for such longer period as may be required by
applicable law) the respective books, records, and documents of each Party
hereunder as they relate to the Equity Interests. During said period,
representatives of each Party shall be permitted to inspect and make copies of
the books, records and documents of each other Party during normal business
hours and upon reasonable notice for purposes related to such Party's ownership
of all or any portion of the Equity Interests or for any other appropriate
purpose.
5.4.2 Miscellaneous. The Parties shall take such other
actions and comply with other obligations as are required after the Closing
under this Agreement or under documents ancillary hereto.
5.5 Other Actions. The Parties agree that they will at any time
and from time to time do, execute, acknowledge, and deliver, or will cause to be
done, executed, acknowledged, and delivered, all such further acts, deeds,
assignments, transfers, conveyances, documents, instruments, and assurances as
may be reasonably required by any other Party in order to carry out fully and to
effectuate the transactions herein contemplated under, and in accordance with,
the provisions of this Agreement.
6. Representations and Warranties by InterCall. InterCall hereby
represents, warrants, and covenants as follows:
7
<PAGE> 13
6.1 Organization and Good Standing of InterCall. InterCall is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has full corporate power and authority to carry on
its business and to own and operate its properties and assets as presently owned
and operated.
6.2 Authority of InterCall. InterCall has taken all corporate
action necessary to approve and authorize the execution of this Agreement, and
to consummate the transactions contemplated hereby. The representatives of
InterCall signing this Agreement have full power and authority to execute this
Agreement in the indicated capacity and to consummate on behalf of InterCall the
transactions contemplated hereby. When executed and delivered, this Agreement
shall constitute a valid and binding obligation of InterCall, enforceable in
accordance with its terms and conditions, except as enforcement may be limited
by applicable bankruptcy, insolvency or similar laws affecting creditors rights
generally and by principles of equity. Neither the execution and the delivery of
this Agreement, nor the consummation by InterCall of the transactions
contemplated hereby, nor the compliance with any of the terms and conditions
hereof: (a) will conflict with or result in the breach by InterCall of any of
the terms, conditions, or provisions of (i) InterCall's certificate of
incorporation or bylaws, or (ii) any material indenture, mortgage, deed of
trust, permit, lease, decree, order, judgment, law or other contract, agreement
or instrument to which InterCall is a party or by which it is bound; or (b) will
constitute an uncured default or event of acceleration of any such indenture,
mortgage, deed of trust, permit, lease, decree, order, judgment, law or other
contract, agreement or instrument.
6.3 Consents. Any material consent of any third party that is
required to be obtained by InterCall in connection with its participation in the
Corporate Transfers and related transactions provided for herein, including
without limitation approval of KNOLOGY Holdings to the assignment of the KNOLOGY
Holdings Note, either has been, or will be, obtained by InterCall as of the
Closing unless waived by each of the other Parties to this Agreement.
6.4 Litigation. There are no judicial or administrative actions
or proceedings pending, or to the best of InterCall's knowledge, threatened that
question the validity of this Agreement or any transaction contemplated hereby,
which if adversely determined would have a material adverse effect upon the
ability of InterCall to enter into this Agreement or perform its obligations
hereunder.
6.5 Equity Interests, ClearSource Stock, ClearSource
Subscription Funds and KNOLOGY Holdings Note. InterCall is, and at the Closing
shall be, the owner of the Equity Interests and the ClearSource Stock, and the
holder of the ClearSource Subscription Funds and the KNOLOGY Holdings Note.
InterCall has, and at the Closing shall have, good and marketable title thereto
and
8
<PAGE> 14
the absolute right to assign, convey, transfer, exchange, and deliver the same
to the Company, free and clear of any liens or encumbrances, as required
hereunder.
6.6 Accredited Investor Status. InterCall is, and at the
Closing Date will be, an "accredited investor" (as such term is defined in Rule
501 promulgated under the Securities Act of 1933). InterCall, either alone or in
conjunction with a representative, has such knowledge and experience in
financial and business matters that it is capable of evaluating the risks and
merits of an investment in the Series A Preferred Stock. InterCall hereby
acknowledges that such stock will be subject to resale by it only pursuant to
registration or exemption under applicable federal and state securities laws,
including without limitation SEC Rule 144 (when applicable).
6.7 Representations and Warranties at the Closing. Except as
expressly otherwise permitted in this Agreement, the representations and
warranties of InterCall set forth in this Agreement shall be true at the Closing
as though such representations and warranties were made on such date, unless
they reference a specific earlier date whereupon, at the Closing, they shall be
true as at the earlier date referenced.
7. Representations and Warranties by the Company. The Company hereby
represents, warrants, and covenants as follows:
7.1 Organization and Good Standing of the Company. The Company
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Delaware, and has full corporate power to carry on its
businesses and to own and operate its properties and assets as presently owned
and operated.
7.2 Authority of the Company. The Company has taken all
corporate action necessary to approve and authorize the execution of this
Agreement, and to consummate on behalf of the Company the transactions
contemplated hereby. The representatives of the Company signing this Agreement
have full power and authority to execute this Agreement in the indicated
capacity and to consummate on behalf of the Company the transactions
contemplated hereby. When executed and delivered, this Agreement shall
constitute a valid and binding obligation of the Company, enforceable in
accordance with its terms and conditions except as enforcement may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors rights
generally and by principles of equity. Neither the execution and the delivery of
this Agreement, nor the consummation by the Company of the transactions
contemplated hereby, nor the compliance with any of the terms and conditions
hereof: (a) will conflict with or result in the breach by the Company of any of
the terms, conditions or provisions of (i) the Company's certificate of
incorporation or bylaws, or (ii) any material indenture, mortgage, deed of
trust, permit, lease, decree, order, judgment, law, or
9
<PAGE> 15
other contract, agreement or instrument to which the Company is a party, or by
which it is bound; or (b) will constitute an uncured default or event of
acceleration of any such indenture, mortgage, deed of trust, permit, lease,
decree, order, judgment, law or other contract, agreement or instrument.
7.3 Consents. Any material consent of any third party that is
required to be obtained by the Company in connection with its participation in
the Corporate Transfers and related transactions provided for herein, either has
been, or will be, obtained by the Company as of the Closing unless waived by
each of the other Parties to this Agreement.
7.4 Litigation. There are no judicial or administrative actions
or proceedings pending, or to the best of the Company's knowledge, threatened,
that question the validity of this Agreement or any transaction contemplated
hereby, which if adversely determined would have a material adverse effect upon
the ability of the Company to enter into this Agreement or perform its
obligations hereunder.
7.5 Capitalization. The authorized capital stock of the Company
consists of 200,000,000 shares of Common Stock and 175,000,000 shares of
preferred stock, of which 75,000,000 shares have been designated as Series A
Preferred Stock and 50,000,000 shares have been designated as Series B Preferred
Stock. As of the date of this Agreement, 100 shares of Common Stock are issued
and outstanding and owned by InterCall, and no shares of preferred stock have
been issued or are outstanding. Except for the issuance of 43,918,649 shares of
Series A Preferred Stock in connection with the Corporate Transfers, the Company
will not change its authorized capital stock or issue any additional shares
thereof prior to the Closing.
7.6 Accredited Investor Status. The Company is, and at the
Closing Date will be, an "accredited investor" (as such term is defined in Rule
501 promulgated under the Securities Act of 1933). The Company, either alone or
in conjunction with a representative, has such knowledge and experience in
financial and business matters that it is capable of evaluating the risks and
merits of an investment in the common stock of each of Valley and Globe Telecom.
The Company hereby acknowledges that such stock will be subject to resale by it
only pursuant to registration or exemption under applicable federal and state
securities laws, including without limitation SEC Rule 144 (when applicable).
7.7 Representations and Warranties at the Closing. Except as
otherwise expressly permitted in this Agreement, the representations and
warranties of the Company set forth in this Agreement shall be true at the
Closing as though such representations and warranties were made on such date,
unless they reference a specific earlier date whereupon, at the Closing, they
shall be true as at the earlier date referenced.
10
<PAGE> 16
8. Representations and Warranties by Valley and Globe Telecom. Each
of Valley and Globe Telecom hereby represents, warrants, and covenants as
follows:
8.1 Organization and Good Standing of Valley and Globe Telecom.
Valley is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Alabama, and has full corporate power to carry on
its businesses and to own and operate its properties and assets as presently
owned and operated. Globe Telecom is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Georgia, and has
full corporate power to carry on its businesses and to own and operate its
properties and assets as presently owned and operated.
8.2 Authority of Valley and Globe Telecom. Each of Valley and
Globe Telecom has taken all corporate action necessary to approve and authorize
the execution of this Agreement, and to consummate on behalf of Valley and Globe
Telecom the transactions contemplated hereby. Each of the representatives of
Valley and Globe Telecom signing this Agreement have full power and authority to
execute this Agreement in the indicated capacity and to consummate on behalf of
Valley and Globe Telecom the transactions contemplated hereby. When executed and
delivered, this Agreement shall constitute a valid and binding obligation of
each of Valley and Globe Telecom, enforceable in accordance with its terms and
conditions except as enforcement may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors rights generally and by
principles of equity. Neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, nor Valley's or
Globe Telecom's compliance with any of the terms and conditions hereof: (a) will
conflict with or result in the breach by Valley or Globe Telecom of any of the
terms, conditions or provisions of (i) the certificate of incorporation or
bylaws of Valley or Globe Telecom, or (ii) any material indenture, mortgage,
deed of trust, permit, lease, decree, order, judgment, law, or other contract,
agreement or instrument to which Valley or Globe Telecom is a party, or by which
it is bound; or (b) will constitute an uncured default or event of acceleration
of any such indenture, mortgage, deed of trust, permit, lease, decree, order,
judgment, law or other contract, agreement or instrument.
8.3 Consents. Any material consent of any third party that is
required to be obtained by Valley or Globe Telecom in connection with its
respective participation in the Corporate Transfers and related transactions
provided for herein, either has been, or will be, obtained by the applicable
Party as of the Closing unless waived by each of the other Parties to this
Agreement.
8.4 Litigation. There are no judicial or administrative actions
or proceedings pending, or to the best of Valley's or Globe Telecom's knowledge,
threatened, that question the validity of this Agreement or any transaction
11
<PAGE> 17
contemplated hereby, which if adversely determined would have a material adverse
effect upon the ability of Valley or Globe Telecom to enter into this Agreement
or perform its respective obligations hereunder.
8.5 Representations and Warranties at the Closing. Except as
otherwise expressly permitted in this Agreement, the representations and
warranties of each of Valley and Globe Telecom set forth in this Agreement shall
be true at the Closing as though such representations and warranties were made
on such date, unless they reference a specific earlier date whereupon, at the
Closing, they shall be true as at the earlier date referenced.
9. Conditions Precedent to the Closing Obligations of All Parties.
The obligations of each of the Parties under this Agreement to consummate the
transactions contemplated by this Agreement are subject to fulfillment or waiver
by such Parties at or prior to the Closing of each of the following conditions:
9.1 Representations and Warranties. The representations and
warranties of each of the other Parties contained in this Agreement shall be
true and correct in all material respects.
9.2 Performance of this Agreement. All other Parties shall have
performed and complied in all material respects with all covenants, conditions,
and agreements required by this Agreement to be performed or complied with by
them prior to or at the Closing.
9.3 Litigation Affecting Closing. On the Closing Date, no
preliminary or permanent injunction or other order issued by any federal or
state court of competent jurisdiction in the United States or by any United
States federal or state government or regulatory authority which restrains,
enjoins or otherwise prohibits the Closing shall be in effect, nor shall any
proceeding for such purpose be pending or threatened by any government entity or
other person or entity, and no statute, rule, regulation or executive order
shall have been promulgated or enacted by any United States federal or state
governmental authority which makes unlawful or otherwise prohibits the
consummation of the Closing.
9.4 Approval and Consents. All approvals, consents, licenses,
permits or authorizations of all persons, corporations, governmental authorities
and other entities required to consummate the transactions contemplated by this
Agreement, or necessary so that the consummation of such transactions will not
result in a breach of any material contract or agreement to which one or more of
the Parties is bound, shall have been obtained, and any required waiting and
notice periods shall have elapsed, other than ordinary course or routine
consents, approvals or authorizations, the failure of which to be obtained will
not materially adversely affect the rights of the Parties hereunder or the
business, operations or financial condition of any Party following the Closing.
12
<PAGE> 18
9.5 Stock Authorizations. The Company shall have taken all
corporate actions and proceedings necessary for the issuance to InterCall of the
appropriate number of shares of Common Stock and Series A Preferred Stock in
connection with the Company Transfer. Each of Valley and Globe Telecom shall
have taken all corporate actions and proceedings necessary for the Valley
Transfer and the Globe Transfer.
9.6 Good Faith. In order for any condition precedent in this
Section 9, the accomplishment of which is within the control of a Party, to be
effective for the benefit of such Party, such Party shall have exercised its
good faith best efforts toward the accomplishing of same.
10. Cost and Expenses. Each Party shall pay its own expenses incident
to the preparation and implementation of this Agreement and the expenses and
fees involved in the preparation and delivery of all documents required to be
delivered by or on behalf of such Party hereunder, whether or not the
transactions contemplated hereby are consummated. In the event litigation is
commenced to enforce any rights under this Agreement or to pursue any other
remedy available to any party, all legal expenses or other direct costs of
litigation of the prevailing Party shall be paid by the non-prevailing Party.
11. Conduct of the Parties Pending the Closing. Each of the Parties
covenants and agrees that, except with the consent of the other parties hereto,
from the date hereof until the completion of the Closing:
11.1. Corporate Documents. No modification or amendment will be
made to such Party's certificate of incorporation or bylaws.
11.2 Capitalization, etc. Such Party will not make any change to
its authorized or issued capital stock, declare or pay any dividends outside the
ordinary course of business or inconsistent with past practice, redeem, purchase
or otherwise acquire any of its capital stock, or issue any additional shares of
capital stock.
11.3 Conduct of Business. Such Party will use its best efforts
to maintain and preserve its business organization, employee relationships,
customer relationships, vendor relationships, and goodwill.
11.4 Merger, etc. Except as contemplated in connection with the
Corporate Transfers and related transactions provided for herein, the Parties
will not merge or consolidate with any other business organization, sell or
lease all or substantially all of its assets or agree to do any of the
foregoing.
13
<PAGE> 19
11.5 Equity Interests. No Party shall sell, assign, transfer,
convey, give, pledge, hypothecate or otherwise alienate or encumber any of the
Equity Interests or any right, title or interest therein.
12. Survival. It is the express intention and agreement of the parties
hereto that the representations and warranties set forth in this Agreement shall
survive the Closing, for a period equal to one (1) year from the date hereof and
shall expire and be terminated and extinguished forever at such time, except
with respect to claims asserted in good faith pursuant hereto by written notice
to the other Parties at any time within one (1) year following the date hereof.
Any written claim made hereunder must be in writing, must be given within one
(1) year from the date hereof and must set forth the nature and details of the
claim with specificity in order to constitute a valid notice pursuant to the
preceding sentence.
13. Miscellaneous.
13.1 Entire Agreement. This Agreement embodies the entire
agreement and understanding between the Parties hereto as to the matters herein
addressed and supersedes any and all other prior agreements and understandings
relating to the subject matter hereof.
13.2 No Waiver. No failure to exercise, and no delay in
exercising, any right, power or remedy hereunder or under any document delivered
pursuant hereto shall impair any right, power or remedy which the Parties hereto
may have, nor shall any such delay be construed to be a waiver of any of such
rights, powers or remedies, or an acquiescence in any breach or default under
this Agreement, nor shall any waiver of any breach or default of any Party
hereunder be deemed a waiver of any default or breach subsequently occurring.
13.3 Amendment. No provision of this Agreement or any document
or instrument relating to the Agreement may be amended, modified, supplemented,
changed, waived, discharged, or terminated, unless all Parties consent thereto
in writing.
13.4 Notices. All notices, demands, requests, or other
communications which may be or are required to be given, served, or sent by any
Party to any other Party pursuant to this Agreement shall be in writing and
shall be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, overnight or
express mail, addressed as follows:
14
<PAGE> 20
(i) If to the Company:
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, GA 31833
Attn.: President
(ii) If to InterCall:
c/o ITC Holding
1239 O.G. Skinner Drive
West Point, GA 31833
Attn.: President
(iii) If to Valley:
c/o ITC Holding
1239 O.G. Skinner Drive
West Point, GA 31833
Attn.: President
(iv) If to Globe Telecom:
c/o ITC Holding
1239 O.G. Skinner Drive
West Point, GA 31833
Attn.: President
Each Party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt or the affidavit of messenger being
deemed conclusive evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
13.5 Severability of Provisions. In case any one or more of the
provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
15
<PAGE> 21
13.6 Successors and Assigns. This Agreement shall be binding
upon the Parties, and their respective successors and assigns, and shall inure
to the benefit of the Parties and their respective successors and permitted
assigns. This Agreement is for the benefit of the Parties only and is not for
the benefit of any third parties.
13.7 Counterparts. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one Agreement, and
any Party hereto may execute this Agreement by signing any such counterpart. The
authorized attachment of counterpart signature pages shall constitute execution
by the Parties.
13.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (other than the
choice-of-law rules thereof).
13.9 Further Instruments and Acts. From time to time at a
Party's request, whether at or after the Closing and without further
consideration, the other Parties shall execute and deliver such further
instruments of conveyance, transfer, assignment, and exchange and take such
other action as the requesting Party reasonably may require to more effectively
convey and transfer to the requesting Party the properties to be conveyed,
transferred, assigned, and exchanged hereunder, and, if necessary, will assist
the requesting Party in the collection or reduction to possession of such
property.
13.10 Assignment. The right and obligations arising under this
Agreement are not assignable by any Party without the prior written consent of
the other Parties hereto, which shall not be unreasonably withheld.
13.11 Enforcement. Each Party agrees that a failure of such Party
to perform his or its obligations at the Closing would cause irreparable injury
to the other Parties, for which there is no adequate remedy at law. Therefore,
each Party agrees that the other Parties shall have the right, in addition to
all other rights and remedies at law or in equity, to obtain specific
performance of, or injunctive relief respecting, this Agreement, and hereby
consents and agrees that such Party shall not, in any proceeding to obtain
specific performance or injunctive relief, raise as a defense thereto that there
is an adequate remedy at law. In the event that any of the Parties initiates a
proceeding to obtain specific performance or injunctive relief, that Party shall
not be required to post bond.
13.12 Termination. This Agreement, as to all Parties, may be
terminated: (a) by mutual consent in writing of all the Parties to this
Agreement; or (b) by any one or more of the Parties if the Closing shall not
have taken place by April 30, 2000.
16
<PAGE> 22
IN WITNESS WHEREOF, the undersigned have executed this Section 351
Agreement under seal, with the corporate parties acting by and through their
duly authorized officers, to be effective as of the date first above written.
KNOLOGY, INC.
By: /s/ Chad Wachter
-----------------------------------
Title: Vice President, General Counsel
--------------------------------
and Secretary
--------------------------------
(Seal)
INTERCALL, INC.
By: /s/ Kimberley E. Thompson
-----------------------------------
Title: Vice President, General Counsel
--------------------------------
and Secretary
--------------------------------
(Seal)
VALLEY TELEPHONE COMPANY, INC.
By: /s/ Chad Wachter
-----------------------------------
Title: Vice President, General Counsel
--------------------------------
and Secretary
--------------------------------
(Seal)
GLOBE TELECOMMUNICATIONS, INC.
By: /s/ Chad Wachter
-----------------------------------
Title: Vice President, General Counsel
--------------------------------
and Secretary
--------------------------------
(Seal)
17
<PAGE> 1
Exhibit 10.68
AMENDMENT TO
SECTION 351 AGREEMENT
THIS AMENDMENT TO THE SECTION 351 AGREEMENT (this "AMENDMENT") is
effective as of November 23, 1999, by and among KNOLOGY, Inc., a Delaware
corporation (the "COMPANY"); InterCall, Inc., a Delaware corporation
("INTERCALL"); Valley Telephone Company, Inc., an Alabama corporation
("VALLEY"); and Globe Telecommunications, Inc., a Georgia corporation ("GLOBE
TELECOM").
WHEREAS, the Company, InterCall, Valley and Globe Telecom entered into
that certain Section 351 Agreement (the "SECTION 351 AGREEMENT") as of November
1, 1999, whereby, among other things, InterCall transferred to the Company (i)
its equity ownership interests in each of KNOLOGY Holdings, Inc. ("KNOLOGY
HOLDINGS"), Valley, Globe Telecom, Interstate Telephone Company and ITC Globe,
Inc. (together, the "EQUITY INTERESTS"), pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended (the "CODE"), (ii) 222,832 shares of Series A
Preferred Stock and 50,000 shares of Series B Preferred Stock in ClearSource,
Inc. (the "CLEARSOURCE STOCK"), (iii) $5,663,000 in cash, to be used to make
subscription payments to ClearSource, Inc. (the "CLEARSOURCE SUBSCRIPTION
FUNDS") and (iv) a note of KNOLOGY Holdings in the principal amount of up to $13
million, plus accrued interest (the "KNOLOGY HOLDINGS NOTE");
WHEREAS, the Company agreed to issue 43,918,649 shares of Series A
Preferred Stock of the Company in exchange for the transfer by InterCall to the
Company of the Equity Interests, the ClearSource Stock, the ClearSource
Subscription Funds and the KNOLOGY Holdings Note (the "COMPANY TRANSFER"), such
number of shares being based in part upon the expected value of the KNOLOGY
Holdings Note.
WHEREAS, the actual value of the KNOLOGY Holdings Note at the time of
transfer was less than originally anticipated;
WHEREAS, the parties desire to amend the number of shares of Series A
Preferred Stock of the Company issued by the Company to InterCall in the Company
Transfer, from 43,918,649 to 43,211,531; and
WHEREAS, Section 13.3 of the Section 351 Agreement permits the parties
to the Section 351 Agreement to amend the provisions of the Section 351
Agreement by written consent;
NOW THEREFORE, intending to be legally bound, and in consideration of
these premises and the mutual covenants hereinafter set forth, and for other
good
<PAGE> 2
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Section 2.3 of the Section 351 Agreement is hereby deleted and
replaced in its entirety with the following:
"2.3 Issuance of Stock. At the Closing, in exchange for the transfer
of the Equity Interests, the ClearSource Stock, the ClearSource Subscription
Funds and the KNOLOGY Holdings Note provided in Section 2.1, the Company shall
issue to InterCall 43,211,531 shares of Series A Preferred Stock. The shares of
Series A Preferred Stock to be so issued shall be represented by stock
certificates, the denominations of which shall be designated by InterCall, shall
be duly authorized, validly issued, fully-paid and non-assessable and shall
contain such restrictive legends as the Company reasonably determines are
necessary for compliance with applicable securities laws."
2. Section 7.5 of the Section 351 Agreement is hereby deleted and
replaced in its entirety with the following:
"7.5 Capitalization. The authorized capital stock of the Company
consists of 200,000,000 shares of Common Stock and 175,000,000 shares of
preferred stock, of which 75,000,000 shares have been designated as Series A
Preferred Stock and 50,000,000 shares have been designated as Series B Preferred
Stock. As of the date of this Agreement, 100 shares of Common Stock are issued
and outstanding and owned by InterCall, and no shares of preferred stock have
been issued or are outstanding. Except for the issuance of 43,211,531 shares of
Series A Preferred Stock in connection with the Corporate Transfers, the Company
will not change its authorized capital stock or issue any additional shares
thereof prior to the Closing."
3. Except as otherwise provided herein, all terms, provisions,
covenants, representations, warranties, agreements and conditions of the Section
351 Agreement shall remain unchanged and in full force and effect.
4. This Amendment, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by and construed
in accordance with the laws of the State of Delaware (other than the
choice-of-law rules thereof).
5. From and after the execution of this Amendment by the parties
hereto, any reference to the Section 351 Agreement shall be deemed to be a
reference to the Section 351 Agreement as amended hereby.
6. Capitalized terms not otherwise defined herein shall have the
meaning set forth in the Section 351 Agreement.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this
Amendment to Section 351 Agreement under seal, with the corporate parties acting
by and through their duly authorized officers, to be effective as of the date
first above written.
KNOLOGY, INC.
By:
-------------------------------------------------
Name: Chad Wachter
Title: Vice President, General Counsel
and Secretary
(Seal)
INTERCALL, INC.
By:
-------------------------------------------------
Name: Kimberley E. Thompson
Title: Vice President, General Counsel
and Secretary
(Seal)
VALLEY TELEPHONE COMPANY, INC.
By:
-------------------------------------------------
Name: Chad Wachter
Title: Vice President, General Counsel
and Secretary
(Seal)
GLOBE TELECOMMUNICATIONS, INC.
By:
-------------------------------------------------
Name: Chad Wachter
Title: Vice President, General Counsel
and Secretary
(Seal)
<PAGE> 1
Exhibit 10.69
LETTER OF TRANSMITTAL
To Accompany Certificates Representing
Shares of Common Stock and Preferred Stock of
KNOLOGY HOLDINGS, INC.
To Be Exchanged for
Shares of Common Stock and Series A Preferred Stock of
KNOLOGY, INC.
BY HAND DELIVERY, OVERNIGHT
COURIER OR MAIL TO:
KNOLOGY, Inc
1241 O.G. Skinner Avenue
West Point, GA 31833
Attn: Chad S. Wachter
In connection with the Old Knology/Telco Reorganization, as described
in the Confidential Information Statement dated November 3, 1999 (as the same
may be amended or supplemented from time to time, the "Information Statement"),
receipt of which is hereby acknowledged, the undersigned, as registered holder
of the stock (the "Stock"), as evidenced by the certificate(s) ("Certificates")
for common stock and/or preferred stock of KNOLOGY Holdings, Inc. ("Old
Knology") listed below hereby tenders the Stock, as evidenced by the
Certificates, in exchange for shares of KNOLOGY, Inc. ("NEW KNOLOGY") common
stock and/or Series A preferred stock ("NEW KNOLOGY Shares"), upon the terms and
subject to the conditions set forth in the Information Statement and in this
Letter of Transmittal (which, together with the Information Statement,
constitute the "Exchange Offer"). Capitalized terms used but not defined herein
have the same meaning given them in the Information Statement.
Subject to and effective upon the acceptance for exchange of the Stock
tendered herewith, the undersigned hereby sells, assigns and transfers to or
upon the order of NEW KNOLOGY all right, title and interest in and to the Stock.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
STOCK TENDERED HEREBY AND THAT, WHEN THE SAME IS ACCEPTED FOR EXCHANGE, NEW
KNOLOGY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE STOCK
TENDERED HEREBY IS NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES. THE UNDERSIGNED
WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY NEW
KNOLOGY TO BE NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, SALE, ASSIGNMENT
AND TRANSFER OF THE STOCK TENDERED HEREBY.
The undersigned acknowledges that the undersigned has been furnished
with the Information Statement, understands and has evaluated the risks of the
Exchange Offer, has been given the opportunity to ask questions of and receive
answers from the executive officers of NEW KNOLOGY concerning the terms and
conditions of the Exchange Offer, has received any documents and additional
information which Stockholder has requested to evaluate the merits and risks of
the Exchange Offer, has not been furnished any offering literature or prospectus
other than the Information Statement, and except as described in this paragraph,
has not been furnished with any oral or written representation or oral or
written information in connection with the Exchange Offer which is not contained
in the Information Statement. THE UNDERSIGNED AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Stock
tendered hereby should be printed below, if they are not already set forth
below, as they appear on the Certificates. The Certificate number(s) and the
shares of Stock of Old Knology that the undersigned wishes to tender should be
indicated in the appropriate boxes above.
If any tendered Certificates are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more shares of Stock
of Old Knology than are tendered or accepted for exchange, Certificates for such
nonexchanged or nontendered shares of Stock will be returned without expense to
the tendering holder promptly following the expiration or termination of the
Exchange Offer.
The undersigned understands that tenders of the Stock pursuant to the
procedures described herein will, upon NEW KNOLOGY's acceptance for exchange of
the tendered Stock, constitute a binding
<PAGE> 2
agreement between the undersigned and NEW KNOLOGY upon the terms and subject to
the conditions of the Exchange Offer.
Unless otherwise indicated herein in Box D, the undersigned hereby
directs that the NEW KNOLOGY Shares be issued in the name(s) of the undersigned.
If applicable, substitute certificates representing shares of Stock of Old
Knology not exchanged or not accepted for exchange will be issued to the
undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions," the undersigned hereby directs that certificates for the NEW
KNOLOGY Shares be delivered to the undersigned at the address shown below the
undersigned's signature.
NEW KNOLOGY will determine, in its sole discretion, all questions as to
the form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of the Stock, which determination shall be
final and binding on all parties. NEW KNOLOGY 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 NEW KNOLOGY, be unlawful. NEW KNOLOGY also reserves the
absolute right, subject to applicable law, to waive any of the conditions of the
Exchange Offer set forth in the Information Statement or any defect or
irregularity in any tender of the Stock of any particular holder whether or not
similar defects or irregularities are waived in the case of other holders. NEW
KNOLOGY's interpretation of the terms and conditions of the Exchange Offer
(including this Letter of Transmittal and the instructions hereto) will be final
and binding. No tender of the Stock will be deemed to have been validly made
until all defects or irregularities with respect to such tender have been cured
or waived. Neither NEW KNOLOGY, any affiliates of NEW KNOLOGY, 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.
BY TENDERING THE STOCK AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT ANY NEW KNOLOGY SHARES TO BE
RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED FOR INVESTMENT ONLY, FOR THE
UNDERSIGNED'S OWN ACCOUNT, AND NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF OR PARTICIPATION THEREIN. THE UNDERSIGNED
UNDERSTANDS THAT THE NEW KNOLOGY SHARES TO BE ISSUED PURSUANT TO THIS AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT IN RELIANCE UPON THE
REPRESENTATIONS SET FORTH HEREIN. THE UNDERSIGNED ACKNOWLEDGES THE RESTRICTIONS
ON THE TRANSFER OF THE NEW KNOLOGY SHARES DESCRIBED IN THE INFORMATION
STATEMENT.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. This tender is
irrevocable.
The undersigned recognizes that, under certain circumstances set forth
in the Information Statement, NEW KNOLOGY may not be required to accept for
exchange any of the Stock tendered hereby. NEW KNOLOGY intends to accept all
tenders of Stock simultaneously at the closing of the Old Knology/TELCO
Reorganization as described in the Information Statement. If for any reason
whatsoever the acceptance for exchange or the exchange of any Stock tendered
pursuant to the Exchange Offer is delayed (whether before or after NEW KNOLOGY's
acceptance for exchange of Stock), or NEW KNOLOGY extends the Exchange Offer or
is unable to accept for exchange or exchange the Stock tendered pursuant to the
Exchange Offer, then, without prejudice to its rights set forth herein, NEW
KNOLOGY may, subject to applicable laws, retain tendered Stock and such Stock
may not be withdrawn.
The Exchange Offer will expire at 5:00 P.M., New York City Time, on
December 3, 1999, unless extended. HOLDERS ARE REQUESTED TO DELIVER THIS LETTER
AND ANY STOCK CERTIFICATES TO NEW KNOLOGY BY NO LATER THAN NOVEMBER 15, 1999.
ALL HOLDERS MUST COMPLETE BOXES A, B AND F AND DELIVER OR CAUSE TO BE DELIVERED
STOCK CERTIFICATE(S) WITH OR BY THIS LETTER OF TRANSMITTAL.
2
<PAGE> 3
CERTIFICATES ENCLOSED
NAME AND ADDRESS OF
REGISTERED HOLDER(S)
B NAME:----------------------------------------
O
X TITLE:---------------------------------------
A ADDRESS:-------------------------------------
TELEPHONE NUMBER:----------------------------
DATED:---------------------------------------
TAXPAYER IDENTIFICATION OR
SOCIAL SECURITY NUMBER:----------------------
|_| ADDRESS CHANGE INDICATED ABOVE
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT TENDERED
CERTIFICATE REPRESENTED BY (IF LESS THAN ALL)*
NUMBER(S) CERTIFICATE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL SHARES OF
COMMON STOCK
TENDERED:
- --------------------------------------------------------------------------------
PREFERRED STOCK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL SHARES OF
PREFERRED STOCK
TENDERED:
</TABLE>
- --------------------------------------------------------------------------------
* Need not be completed if tendering for exchange all Stock held. Stock
may be tendered in whole or in part. All Stock evidenced by a
Certificate shall be deemed tendered unless a lesser number is
specified in this column. See General Information.
- --------------------------------------------------------------------------------
|_| I HAVE LOST MY CERTIFICATE(S) FOR ________ SHARES OF OLD KNOLOGY COMMON
STOCK AND/OR ______ SHARES OF OLD KNOLOGY PREFERRED STOCK AND REQUIRE
ASSISTANCE WITH RESPECT TO REPLACING THE SHARES.
- ------------------------------------------------------------------------------
SIGN HERE (ALL REGISTERED HOLDERS)
B
O THE UNDERSIGNED REPRESENTS THAT HE/SHE IS THE
X STOCKHOLDER DESCRIBED IN THE LETTER OF
TRANSMITTAL ABOVE AND THAT HE/SHE HAS READ AND
B AGREES TO ALL OF ITS TERMS AND CONDITIONS:
---------------------------------------
---------------------------------------
SIGNATURE OF OWNER(S)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SIGNATURE(S) GUARANTEE
B
O YOUR SIGNATURE(S) MUST BE MEDALLION GUARANTEED
X BY AN ELIGIBLE INSTITUTION IF THE REGISTRATION
OF THE NEW CERTIFICATES WILL BE DIFFERENT FROM
C THE CURRENT REGISTRATION (BOX D IS COMPLETED).
NOTE: A NOTARIZATION BY A NOTARY PUBLIC
IS NOT ACCEPTABLE.
FOR USE BY INSTITUTION ONLY.
PLACE MEDALLION GUARANTEE IN SPACE BELOW.
- ------------------------------------------------------------------------------
GENERAL INFORMATION
* RETURNING CERTIFICATES: Do not send Certificate(s) to Old Knology.
Return this Letter of Transmittal and the Certificate(s) to be
exchanged only to NEW KNOLOGY at the appropriate address shown on the
first page of this Letter of Transmittal. The method of delivery of all
documents is at your option and your risk, but it is recommended that
documents be delivered by certified or registered mail with return
receipt requested, properly insured. If your Certificate(s) are lost in
the mail, you may have to pay the cost of a bond to have your
Certificate(s) replaced. No alternative, conditional or contingent
surrender of shares of Stock of Old Knology is permitted and none will
be accepted.
* PARTIAL TENDERS: Tenders of Stock will be accepted in whole or in part.
If less than all the shares of Stock evidenced by any Certificate
submitted are to be tendered, fill in the number of shares of Stock
which are to be tendered in the box entitled "Amount Tendered (if less
than all)." In such case, new certificate(s) for the remainder of the
shares of Stock that were evidenced by the old Certificate(s) will be
sent to the tendering holder, unless the appropriate boxes on this
Letter of Transmittal are completed, promptly after acceptance of the
tender by NEW KNOLOGY. All shares of Stock represented by
3
<PAGE> 4
Certificates delivered to NEW KNOLOGY will be deemed to have been
tendered unless otherwise indicated.
* SIGNATURE GUARANTEE: Box C (Medallion Signature(s) Guarantee) needs to
be completed only if the shares will be registered in (and the cash
payment is to be made payable to) the name(s) of someone other than the
current registered holder(s) (Box D is completed). A Medallion
Signature(s) Guarantee must be from a duly authorized representative of
a commercial bank or trust company located in the United States, by a
member firm of a registered national securities exchange, or by a
member of the National Association of Securities Dealers, Inc.
* LOST CERTIFICATES: If your Certificates are lost, please check the
small box below Box A, complete the Letter of Transmittal and return it
to us. There may be a fee and additional documents required to replace
lost Certificates.
* ADDRESS CHANGES: If your permanent address should be changed on our
records, please indicate the address change in Box A. An address in Box
E will be treated as one time only, special instructions.
* QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to NEW KNOLOGY, attention Chad
S. Wachter, at the address and telephone number set forth on the first
page of this Letter of Transmittal. Additional copies of the
Information Statement and the Letter of Transmittal may be obtained
from NEW KNOLOGY.
- -------------------------------------------------------------------------------
SPECIAL REGISTRATION INSTRUCTIONS
B TO BE COMPLETED ONLY IF THE NEW CERTIFICATE IS TO BE REGISTERED IN (AND
O THE CASH PAYMENT IS TO BE MADE PAYABLE TO) THE NAME(S) OF SOMEONE OTHER
X THAN THE REGISTERED HOLDER(S) LISTED IN BOX A. ISSUE TO:
---------------------------------------
D NAME(S)
---------------------------------------
STREET ADDRESS
---------------------------------------
CITY, STATE AND ZIP CODE
---------------------------------------
TAX ID NUMBER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
B TO BE COMPLETED ONLY IF THE NEW CERTIFICATE (AND THE CASH PAYMENT) IS
O TO BE DELIVERED TO AN ADDRESS OTHER THAN THAT IN BOX A FOR THIS MAILING
X ONLY. COMPLETING THIS BOX WILL NOT CHANGE YOUR ADDRESS IN THE RECORDS
OF NEW KNOLOGY.
E
MAIL TO:
---------------------------------------
NAME
---------------------------------------
STREET ADDRESS
---------------------------------------
CITY, STATE AND ZIP CODE
- -------------------------------------------------------------------------------
4
<PAGE> 5
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAX IDENTIFICATION NUMBER ON THIS
SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP WITHHOLDING.
FAILURE TO DO SO WILL SUBJECT YOU TO 31% FEDERAL INCOME TAX WITHHOLDING FROM ANY
CASH PAYMENT MADE TO YOU PURSUANT TO THE EXCHANGE.
BOX F
SUBSTITUTE FORM W-9
Please provide the Taxpayer Identification Number ("TIN") of the person
submitting this Letter of Transmittal in the box at right and certify by signing
and dating below. If there is more than one registered holder, please provide
the TIN of the first person listed as the registered holder and circle the name
__________________________ of such person in Box A. If only one registered
holder has a TIN, that person's number must be furnished.
EMPLOYER IDENTIFICATION
NUMBER OR SOCIAL
SECURITY NUMBER
CERTIFICATION-Under penalties of perjury, the undersigned hereby certifies the
following:
(1) THE TIN SHOWN ABOVE IS THE CORRECT TIN OF THE PERSON WHO IS SUBMITTING
THIS LETTER OF TRANSMITTAL AND WHO IS REQUIRED BY LAW TO PROVIDE SUCH
TIN, OR SUCH PERSON IS WAITING FOR A TIN TO BE ISSUED, AND
(2) THE PERSON WHO IS SUBMITTING THIS LETTER OF TRANSMITTAL AND WHO IS
REQUIRED BY LAW TO PROVIDE SUCH TIN IS NOT SUBJECT TO BACKUP
WITHHOLDING BECAUSE SUCH PERSON HAS NOT BEEN NOTIFIED BY THE INTERNAL
REVENUE SERVICE ("IRS") THAT SUCH PERSON IS SUBJECT TO BACKUP
WITHHOLDING, OR BECAUSE THE IRS HAS NOTIFIED SUCH PERSON THAT HE OR SHE
IS NO LONGER SUBJECT TO BACKUP WITHHOLDING, OR BECAUSE SUCH PERSON IS
AN EXEMPT PAYEE.
Certification Instructions. You must cross out item (2) above if you have been
notified by the IRS that you are subject to backup withholding because of
underreporting interest or dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2).
SIGNATURE:____________________________ DATE: ____________________________
5
<PAGE> 1
Exhibit 10.70
THE EXCHANGE OFFER WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 3, 1999,
UNLESS EXTENDED (THE "EXPIRATION DATE").
HOLDERS ARE REQUESTED TO DELIVER THIS LETTER
AND ANY WARRANTS TO THE EXCHANGE AGENT
BY NO LATER THAN NOVEMBER 15, 1999.
KNOLOGY, INC.
TAX IDENTIFICATION NUMBER
58-2424258
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE ITS WARRANTS TO PURCHASE SERIES A PREFERRED STOCK OF
KNOLOGY, INC.
FOR ANY AND ALL OUTSTANDING
WARRANTS TO PURCHASE PREFERRED STOCK OF KNOLOGY HOLDINGS, INC.
ISSUED PURSUANT TO THAT CERTAIN WARRANT AGREEMENT DATED AS OF OCTOBER 22, 1997,
BY AND BETWEEN KNOLOGY HOLDINGS, INC. AND
UNITED STATES TRUST COMPANY OF NEW YORK, AS WARRANT AGENT
THE EXCHANGE AGENT
FOR THE EXCHANGE OFFER IS:
UNITED STATES TRUST COMPANY OF NEW YORK
BY FACSIMILE: BY MAIL:
(212) 420-6211 United States Trust Company of New York
Attention Customer Service P O. Box 843, Cooper Station
Confirm by Telephone to (800) 548-6565 New York, New York 10276
Attention Corporate Trust Services
BY HAND BEFORE 4:30 P.M.: BY OVERNIGHT COURIER AND BY HAND AFTER
4:30 P.M.:
United States Trust Company of New York United States Trust Company of New York
111 Broadway 770 Broadway, 13th Floor
New York, New York 10006 New York, New York 10003
Attention Lower Level Corporate Trust
Window
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
<PAGE> 2
Capitalized terms used but not defined herein shall have the same
meaning given them in the Information Statement (as defined below).
This Letter of Transmittal is to be completed by holders of Old Knology
Warrants (as defined below) either if Old Knology Warrants are to be forwarded
herewith or if tenders of Old Knology Warrants are to be made by book-entry
transfer to an account maintained by United States Trust Company of New York
(the "Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in Instruction 11 "Procedures for Tendering Old Knology
Warrants."
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
List below the Old Knology Warrants of which you are a holder. If the
space provided below is inadequate, list the certificate numbers and amount on a
separate signed schedule and attach that schedule to this Letter of Transmittal.
See Instruction 3.
ALL TENDERING HOLDERS COMPLETE THIS BOX:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD KNOLOGY WARRANTS TENDERED
- ---------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED
HOLDER
(FILL IN, IF BLANK) OLD KNOLOGY WARRANTS TENDERED
- ---------------------------------------------------------------------------------------------------------------------
CERTIFICATE
NUMBER(S )* AMOUNT AMOUNT
(ATTACH ADDITIONAL (ATTACH ADDITIONAL TENDERED (IF LESS
LIST IF NECESSARY) LIST IF NECESSARY) THAN ALL)**
-------------------------------------------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
TOTAL WARRANTS TENDERED:
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by book-entry holders. Such holders should check
the box below and provide the requested information.
** Need not be completed if tendering for exchange all Old Knology
Warrants held. Old Knology Warrants may be tendered in whole or in
part. All Old Knology Warrants held shall be deemed tendered unless a
lesser number is specified in this column. See Instruction 4.
|_| CHECK HERE IF TENDERED OLD KNOLOGY WARRANTS ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ---------------------------------------
DTC Account Number: ---------------------------------------
2
<PAGE> 3
Transaction Code Number: ---------------------------------------
LADIES AND GENTLEMEN:
The undersigned hereby tenders to KNOLOGY, Inc., a Delaware corporation
("NEW KNOLOGY"), the above described number of warrants to purchase preferred
stock (the "Old Knology Warrants") of KNOLOGY Holdings, Inc. ("Old Knology")
issued pursuant to that certain Warrant Agreement dated as of October 22, 1997
by and between Old Knology and United States Trust Company of New York, as
warrant agent ("Warrant Agent'), in exchange for warrants to purchase NEW
KNOLOGY Series A preferred stock (the "NEW KNOLOGY Warrants") which have not
been registered under the Securities Act of 1933 (the "Securities Act"), upon
the terms and subject to the conditions set forth in the Information Statement
dated November 3, 1999 (as the same may be amended or supplemented from time to
time, the "Information Statement"), receipt of which is hereby acknowledged, and
in this Letter of Transmittal (which, together with the Information Statement,
constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of the Old
Knology Warrants tendered herewith, the undersigned hereby sells, assigns and
transfers to or upon the order of NEW KNOLOGY all right, title and interest in
and to such Old Knology Warrants as are being tendered herewith. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent as its agent and
attorney-in-fact (with full knowledge that the Exchange Agent is also acting as
agent of NEW KNOLOGY in connection with the Exchange Offer) with respect to the
tendered Old Knology Warrants, with full power of substitution (such power of
attorney being an irrevocable power coupled with an interest), to: (i) deliver
such Old Knology Warrants to NEW KNOLOGY together with all accompanying
evidences of transfer and authenticity to, or upon the order of, NEW KNOLOGY
upon receipt by the Exchange Agent, as the undersigned's agent, of the NEW
KNOLOGY Warrants to be issued in exchange for such Old Knology Warrants; (ii)
present certificates ("Certificates") for such Old Knology Warrants for
transfer, and to transfer such Old Knology Warrants on the account books
maintained by DTC; and (iii) receive for the account of NEW KNOLOGY all benefits
and otherwise exercise all rights of beneficial ownership of such Old Knology
Warrants, all in accordance with the terms and conditions of the Exchange Offer.
For purposes of the Exchange Offer, the term "undersigned" as used herein shall
be deemed to include any participant in the book-entry transfer system whose
name appears on a security position listing as a holder of Old Knology Warrants.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS
FULL POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE OLD
KNOLOGY WARRANTS TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, NEW KNOLOGY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE OLD KNOLOGY WARRANTS TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE
CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY NEW KNOLOGY OR THE EXCHANGE AGENT TO BE NECESSARY
OR DESIRABLE TO COMPLETE THE EXCHANGE, SALE, ASSIGNMENT AND TRANSFER OF THE OLD
KNOLOGY WARRANTS TENDERED HEREBY.
The undersigned acknowledges that the undersigned has been furnished
with the Information Statement, understands and has evaluated the risks of the
Exchange Offer, has been given the opportunity to ask questions of and receive
answers from the executive officers of NEW KNOLOGY concerning the terms and
conditions of the Exchange Offer, has received any documents and additional
information which Stockholder has requested to evaluate the merits and risks of
the Exchange Offer, has not been furnished any offering literature or prospectus
other than the Information Statement, and except as described in this paragraph,
has not been furnished with any oral or written representation or oral or
written information in connection with the Exchange Offer which is not contained
in the Information Statement. THE UNDERSIGNED AGREES TO ALL OF THE TERMS OF THE
EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Old
Knology Warrants tendered hereby should be printed above, if they are not
already set forth above, as they appear on the Certificates representing such
Old Knology Warrants. The Certificate number(s) and the Old Knology Warrants
that the undersigned wishes to tender should be indicated in the appropriate
boxes above.
3
<PAGE> 4
If any tendered Old Knology Warrants are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted for more Old
Knology Warrants than are tendered or accepted for exchange, Certificates for
such nonexchanged or nontendered Old Knology Warrants will be returned (or, in
the case of Old Knology Warrants tendered by book-entry transfer, such Old
Knology Warrants will be credited to an account maintained at DTC), without
expense to the tendering holder promptly following the expiration or termination
of the Exchange Offer.
The undersigned understands that tenders of Old Knology Warrants
pursuant to the procedures described in the instructions herein will, upon NEW
KNOLOGY's acceptance for exchange of such tendered Old Knology Warrants,
constitute a binding agreement between the undersigned and NEW KNOLOGY upon the
terms and subject to the conditions of the Exchange Offer. The undersigned
recognizes that, under certain circumstances set forth in Instruction 12, NEW
KNOLOGY may not be required to accept for exchange any of the Old Knology
Warrants tendered hereby. NEW KNOLOGY intends to accept all tenders of Old
Knology Warrants simultaneously at the Closing of the Old Knology/TELCO
Reorganization as described in the Information Statement.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the NEW KNOLOGY
Warrants be issued in the name(s) of the undersigned or, in the case of a
book-entry transfer of Old Knology Warrants, that such NEW KNOLOGY Warrants be
credited to the account indicated above maintained at DTC. If applicable,
substitute certificates representing Old Knology Warrants not exchanged or not
accepted for exchange will be issued to the undersigned or, in the case of a
book-entry transfer of Old Knology Warrants, will be credited to the account
indicated above maintained at DTC. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please deliver NEW KNOLOGY Warrants to the
undersigned at the address shown below the undersigned's signature.
BY TENDERING OLD KNOLOGY WARRANTS AND EXECUTING THIS LETTER OF
TRANSMITTAL, THE UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT ANY NEW KNOLOGY
WARRANTS TO BE RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED FOR INVESTMENT
ONLY, FOR THE UNDERSIGNED'S OWN ACCOUNT, AND NOT WITH A VIEW TO, OR FOR RESALE
IN CONNECTION WITH, ANY DISTRIBUTION THEREOF OR PARTICIPATION THEREIN. THE
UNDERSIGNED IS AN "ACCREDITED INVESTOR" AS SUCH TERM IN DEFINED IN RULE 501(a)
UNDER THE SECURITIES ACT. THE UNDERSIGNED UNDERSTANDS THAT THE NEW KNOLOGY
WARRANTS TO BE ISSUED PURSUANT TO THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT IN RELIANCE UPON THE REPRESENTATIONS SET FORTH HEREIN. THE
UNDERSIGNED ACKNOWLEDGES THE RESTRICTIONS DESCRIBED IN THE INFORMATION STATEMENT
ON THE TRANSFER OF THE NEW KNOLOGY WARRANTS AND THE UNDERLYING STOCK.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Information Statement and in the Instructions contained in this
Letter of Transmittal, this tender is irrevocable.
ALTHOUGH THE EXCHANGE OFFER WILL REMAIN OPEN UNTIL THE EXPIRATION DATE,
NEW KNOLOGY REQUESTS THAT YOU PLEASE DELIVER THIS LETTER AND ANY WARRANTS TO THE
EXCHANGE AGENT BY NO LATER THAN NOVEMBER 15, 1999.
4
<PAGE> 5
PLEASE SIGN HERE
- --------------------------------------------
Authorized Signature
Name:---------------------------------------
Title:--------------------------------------
Address: -----------------------------------
- --------------------------------------------
Telephone Number: --------------------------
Dated:---------------------------------------
- -------------------------------------------------
Taxpayer Identification or Social Security Number
PLEASE SIGN HERE
- --------------------------------------------
Authorized Signature
Name:---------------------------------------
Title:--------------------------------------
Address: -----------------------------------
- --------------------------------------------
Telephone Number: --------------------------
Dated:---------------------------------------
- -------------------------------------------------
Taxpayer Identification or Social Security Number
(NOTE: Signature(s) must be guaranteed if required by Instructions 2 and 5.
This Letter of Transmittal must be signed by the registered holder(s) exactly as
the name(s) appear(s) on Certificate(s) for the Old Knology Warrants hereby
tendered or on a security position listing, or by any person(s) authorized to
become the registered holder(s) by endorsements and documents transmitted
herewith, including such opinions of counsel, certifications and other
information as may be required by NEW KNOLOGY or the Warrant Agent for the Old
Knology Warrants to comply with any restrictions on transfer applicable to the
Old Knology Warrants. If signature is by an attorney-in-fact, executor,
administrator, trustee, guardian, officer of a corporation or another acting in
a fiduciary capacity or representative capacity, please set forth the signer's
full title. See Instructions 2 and 5.)
5
<PAGE> 6
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 2 AND 5)
Signature(s) Guaranteed by an
Eligible Institution: ------------------------ Date: ------------------------
AUTHORIZED SIGNATURE
Name of Eligible Institution
Guaranteeing Signature: ---------------------- Address: ----------------------
Capacity (full title): ------------------------ -------------------------------
Telephone Number: ----------------------------- -------------------------------
- --------------------------------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 2, 5 AND 6)
To be completed ONLY if the NEW KNOLOGY Warrants or any Old Knology
Warrants that are not tendered are to be issued in the name of someone other
than the registered holder(s) of the Old Knology Warrants whose name(s)
appear(s) above.
Issue:
- - Old Knology Warrants not tendered, to:
- - NEW KNOLOGY Warrants, to:
Name(s) ---------------------------------
Address ---------------------------------
- -----------------------------------------
Telephone Number: -----------------------
- ---------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 2, 5 AND 6)
To be completed ONLY if the NEW KNOLOGY Warrants or any Old Knology
Warrants that are not tendered are to be sent to someone other than the
registered holder(s) of the Old Knology Warrants whose name(s) appear(s) above,
or to such registered holder at an address other than that shown above:
Mail:
- - Old Knology Warrants not tendered, to:
- - NEW KNOLOGY Warrants, to:
Name(s) ----------------------------------
Address ----------------------------------
- ------------------------------------------
Telephone Number: ------------------------
- -----------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
- --------------------------------------------------------------------------------
6
<PAGE> 7
INSTRUCTIONS
(FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER)
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; ACCEPTANCE FOR
EXCHANGE AND ISSUANCE OF NEW KNOLOGY WARRANTS. This Letter of Transmittal is to
be completed either if (a) Certificates are to be forwarded herewith or (b)
tenders are to be made pursuant to the procedures for tender by book-entry
transfer set forth in Instruction 11 "Procedures for Tendering Old Knology
Warrants." Certificates, or timely confirmation of a book-entry transfer of such
Old Knology Warrants into the Exchange Agent's account at DTC, as well as this
Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein on or prior to the Expiration Date, although
holders are requested to respond to the Exchange Offer by no later than November
15, 1999. The term "book-entry confirmation" means a timely confirmation of
book-entry transfer of Old Knology Warrants into the Exchange Agent's account at
DTC. Old Knology Warrants may be tendered in whole or in part.
NEW KNOLOGY will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
Subject to the terms and conditions of the Exchange Offer, NEW KNOLOGY
will be deemed to have accepted for exchange, and thereby exchanged, Old Knology
Warrants validly tendered as, if and when NEW KNOLOGY gives oral or written
notice to the Exchange Agent (any such oral notice to be promptly confirmed in
writing) of NEW KNOLOGY's acceptance of such Old Knology Warrants for exchange
pursuant to the Exchange Offer. NEW KNOLOGY intends to accept all tenders of Old
Knology Warrants simultaneously at the Closing of the Old Knology/TELCO
Reorganization as described in the Information Statement. NEW KNOLOGY's
acceptance for exchange of Old Knology Warrants tendered pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering holder and NEW KNOLOGY upon the terms and subject to the conditions of
the Exchange Offer. The Exchange Agent will act as agent for NEW KNOLOGY for the
purpose of receiving tenders of Old Knology Warrants, Letters of Transmittal and
related documents, and as agent for tendering holders for the purpose of
receiving Old Knology Warrants, Letters of Transmittal and related documents and
transmitting NEW KNOLOGY Warrants to holders who validly tendered Old Knology
Warrants. If for any reason whatsoever the acceptance for exchange or the
exchange of any Old Knology Warrants tendered pursuant to the Exchange Offer is
delayed (whether before or after NEW KNOLOGY's acceptance for exchange of Old
Knology Warrants), or NEW KNOLOGY extends the Exchange Offer or is unable to
accept for exchange or exchange Old Knology Warrants tendered pursuant to the
Exchange Offer, then, without prejudice to NEW KNOLOGY's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of NEW KNOLOGY and
subject to applicable laws, retain tendered Old Knology Warrants and such Old
Knology Warrants may not be withdrawn.
Upon the terms and subject to the conditions of the Exchange Offer, NEW
KNOLOGY will exchange, and will issue to the Exchange Agent, NEW KNOLOGY
Warrants for Old Knology Warrants validly tendered promptly after conditions to
the Exchange Offer have been satisfied, or if previously satisfied, promptly
after valid tender. In all cases, delivery of NEW KNOLOGY Warrants in exchange
for Old Knology Warrants tendered and accepted for exchange pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
(i) Old Knology Warrants or a book-entry confirmation of a book-entry transfer
of Old Knology Warrants into the Exchange Agent's account at DTC; (ii) this
Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees; and (iii) any other documents
required by this Letter of Transmittal. The delivery of NEW KNOLOGY Warrants
might not be made to all tendering holders at the same time.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if: (i) this Letter of Transmittal is signed by the
registered holder (which shall include any participant in DTC whose name appears
on a security position listing as the owner of the Old Knology Warrants) of Old
Knology Warrants tendered herewith, unless such holder has completed either the
box entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" above; or (ii) such Old Knology Warrants are tendered for
the account of a firm that is an Eligible Institution (as defined below). In all
other cases, an Eligible Institution must guarantee the signature(s) on this
Letter of Transmittal. See Instruction 5.
7
<PAGE> 8
"Eligible Institution" means a guarantor institution which is a member
of one or more of the following recognized signature guarantee programs: (i) The
Securities Transfer Agents Medallion Program (STAMP), (ii) The New York Stock
Exchange Medallion Signature Program (MSF), or (iii) The Stock Exchange
Medallion Program (SEMP).
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Old Knology Warrants Tendered" is inadequate, the Certificate
number(s) and/or the amount of Old Knology Warrants and any other required
information should be listed on a separate signed schedule and attached to this
Letter of Transmittal.
4. PARTIAL TENDERS. Tenders of Old Knology Warrants will be accepted in
whole or in part. If less than all the Old Knology Warrants evidenced by any
Certificate submitted are to be tendered, fill in the amount of Old Knology
Warrants which are to be tendered in the box entitled "Amount Tendered (if less
than all)." In such case, new certificate(s) for the remainder of the Old
Knology Warrants that were evidenced by the old Certificate(s) will be sent to
the tendering holder, unless the appropriate boxes on this Letter of Transmittal
are completed, promptly after acceptance of the tender by NEW KNOLOGY. All Old
Knology Warrants represented by Certificates delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the Old
Knology Warrants tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) or on a security
position listing, without alteration, enlargement or any change whatsoever.
If any of the Old Knology Warrants tendered hereby are owned of record
by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If any tendered Old Knology Warrants are registered in different names
on several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are names
in which Certificates are registered.
If this Letter of Transmittal or any Certificates or warrant powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to NEW KNOLOGY, in its sole discretion, of such persons'
authority to so act.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Old Knology Warrants listed and transmitted hereby,
the Certificate(s) must be endorsed or accompanied by appropriate warrant
power(s), signed exactly as the name(s) of the registered owner appear(s) on the
Certificate(s), and also must be accompanied by such opinions of counsel,
certifications and other information as NEW KNOLOGY or the Warrant Agent for the
Old Knology Warrants may require in accordance with the restrictions on transfer
applicable to the Old Knology Warrants. Signature(s) on such Certificate(s) or
warrant power(s) must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If NEW KNOLOGY Warrants
or Certificates for Old Knology Warrants not exchanged are to be issued in the
name of a person other than the signer of this Letter of Transmittal, or are to
be sent to someone other than the signer of this Letter of Transmittal or to an
address other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed. In the case of issuance in a different name,
the taxpayer identification number of the person named must also be indicated.
Holders tendering Old Knology Warrants by book-entry transfer may request that
Old Knology Warrants not exchanged be credited to such account maintained at DTC
as such holder may designate. If no such instructions are given, Old Knology
Warrants not exchanged will be returned by mail or, if tendered by book-entry
transfer, by crediting the account indicated above maintained at DTC.
7. IRREGULARITIES. NEW KNOLOGY will determine, in its sole discretion,
all questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Old Knology
8
<PAGE> 9
Warrants, which determination shall be final and binding on all parties. NEW
KNOLOGY 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 NEW KNOLOGY, be
unlawful. NEW KNOLOGY also reserves the absolute right, subject to applicable
law, to waive any of the conditions of the Exchange Offer set forth in the
Information Statement or any defect or irregularity in any tender of Old Knology
Warrants of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. NEW KNOLOGY's
interpretation of the terms and conditions of the Exchange Offer (including this
Letter of Transmittal and the instructions hereto) will be final and binding. No
tender of Old Knology Warrants will be deemed to have been validly made until
all defects or irregularities with respect to such tender have been cured or
waived. Neither NEW KNOLOGY, any affiliates of NEW KNOLOGY, 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.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth above. Additional copies of the Information
Statement and the Letter of Transmittal may be obtained from the Exchange Agent.
9. MUTILATED, LOST, DESTROYED OR STOLEN CERTIFICATES. If any
Certificate representing Old Knology Warrants has been mutilated, lost,
destroyed or stolen, the holder should promptly notify the Exchange Agent. The
holder will then be instructed as to the steps that must be taken in order to
replace the Certificate. This Letter of Transmittal and related documents cannot
be processed until the procedures for replacing mutilated, lost, destroyed or
stolen Certificates have been followed.
10. SECURITY TRANSFER TAXES. Holders who tender their Old Knology
Warrants for exchange will be obligated to pay any transfer taxes in connection
therewith. If any such tax applies, unless satisfactory evidence of payment of
such transfer tax or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer tax will be billed directly to such
tendering holder.
11. PROCEDURES FOR TENDERING OLD KNOLOGY WARRANTS.
Valid Tender. Except as set forth below, in order for Old Knology
Warrants to be validly tendered pursuant to the Exchange Offer, (i) 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 above prior to the
Expiration Date and (ii) tendered Old Knology Warrants must be received by the
Exchange Agent, or such Old Knology Warrants 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.
If less than all of the Old Knology Warrants held by a holder are
tendered by such holder, such holder should fill in the amount of Old Knology
Warrants being tendered in the appropriate box on this Letter of Transmittal.
The entire amount of Old Knology Warrants delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated. See Instruction 4.
If any Letter of Transmittal, endorsement, bond power, power of
attorney, or any other document required by this 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 NEW KNOLOGY,
evidence satisfactory to NEW KNOLOGY, in its sole discretion, of such person's
authority to so act must be submitted. See Instruction 5.
Any beneficial owner of Old Knology Warrants 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 OLD KNOLOGY WARRANTS, THIS LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF
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<PAGE> 10
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 OLD KNOLOGY WARRANTS SHOULD BE SENT TO NEW
KNOLOGY. 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 Old Knology Warrants at DTC for
purposes of the Exchange Offer within two business days after the date of the
Information Statement. Any financial institution that is a participant in DTC's
book-entry transfer facility system may make a book-entry delivery of the Old
Knology Warrants by causing DTC to transfer such Old Knology Warrants into the
Exchange Agent's account at DTC in accordance with DTC's procedures for
transfers. However, although delivery of Old Knology Warrants may be effected
through book-entry transfer into the Exchange Agent's account at DTC, this
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 above prior to the Expiration Date or, alternatively, a
computer-generated message, transmitted by means of the book-entry transfer ATOP
system and received by the Exchange Agent and forming a part of a book-entry
confirmation, in which a holder acknowledges and agrees to be bound by the terms
of this Letter of Transmittal, must be sent.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
Signature Guarantees. Certificates for Old Knology Warrants need not be
endorsed and signature guarantees on a Letter of Transmittal are unnecessary
unless (a) a certificate for Old Knology Warrants 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 "Special Delivery
Instructions" in this Letter of Transmittal. In the case of (a) or (b) above,
such certificates for Old Knology Warrants must be duly endorsed or accompanied
by a properly executed warrant power, with the endorsement or signature on the
warrant power and on the Letter of Transmittal guaranteed by an Eligible
Institution, unless surrendered on behalf of such Eligible Institution. See
Instructions 2 and 5.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Old Knology Warrants will be determined by NEW KNOLOGY, in its sole
discretion, which determination shall be final and binding on all parties. NEW
KNOLOGY's interpretation of the terms and conditions of the Exchange Offer
(including this Letter of Transmittal and the instructions hereto) will be final
and binding on all parties. See Instruction 7.
12. CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any
extension of the Exchange Offer, NEW KNOLOGY will not be required to accept for
exchange, or to exchange, any Old Knology Warrants for any NEW KNOLOGY Warrants,
and may, at any time and from time to time, terminate the Exchange Offer or
waive any conditions to or amend the Exchange Offer in any respect (whether or
not any Old Knology Warrants have theretofore been accepted for exchange), as
set forth in "Description of the Exchange--Closing Conditions" in the
Information Statement.
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<PAGE> 1
EXHIBIT 10.71
KNOLOGY, INC. SPIN-OFF PLAN
WHEREAS, ITC Holding Company, Inc. ("ITC Holding") maintains the ITC
Holding Company, Inc. Stock Option Plan, as amended and restated (the "ITC
Option Plan");
WHEREAS, in connection with the distribution ("Distribution") of KNOLOGY
Series A Preferred Stock by ITC Holding on December 30, 1999, ITC Holding has
determined that it is appropriate and desirable to adjust the outstanding and
unexercised options granted under the ITC Option Plan (the "ITC Options") by
reducing the exercise price of the ITC Options and also distributing options to
purchase KNOLOGY Series A Preferred Stock (the "KNOLOGY Options");
WHEREAS, the purpose of this adjustment is to account for the reduction
in the fair market value of ITC Holding common stock as a result of the
Distribution;
WHEREAS, it is intended that this adjustment satisfy the requirements of
Section 424(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, KNOLOGY, Inc. ("KNOLOGY") will be the issuer of shares of Stock
on exercise of the KNOLOGY Options, and, therefore, wishes to adopt this KNOLOGY
Inc. Spin-Off Plan (the "Plan") pursuant to which the shares of Stock will be
issued; and
WHEREAS, the Plan is intended only for the KNOLOGY Options distributed in
connection with the Distribution and no additional options shall be granted
under this Plan.
NOW, THEREFORE, BE IT RESOLVED, that KNOLOGY sets forth herein the terms
of the Plan as follows:
Section 1. Except as provided in Sections 2 through 10 below, the terms of
the Plan shall be identical to the terms of the ITC Option Plan,
attached hereto as Exhibit A; provided, however, that the terms of
the Plan shall be interpreted in a manner not inconsistent with
the implementation of the Distribution of the KNOLOGY Options and
the administration thereof.
Section 2. The name of the Plan shall be the "KNOLOGY Spin-Off Plan".
Section 3. The Plan shall be effective as of December __, 1999, the date the
Plan was approved by the Board of Directors of KNOLOGY.
<PAGE> 2
Section 4. "Stock" shall mean the Series A Preferred Stock, par value $0.01,
of KNOLOGY and any other capital stock of KNOLOGY into which such
stock may be converted, or reclassified or that may be issued in
respect of, in exchange for or in substitution of, such stock by
reason of any stock splits, stock dividends, distributions,
mergers, consolidations or other like events (including automatic
conversion of the Series A Preferred Stock pursuant to its terms).
Section 5. Notwithstanding anything else to the contrary contained in the
Plan, if an Option is granted, assumed or modified pursuant to the
Plan on account of any recapitalization, reclassification, stock
split, reverse split, combination of shares, exchange of shares,
stock dividend or other distribution payable in capital stock of
ITC Holding or KNOLOGY, or other increase or decrease in such
shares effected without receipt of consideration by ITC Holding or
KNOLOGY, the Option Price payable with respect to shares that are
subject to the Option may be less than the Fair Market Value of
the shares to the extent necessary and appropriate to properly
reflect the transaction.
Section 6. Only holders of outstanding but unexercised ITC Options who
receive Options distributed in the Distribution occurring on or
about December 30, 1999 are eligible to participate in the Plan.
Section 7. Solely for purposes of the Plan, an Optionee who is employed by or
provides services to (1) ITC Holding, or (2) ITC/\DeltaCom, Inc.
or any of their respective affiliates immediately following the
Distribution and who continues to be employed by or provide
services to such company or any of its affiliates following the
Distribution shall not be considered to have terminated qualifying
employment or service for purposes of the plan and options granted
thereunder (including, without limitation, option exercise and
vesting provisions).
Section 8. The number of shares of Stock reserved for issuance under the
Plan is 6,258,036 shares, which is the number of shares of Stock
available for issuance pursuant to the exercise of KNOLOGY Options
distributed by ITC Holding in the Distribution to holders of ITC
Options.
Section 9. The term "Optionee" shall mean a person who holds an Option issued
under the Plan.
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<PAGE> 3
Section 10. The term "Company" shall KNOLOGY, Inc. and any successor to such
corporation.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Plan as of the __ day of December, 1999 to evidence its adoption of
this Plan.
KNOLOGY, INC.
By:
--------------------------
3
<PAGE> 1
EXHIBIT 10.72
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "AGREEMENT") is entered into
as of December 22, 1999 between KNOLOGY, Inc., a Delaware corporation
("BORROWER"), and InterCall, Inc., a Delaware corporation ("LENDER").
BACKGROUND
WHEREAS, Borrower and Lender desire to enter into a line of credit
facility pursuant to which Lender will make credit available to Borrower for the
purposes hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. LOANS
1.1. LINE OF CREDIT LOAN
Subject to the terms and conditions hereof, during the
period beginning on the date hereof (the "CLOSING DATE") and ending on March
31, 2000, Lender shall make advances (each a "BORROWING") to Borrower in such
amounts as Borrower shall reasonably request from time to time, provided that
the maximum aggregate principal amount of all such Borrowings shall at no time
exceed $30,400,000 (the "COMMITMENT"). Each Borrowing shall be made upon written
or e-mail notice of the Borrower received by the Lender not later than 5:00 PM
five (5) Business Days (as hereinafter defined) prior to the date of the
proposed Borrowing, and the amount of such proposed Borrowing shall not be in an
amount of less than $100,000. The loan facility contemplated by this SECTION 1.1
sometimes is referred to herein as the "LINE OF CREDIT LOAN." The Line of Credit
Loan shall be evidenced by, and shall be due and payable in accordance with,
that certain Line of Credit Note of Borrower (the "NOTE"), dated the Closing
Date and in substantially the form of the promissory note attached hereto as
EXHIBIT A (the terms and provisions of which Note are incorporated herein by
reference).
1.2. INTEREST
The outstanding principal amount of the Line of Credit
Loan shall bear interest at the rate of eleven and seven-eighths percent
(11.875%) per annum.
Interest shall be due and payable as more fully set
forth in the Note.
<PAGE> 2
1.3. USE OF PROCEEDS
The proceeds of the Line of Credit Loan shall be used by
Borrower for the sole purpose of making a capital contribution to KNOLOGY
Holdings, Inc., a Delaware corporation.
2. REPRESENTATIONS AND WARRANTIES OF BORROWER
In order to induce Lender to enter into this Agreement
and to make the Line of Credit Loan, Borrower hereby makes the following
representations and warranties to Lender, which representations and warranties
shall survive the execution and delivery hereof and of the Note:
2.1. ORGANIZATION AND STANDING; AUTHORITY
Borrower (a) is a corporation duly organized, validly
existing, and in good standing under the laws of the state of its
incorporation, (b) is qualified to do business as a foreign corporation and is
in good standing in all jurisdictions where its activities or ownership of
property require such qualification, except for any such jurisdictions where the
failure to be so qualified would not have a material adverse effect on the
ability of Borrower to perform or comply with all terms, conditions, and
agreements to be performed or complied with by Borrower under this Agreement or
under any of the other Loan Documents (as hereinafter defined), or to perform
the transactions contemplated hereby or thereby, and (c) has the power and
authority to own, operate, and lease its properties, to carry on its business as
currently conducted, to execute and deliver and perform this Agreement, the
Note, and any other instruments or agreements executed pursuant hereto or
thereto (this Agreement, the Note, and such other instruments and agreements
hereinafter collectively referred to as the "LOAN DOCUMENTS"), to incur the
obligations provided for in the Loan Documents, and to perform the transactions
contemplated in the Loan Documents, all of which have been duly and validly
authorized by all proper and necessary action (all of which actions are in full
force and effect).
2.2. APPROVALS
No approval, consent or other action by any governmental
authority or by any other person or entity, which has not been obtained,
is or will be necessary to permit the valid execution, delivery or performance
by Borrower of this Agreement or any of the other Loan Documents.
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<PAGE> 3
2.3. BINDING EFFECT, NO VIOLATIONS
Each of the Loan Documents, upon its execution and
delivery, will constitute a legal, valid, and binding obligation of Borrower,
enforceable against Borrower in accordance with its terms. The execution,
delivery, and performance of the Loan Documents will not (a) violate, conflict
with, or constitute a default under, any law, regulation, order or any other
requirement of any court, tribunal, arbitrator, or governmental authority, any
terms of the Borrower's Certificate of Incorporation, or any material contract,
agreement or other arrangement binding upon or affecting Borrower or any of its
properties, or (b) result in the creation, imposition or acceleration of any
indebtedness or any mortgage, pledge, lien, charge, reservation, covenant,
restriction, security interest, or other encumbrance (an "ENCUMBRANCE") of any
nature upon, or with respect to, Borrower or any of its properties.
2.4. LITIGATION
There is no claim, litigation, proceeding, or
investigation pending, threatened or reasonably anticipated against or
affecting Borrower and relating to this Agreement, any of the other Loan
Documents, or any of the transactions contemplated hereby or thereby, before or
by any court,tribunal, arbitrator, or governmental authority.
2.5. TITLE TO ASSETS
As of the date hereof, Borrower has good, valid, and
marketable title to all of its properties and assets (whether real or
personal), and there exist no Encumbrances on any of Borrower's properties or
assets. All personal property of Borrower is in good condition and repair, and
is suitable and adequate for the uses for which it is being used.
2.6. INFORMATION
The statements made and the documents delivered by
Borrower to Lender in connection with this Agreement and the other Loan
Documents are true, correct and complete in all material respects and omit no
material facts which are necessary to prevent such statements from being
misleading.
2.7. NO CHANGE
No change in the business, operations, properties or
condition (financial or otherwise) of Borrower, or any other event, has
occurred since the date of the most recent information submitted to Lender by
Borrower as described in SECTION 2.6 hereof, which change could reasonably be
expected to have a material
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<PAGE> 4
adverse effect on the ability of Borrower to perform or comply with all terms,
conditions, and agreements to be performed or complied with by Borrower under
this Agreement or under any of the other Loan Documents, or to perform the
transactions contemplated hereby and thereby.
2.8. TAXES
Borrower has filed all tax returns and reports required
by any governmental authority to be filed by Borrower, and such returns and
reports are true and correct in all material respects. Borrower has paid all
taxes, assessments, and other government charges imposed upon Borrower or
Borrower's income, profits or properties, or upon any part thereof, other than
those presently payable without penalty or interest and those which are being
contested in good faith.
2.9. NO DEFAULT
No Event of Default (as hereinafter defined), and no
event which with notice, lapse of time or other condition would constitute an
Event of Default, has occurred and is continuing.
2.10. COMPLIANCE WITH LAWS
Borrower has complied and is in compliance with all
applicable laws, regulations, orders, and other requirements of any
governmental authority or arbitrator, and with all terms of Borrower's
Certificate of Incorporation and each agreement or other arrangement binding
upon or affecting Borrower or any of its properties, except for any
non-compliance with any of the foregoing which would not have a material adverse
effect on the ability of the Borrower to perform or comply with all terms,
conditions, and agreements to be performed or complied with by Borrower under
this Agreement or under any of the other Loan Documents, or to perform the
transactions contemplated hereby or thereby.
2.11. LICENSES AND CONTRACTS
All material franchises, licenses, permits,
certificates, consents, approvals, authorizations, agreements, and contracts
necessary to operate Borrower's business as it currently is being operated have
been obtained and are in full force and effect.
2.12. CAPITAL STOCK
The capital stock of Borrower (the "CAPITAL STOCK")
described on EXHIBIT B hereto constitutes all the issued and outstanding
Capital Stock of the Borrower and all conversion rights with respect to, and
subscription rights, calls,
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<PAGE> 5
commitments or claims of any character for, or any
repurchase or redemption options relating to, the Capital Stock of Borrower.
Except as set forth on EXHIBIT B, there are no outstanding contractual
obligations of Borrower to repurchase, redeem or otherwise acquire any of its
Capital Stock or make any material investment (in the form of a loan, capital
contribution or otherwise) in any other person. As of the date hereof, all of
the outstanding Capital Stock of Borrower is duly issued, fully paid and
non-assessable.
3. CONDITIONS PRECEDENT
3.1. CONDITIONS PRECEDENT TO FIRST ADVANCE OF LINE OF CREDIT
LOAN ON OR AFTER THE DATE HEREOF
The obligation of Lender to make the first advance of
the Line of Credit Loan on or after the date hereof is subject to the
satisfaction (in the reasonable judgment of Lender), at or before the date of
such advance, of the following conditions precedent:
3.1.1. REPRESENTATIONS AND WARRANTIES;
COMPLIANCE
All representations and warranties made by Borrower in
this Agreement or any of the other Loan Documents shall be true and correct
in all material respects on and as of the date of such advance with the same
force and effect as though such representations and warranties had been made on
and as of the date of such advance. All of the agreements, terms, covenants, and
conditions required by this Agreement to be complied with and performed prior to
the date of such advance by Borrower shall have been complied with and
performed.
3.1.2. DOCUMENTS
Borrower shall deliver to Lender copies of all documents
and other items reasonably requested by Lender evidencing Borrower's
authority to enter into and perform this Agreement and the other Loan Documents.
3.1.3. EXECUTED NOTE AND OTHER LOAN DOCUMENTS
Borrower shall deliver to Lender the fully executed Note
and fully executed copies of all other Loan Documents.
3.2. CONDITIONS PRECEDENT TO THE SECOND AND EACH SUBSEQUENT
ADVANCE OF THE LINE OF CREDIT LOAN
The obligation of Lender to make the second and each
subsequent advance of the Line of Credit Loan is subject to the satisfaction
(in the reasonable
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<PAGE> 6
judgment of Lender), as of the date of each such Line of
Credit Loan advance, of the conditions precedent specified in SECTION 3.1.1
hereof.
4. COVENANTS OF BORROWER
Until all obligations of Borrower under this Agreement
and the other Loan Documents are paid in full and performed, Borrower hereby
covenants and agrees that it shall, unless Lender otherwise consents in advance
in writing:
4.1. PAYMENT OF NOTE
Punctually pay the principal of and interest on the Note
at the times and places and in the manner specified therein.
4.2. CORPORATE EXISTENCE
Preserve, maintain, and keep in full force and effect
its existence as a corporation in the State of Delaware.
4.3. CORPORATE RIGHTS AND FRANCHISES; QUALIFICATION; CONDUCT
OF BUSINESS
Preserve, maintain, and keep in full force and effect
all franchises, licenses, permits, certificates, consents, approvals,
authorizations, agreements, and contracts which are material to the operation of
Borrower's business as it currently is being conducted, whether now existing or
hereafter granted to or obtained by Borrower; qualify and remain qualified as a
foreign corporation in each jurisdiction in which such qualification is
necessary in view of its activities and ownership of property; and continue to
engage in a business of the same general type as now conducted by Borrower.
4.4. TAXES, CHARGES, AND OBLIGATIONS
Pay and discharge all taxes, assessments, and
governmental charges or levies imposed upon it or upon its income, profits,
properties or any part thereof, prior to the date on which penalties attach
thereto, as well as all claims which, if unpaid, might become an Encumbrance
upon any properties of Borrower, and pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all of the
indebtedness and other obligations of whatever nature of Borrower; provided,
however, that Borrower shall not be required to pay any such tax, assessment,
charge, levy, claim, indebtedness or obligation so long as (a) the validity
thereof is being contested by Borrower in good
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<PAGE> 7
faith and by proper proceedings and (b) Borrower sets aside on its books
reasonable reserves therefor.
4.5. MAINTENANCE OF PROPERTIES
Keep all of its properties in good repair, working
order, and condition, and from time to time make all necessary repairs thereof.
4.6. INSURANCE
Maintain and keep in full force and effect, with
financially sound and reputable insurance companies, insurance in such amounts
and covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which
Borrower operates.
4.7. COMPLIANCE WITH LAWS
Comply with all applicable laws, regulations, orders,
and other requirements of any court, tribunal, arbitrator, or governmental
authority, non-compliance with which could have a material adverse effect on the
business, operations, property or condition (financial or otherwise) of
Borrower.
4.8. BOOKS AND RECORDS
Keep and maintain adequate and proper records and books
of account, in which complete entries are made in accordance with generally
accepted accounting principles consistently applied and in accordance with all
laws, regulations, orders, and other requirements of any court, tribunal,
arbitrator, or governmental authority, reflecting all financial and other
transactions of Borrower normally and customarily included in records and books
of account of companies engaged in the same or similar businesses and activities
as Borrower.
4.9. ACCESS TO BORROWER'S EMPLOYEES, PROPERTIES, AND BOOKS
AND RECORDS
Permit Lender and any agents or representatives thereof,
during normal business hours and upon reasonable notice to Borrower, to
visit and inspect the properties of Borrower, to examine and make abstracts from
any of Borrower's books and records, and to discuss the business, operations,
properties, and condition (financial or otherwise) of Borrower with any of the
officers, directors, employees, agents or representatives (including, without
limitation, the independent certified public accountants) of Borrower.
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<PAGE> 8
4.10. FINANCIAL STATEMENTS
Furnish to Lender (a) within one hundred twenty (120)
days after the end of each fiscal year of Borrower, the audited consolidated
balance sheet of Borrower as of the end of such fiscal year and the related
audited statements of income, changes in stockholders' equity and changes in
financial position of Borrower and its subsidiaries for such fiscal year, all
prepared in accordance with generally accepted accounting principles
consistently applied, and certified without qualification by an independent
certified public accountant of recognized standing; (b) within sixty (60) days
after the end of each quarter of each fiscal year of Borrower and its
subsidiaries, a consolidated balance sheet and related statement of income,
changes in stockholders' equity, and changes in financial position of Borrower
and its subsidiaries, as of the end of such quarter, certified by Borrower's
chief financial officer as having been prepared in accordance with generally
accepted accounting principles consistently applied; (c) not later than fifteen
(15) days after each calendar month end, a consolidated balance sheet and income
statement of Borrower and its subsidiaries as of the last day of such month; and
(d) promptly after each such filing is made with the Securities and Exchange
Commission, a copy of each filing made by Borrower with the Securities and
Exchange Commission.
4.11. NOTICE OF DEFAULT AND LOSS
Give immediate notice to Lender upon the occurrence of
any Event of Default or event which with notice or lapse of time or
otherwise would constitute an Event of Default.
4.12. INDEBTEDNESS
Not create, incur, assume, or suffer to exist any
indebtedness, except for (a) indebtedness under the Loan Documents; or (b)
indebtedness to which the Lender has consented in writing.
4.13. ENCUMBRANCES
Not create, incur, assume or suffer to exist any
Encumbrance upon any of its properties, whether now owned or hereafter acquired.
4.14. FUNDAMENTAL CHANGES
Not amend its Certificate of Incorporation by any
amendment which would adversely affect Borrower's ability to perform or comply
with any of the terms, conditions or agreements to be performed or complied with
by Borrower hereunder or to perform any of the transactions contemplated hereby.
Not engage
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<PAGE> 9
in any consolidation or merger, or purchase, lease or otherwise acquire all or
substantially all of the assets of any other entity.
4.15. TRANSFER OF PROPERTIES
Not sell, lease, assign, pledge or otherwise dispose of
any of its properties, whether now owned or hereafter acquired, except in
the ordinary course of business and for fair market value.
4.16. USE OF PROCEEDS
Not use, or allow the use of, the proceeds of the Line
of Credit Loan for any purpose which would cause any violation of Regulations
U, T, or X of the Board of Governors of the Federal Reserve System or for any
purpose other than that permitted by SECTION 1.3 hereof.
5. EVENTS OF DEFAULT AND REMEDIES
5.1. EVENTS OF DEFAULT
The occurrence of any one or more of the following
events shall constitute an Event of Default hereunder: (a) Borrower shall fail
to pay in full, when due, any payment under the Note; or (b) any representation
or warranty made by or on behalf of Borrower herein or in any other Loan
Document shall prove to have been incorrect or misleading or breached in any
material respect on or as of any date as of which made; or (c) Borrower shall
fail to observe or perform any other term, covenant or agreement contained in
this Agreement or in any other Loan Document to be observed or performed on its
part and such failure shall continue unremedied for a period of five (5)
Business Days after written notice of the existence of such failure shall have
been received by Borrower from Lender; or (d) any event of default under any of
the Loan Documents shall occur; or (e) a decree or order for relief of Borrower
shall be entered by a court of competent jurisdiction in any involuntary case
involving Borrower under any bankruptcy, insolvency, or similar law now or
hereafter in effect, or a receiver, liquidator, or other similar agent for
Borrower or for any substantial part of Borrower's assets or property shall be
appointed, or the winding up or liquidation of Borrower's affairs shall be
ordered; or (f) Borrower shall commence a voluntary case under any bankruptcy,
insolvency, or similar law now or hereafter in effect, or Borrower shall consent
to the entry of an order for relief in an involuntary case under any such law or
to the appointment of or taking possession by a receiver, liquidator or other
similar agent for Borrower or for any substantial part of Borrower's assets or
property, or Borrower shall make any general assignment for the benefit of
creditors, or Borrower shall take any action preparatory to or otherwise in
furtherance of any of the foregoing, or
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<PAGE> 10
Borrower shall fail generally to pay its debts as such debts come due; or (g)
one or more judgments or decrees shall be entered against Borrower involving in
the aggregate a liability (not paid or fully covered by insurance) of
$5,000,000 or more in any fiscal year of Borrower, and all such judgments or
decrees shall not have been vacated, discharged or stayed or bonded pending
appeal within sixty (60) days from the entry thereof.
5.2. RIGHTS AND REMEDIES OF LENDER
Upon the occurrence of any Event of Default, Lender may,
at its option, exercise any one or more of the following rights and
remedies: (a) declare the Commitment and Lender's obligation to advance the
Borrowings to be terminated, and declare the entire unpaid principal amount of
the Note, all interest accrued and unpaid thereon, and all other amounts payable
under this Agreement and the other Loan Documents to be accelerated, and to be
immediately due and payable, whereupon the Note, all such accrued interest, and
all such amounts shall become and be immediately due and payable, without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by Borrower, anything contained herein or in any of the
other Loan Documents to the contrary notwithstanding and (b) in addition to the
foregoing, and not in substitution therefor, exercise any one or more of the
rights and remedies exercisable by Lender under other provisions of this
Agreement, under the Note, under any of the other Loan Documents, or provided
by applicable law.
6. MISCELLANEOUS PROVISIONS
6.1. ADDITIONAL ACTIONS AND DOCUMENTS
Borrower shall take or cause to be taken such further
actions, shall execute, deliver, and file or cause to be executed, delivered,
and filed such further documents and instruments, and shall obtain such consents
as may be necessary or as Lender may reasonably request in order fully to
effectuate the purposes, terms, and conditions of this Agreement and the other
Loan Documents, whether before, at or after the closing of transactions
contemplated hereby and thereby or the occurrence of an Event of Default
hereunder.
6.2. EXPENSES
Borrower shall pay all expenses of Lender incident to
this Agreement, including legal and accounting fees and disbursements.
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6.3. NOTICES
All notices, demands, requests, or other communications
provided for herein or in the other Loan Documents shall be in writing and
shall be hand delivered, mailed by first-class, registered or certified mail,
return receipt requested, postage prepaid, delivered by overnight delivery
service, or transmitted by telegram, telex, or facsimile transmission, addressed
as follows:
<TABLE>
<CAPTION>
<S> <C>
(a) If to Borrower:
KNOLOGY, Inc.
1241 O.G. Skinner Drive
West Point, Georgia 31833
Attention: Chad Wachter, Esq.
Facsimile No.: (706) 645-0148
E-mail: [email protected]
(b) If to Lender:
InterCall, Inc.
1211 O.G. Skinner Drive
West Point, Georgia 31833
Attention: Bryan W. Adams
Facsimile No.: (706) 643-5067
E-mail: [email protected]
with a copy (which shall not constitute notice) to:
Kimberley E. Thompson
Senior Vice President, General Counsel and Secretary
4717 Dolphin Lane
Alexandria, Virginia 22309
Facsimile No.: (703) 619-9720
E-mail: [email protected]
</TABLE>
or such other address as the addressee may indicate by written notice to the
other parties.
Each notice, demand, request or communication which
shall be given or made in the manner described above shall be deemed
sufficiently given or made for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile) the confirmation being deemed
conclusive but not exclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
-11-
<PAGE> 12
6.4. SEVERABILITY
If any part of any provision of this Agreement or any
other Loan Document shall be invalid or unenforceable under applicable law,
such part shall be ineffective to the extent of such invalidity or
unenforceability only, without in any way affecting the remaining parts of such
provisions or the remaining provisions of said agreement.
6.5. SURVIVAL
It is the express intention and agreement of the parties
hereto that all covenants, agreements, statements, representations,
warranties, and indemnities made by Borrower in the Loan Documents shall survive
the execution and delivery of the Loan Documents and the making of all advances
and extensions of credit thereunder.
6.6. WAIVER
No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Agreement or under any
other instrument or document given in connection with or pursuant to this
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial exercise
of any such right, power or privilege shall preclude the further exercise of
such right, power or privilege, or the exercise of any other right, power or
privilege. No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
6.7. RIGHTS CUMULATIVE
Except as specifically provided herein, the remedies
provided herein shall be cumulative and shall not preclude the assertion by
Borrower or by Lender of any other rights or the seeking of any other remedies
against the other, or its successors or assigns. Nothing contained herein shall
preclude a party from seeking equitable relief, where appropriate.
6.8. ENTIRE AGREEMENT; MODIFICATION; BENEFIT; ASSIGNMENT
This Agreement, the exhibits hereto, and the other Loan
Documents constitute the entire agreement of the parties hereto with
respect to the matters contemplated herein, supersede all prior oral and written
agreements with respect to the matters contemplated herein, and may not be
modified, deleted or amended except by written instrument executed by the
parties. All terms of this Agreement
-12-
<PAGE> 13
and of the other Loan Documents shall be binding upon, and shall inure to the
benefit of and be enforceable by, the parties hereto and their respective
successors and assigns as permitted hereunder.
No party hereto shall assign this Agreement, in whole or
in part, whether by operation of law or otherwise, without the prior
consent of Lender (if the assignor is Borrower) or Borrower (if the assignor is
Lender); and any purported assignment contrary to the terms hereof shall be
null, void and of no force and effect.
6.9. TERMINATION
This Agreement shall terminate upon payment in full of
all amounts payable and performance of all other obligations owed by
Borrower to Lender under this Agreement and under the other Loan Documents.
6.10. GOVERNING LAW
This Agreement and the other Loan Documents, the rights
and obligations of the parties hereto, and any claims or disputes relating
thereto shall be governed by and construed in accordance with the laws of the
State of Georgia (excluding the choice of law rules thereof).
6.11. PRONOUNS
All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine, neuter, singular or plural, as the
identity of the person or entity may require.
6.12. HEADINGS
Section and subsection headings contained in this
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
6.13. PAYMENTS
If any payment or performance of the Note or of any of
the other obligations under this Agreement or any of the other Loan
Documents becomes due on a day other than a Business Day, the due date shall be
extended to the next succeeding Business Day, and interest thereon (if
applicable) shall be payable at the then applicable rate during such extension.
For the purposes of this Agreement,
-13-
<PAGE> 14
"BUSINESS DAY" means a day other than a
Saturday, Sunday or other day on which commercial banks in Atlanta, Georgia are
authorized by law to close.
6.14. COUNTERPARTS
This Agreement and any of the other Loan Documents may
be executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of, or on behalf of, each party, or the signatures
of all persons required to bind any party, appear on each counterpart; but it
shall be sufficient that the signature of, or on behalf of, each party, or the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement or any
other Loan Document to produce or account for any particular number of
counterparts; but rather any number of counterparts shall be sufficient so long
as those counterparts contain the respective signatures of, or on behalf of, all
of the parties hereto.
IN WITNESS WHEREOF, the undersigned have duly executed
this Agreement, or have caused this Agreement to be duly executed on their
behalf, as of the day and year first hereinabove set forth.
BORROWER:
KNOLOGY, INC.
By: /s/ CHAD S. WACHTER
----------------------------------------
Name: Chad S. Wachter
Title: Vice President and General Counsel
LENDER:
INTERCALL, INC.
By: /s/ BRYAN W. ADAMS
----------------------------------------
Name: Bryan W. Adams
Title: Vice President
-14-
<PAGE> 15
EXHIBIT A
LINE OF CREDIT NOTE
<PAGE> 16
EXHIBIT B
CAPITAL STOCK
The information regarding the capital stock of Borrower is set forth in
Borrower's Registration Statement on Form S-1 (File No. 333-89179), a copy of
which has been provided to Lender.
-2-
<PAGE> 1
EXHIBIT 10.73
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. IT HAS BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY, WITHOUT A VIEW TO RESALE OR DISTRIBUTION AND MAY NOT
BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR THE
AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND
REGULATIONS PROMULGATED THEREUNDER AND APPLICABLE STATE SECURITIES LAWS.
LINE OF CREDIT NOTE
$ 30,400,000 December 22, 1999
FOR VALUE RECEIVED, KNOLOGY, Inc., a Delaware corporation
(the "MAKER"), promises to pay to the order of InterCall, Inc., a Delaware
corporation, or assigns (the "LENDER" or the "HOLDER"), at 1211 O.G. Skinner
Drive, West Point, Georgia 31833, or at such other place as the Holder of this
Note may from time to time designate, the principal amount of Thirty Million
Four Hundred Thousand Dollars ($30,400,000), or so much thereof as may be
advanced from time to time under that certain Loan Agreement, dated as of even
date herewith, between the Maker and the Lender (the "LOAN AGREEMENT"), and
remains outstanding, together with accrued and unpaid interest on such advances
at the rate of eleven and seven-eighths percent (11.875%) per annum as follows:
The Holder hereby is given the right, on or prior to March
31, 2000 (the "MATURITY DATE"), to convert the entire outstanding principal
amount of this Note, together with all interest accrued thereon, into (i)
options to purchase the numbers of shares of the Maker's Series A Preferred
Stock, par value $.01 per share, equal in the aggregate to the quotient of (A)
all principal and interest due under this Note on the date of such conversion
divided by (B) _____, and (ii) the Residual Note hereinafter described. The
exercise prices per share of the Maker's Series A Preferred Stock for which the
Holder may purchase the shares issuable under the options, and the terms and
conditions of the options, shall be specified by the Holder in its reasonable
discretion. The options may be assigned by the Holder, in whole or in part, to
its affiliates and by Holder or its affiliates to one or more stock or option
holders of its affiliates. The Residual Note shall provide that within five (5)
business days after each receipt by the Maker of the exercise price payable
under any option, issued to the Holder upon the conversion of this Note
(whether or not
<PAGE> 2
the Holder is then the owner of such options), that is exercised, the Maker
shall pay to the Holder an amount equal to such exercise price.
If the Holder notifies the Maker in writing of the Holder's
election not to convert this Note on or prior to the Maturity Date, then the
entire outstanding principal amount of this Note, together with all interest
accrued thereon, shall be due and payable in full in cash on the Maturity Date.
This Note may be prepaid only with the prior written consent
of the Lender.
All payments of cash hereunder shall be made in lawful money
of the United States of America, without offset.
All capitalized terms used herein which are not defined
herein shall have the meanings ascribed to them in the Loan Agreement.
This Note is the Note referred to in the Loan Agreement and
evidences the Line of Credit Loan advanced or to be advanced by the Lender to
or for the benefit of the Maker as borrower under the Loan Agreement. Neither
the reference to the Loan Agreement nor any provision thereof shall affect or
impair the absolute and unconditional obligation of the Maker to pay the
principal amount hereof, together with interest accrued thereon, when due, in
accordance with the terms hereof.
The occurrence of an Event of Default under the Loan
Agreement shall constitute an event of default ("EVENT OF DEFAULT") hereunder.
Upon the occurrence of any such Event of Default hereunder, the entire
outstanding principal amount hereof, and all accrued and unpaid interest
thereon, and any other amounts due under the Loan Agreement, at the option of
the Holder, shall be accelerated and shall be immediately due and payable in
cash, and in addition thereto, and not in substitution therefor, the Holder
shall be entitled to exercise any one or more of the rights and remedies
provided by applicable law, or as provided in the Loan Agreement. Failure to
exercise said option or to pursue such other rights and remedies shall not
constitute a waiver of such option or such other rights and remedies or of the
right to exercise any of the same in the event of any subsequent Event of
Default.
The Maker promises to pay all costs and expenses (including
without limitation reasonable attorneys' fees and disbursements) incurred in
connection with the collection hereof, and to perform each and every covenant
or agreement to be performed by the Maker under this Note, under the Loan
Agreement, and under any other instrument relating to the Loan Agreement.
Any payment on this Note coming due on a Saturday, a Sunday,
or a day which is a legal holiday in the place at which a payment is to be made
<PAGE> 3
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
The Maker hereby waives presentment, protest, demand, notice
of dishonor, and all other notices, and all defenses and pleas on the grounds
of any extension or extensions of the time of payments or the due dates of this
Note, in whole or in part, before or after maturity, with or without notice. No
renewal or extension of this Note, and no delay in enforcement of this Note or
in exercising any right or power hereunder, shall affect the liability of the
Maker.
No single or partial exercise by the Holder of any right or
remedy hereunder, under the Loan Agreement, or under any other instrument
relating to the Loan Agreement shall preclude any other or further exercise
thereof or the exercise of any other rights or remedies.
Whenever used herein, the words "Maker," "Lender" and
"Holder" shall be deemed to include their respective successors and assigns.
This Note shall be governed by and construed under and in
accordance with the laws of the State of Georgia (but not including the choice
of law rules thereof).
IN WITNESS WHEREOF, the undersigned has duly executed this
Note, or has caused this Note to be duly executed on its behalf, as of the day
and year first hereinabove set forth.
KNOLOGY, INC.
By: /s/ CHAD S. WACHTER
----------------------------
Name: Chad S. Wachter
Title: Vice President and
General Counsel
<PAGE> 1
EXHIBIT 10.74
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. IT HAS BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY, WITHOUT A VIEW TO RESALE OR DISTRIBUTION AND MAY NOT
BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR THE
AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND
REGULATIONS PROMULGATED THEREUNDER AND APPLICABLE STATE SECURITIES LAWS.
RESIDUAL NOTE
$ ____________ December __, 1999
FOR VALUE RECEIVED, KNOLOGY, Inc., a Delaware corporation (the
"MAKER"), promises to pay to the order of InterCall, Inc., a Delaware
corporation, or assigns (the "HOLDER"), at 1211 O.G. Skinner Drive, West Point,
Georgia 31833, or at such other place as the Holder of this Note may from time
to time designate, the maximum principal amount of up to ___________________
Dollars ($_____________), together with accrued and unpaid interest thereon, as
follows:
Within five (5) business days after each receipt by the Maker of any
exercise price payable under any option to purchase shares of the Maker's Series
A Preferred Stock, par value $.01 per share, issued to the Holder upon the
conversion of the Line of Credit Note dated December 22, 1999 by the Maker for
the benefit of the Holder ("OPTION") (whether or not the Holder is then the
owner of such Options), that is exercised, the Maker shall pay to the Holder an
amount equal to such exercise price, together with accrued and unpaid interest
on such amount (from the date of receipt thereof by the Maker) at the rate of
eleven and seven-eighths percent (11.875%) per annum. If any Option expires or
terminates in whole or in part without being exercised, the principal amount of
this Note shall be reduced by the aggregate exercise price of such expired or
terminated Option or part thereof.
This Note may be prepaid in whole or in part only with the prior
written consent of the Holder.
<PAGE> 2
All payments hereunder shall be made in lawful money of the United
States of America, without offset.
In the event that any exercise price payable under any exercised
Option received by the Maker, any interest on such exercise price or any other
sum due hereunder is not paid when due and payable, all of such amounts shall,
as the sole remedy of the Holder in connection with such failure to pay, bear
interest at the rate of thirteen and seven-eighths percent (13.875%) per annum
from the date when such payment was due and payable until the date of payment in
full thereof, which rate shall commence, without notice, immediately upon the
date when such payment was due and payable.
The Maker promises to pay all costs and expenses (including without
limitation reasonable attorneys' fees and disbursements) incurred in connection
with the collection hereof, and to perform each and every covenant or agreement
to be performed by the Maker under this Note.
Any payment on this Note coming due on a Saturday, a Sunday, or a
day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
The Maker hereby waives presentment, protest, demand, notice of
dishonor, and all other notices, and all defenses and pleas on the grounds of
any extension or extensions of the time of payments or the due dates of this
Note, in whole or in part, before or after maturity, with or without notice. No
renewal or extension of this Note, and no delay in enforcement of this Note or
in exercising any right or power hereunder, shall affect the liability of the
Maker.
No single or partial exercise by the Holder of any right or remedy
hereunder shall preclude any other or further exercise thereof or the exercise
of any other rights or remedies.
Whenever used herein, the words "Maker" and "Holder" shall be deemed
to include their respective successors and assigns.
This Note shall be governed by and construed under and in accordance
with the laws of the State of Georgia (but not including the choice of law rules
thereof).
- 2 -
<PAGE> 3
IN WITNESS WHEREOF, the undersigned has duly executed this Note, or
has caused this Note to be duly executed on its behalf, as of the day and year
first hereinabove set forth.
KNOLOGY, INC.
By:
----------------------------
Name:
Title:
- 3 -
<PAGE> 4
<PAGE> 1
Exhibit 10.75
{DATE}
Dear Optionee:
We are pleased to announce that ITC Holding Company, Inc. ("ITC Holding")
completed on December 30, 1999, the distribution ("Distribution") in which
Knology, Inc. ("Knology") and its subsidiaries were structurally separated from
ITC Holding and its subsidiaries.
As a result of the Distribution, you will receive 1.09153 Knology options for
each unexercised ITC Holding option you held on the December 15, 1999 (the
"Record Date"). The ratio of 1.09153-to-one is a result of the number of shares
and stock options of ITC Holding outstanding compared to the number of shares
and stock options of Knology owned by ITC Holding. Your Knology options are in
addition to your ITC Holding options, which remain in effect, although the
exercise price is adjusted as a result of the Distribution. A cash payment is
being made to each option holder in lieu of issuing options for fractional
shares of Knology. Your enclosed cash payment was determined by multiplying
$4.75 (the fair market value of one share of Knology stock at the time of the
Distribution) by your fractional share percentage. The Distribution, and its
effect on your options, is discussed more fully in our previous correspondence
to you dated December 2, 1999.
Enclosed please find the following:
- - An Optionee Statement from ITC Holding reflecting your pre-Distribution
options (the "Old Optionee Statement");
- - An Optionee Statement from ITC Holding AND an Optionee Statement from
Knology reflecting your post-Distribution options (collectively
referred to as the "New Optionee Statements");
- - A check representing payment for any fractional Knology option shares
to which you are entitled;
- - A copy of our December 2, 1999, correspondence regarding your options;
and
- - A copy of the Knology, Inc. Spin-Off Plan (the "Knology Plan")
document.
The Old Optionee Statement reflects your option holdings in ITC Holding
immediately prior to the Distribution. The New Optionee Statements reflect your
current option holdings as a result of the Distribution. The total values
reflected on the New Optionee Statements, combined with the amount of the
fractional share check, should equal the total value represented on the Old
Optionee Statement. The total value may vary slightly as a result of rounding.
<PAGE> 2
Please note that if you are not an employee of ITC Holding or a subsidiary of
ITC Holding (i.e., ITC Service Company or Intercall), any ITC Holding option
which is designated as an "incentive stock option" will cease to be an incentive
stock option three months after the date of the Distribution. Similarly, if you
are not an employee of Knology or a subsidiary of Knology (i.e., Knology
Holdings or TOG), any Knology option which is designated as an "incentive stock
option" will cease to be an incentive stock option three months after the date
of the Distribution.
Please also note that vesting and forfeiture of your ITC Holding options and
Knology options will be based on your service at the company where you are
employed. If you terminate employment at your employer while you have unvested
options, you will forfeit the unvested options for the stock of your employer
(for example, ITC Holding) and the other unvested replacement options (Knology).
This will be the case even if you leave employment with one of the ITC Holding
Companies, for example, and commence employment with Knology. In addition to
forfeiting your unvested options, you will have three months from the date your
employment ceases to exercise your vested options.
The combination of this letter and your ITC Holding Option Certificate will
serve as record of your option grants. The Knology option is subject to the
terms and conditions of the Knology Plan, and not the terms and conditions of
the ITC Holding Company, Inc. Stock Option Plan (the "ITC Plan"), as amended and
restated. Although the Knology Plan is similar to the ITC Plan, there are some
differences. A copy of the Knology Plan is enclosed with this letter.
Please retain this letter for your records as it acts as an amendment to your
ITC Holding options. Please contact Chuck Edwards at (706) 645-8896 if you have
any questions regarding the enclosed items.
Very Truly Yours,
Bryan W. Adams
Enclosures
<PAGE> 1
Exhibit 12.1
KNOLOGY, INC.
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
YEAR ENDED Nine Months Nine Months
-------------------------------------------------------------------- Ended Ended
December 31, December 31, December 31, December 31, December 31, September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Income (Loss) cumulative
effect of change in accounting
principle and (provision) benefit
for income taxes per statement
of operations................. $3,399,595 $1,047,874 $2,802,056 $ 183,438 $(27,389,511) $(13,004,836) $(53,693,528)
ADD:
Portion of rents
representative of the
interest factor .............. 0 0 0 0 86,192 88,000 126,500
Interest on indebtedness ..... 149,717 555,815 9,933 12,431 29,033,088 21,477,687 24,073,491
Amortization of debt discount. 0 0 0 0 13,651,778 9,948,239 11,451,948
Fixed charges of
unconsolidated subsidiary..... 0 0 1,078,831 6,249,356 0 0 0
---------- ---------- ---------- ---------- ------------ ------------ ------------
Income as adjusted ........... $3,549,312 $1,603,689 $3,890,820 $6,445,225 $ 15,381,547 $ 18,509,090 $(18,041,589)
========== ========== ========== =========== ============== ============== ============
FIXED CHARGES:
Portion of rents
representative of the
interest factor .............. 0 0 0 0 86,192 88,000 126,500
---------- ---------- ---------- ---------- ------------ ------------ ------------
Interest on indebtedness ..... 149,717 555,815 9,933 12,431 29,033,088 21,477,687 24,073,491
Amortization of debt discount. 0 0 0 0 13,651,778 9,948,239 11,451,948
Fixed charges of
unconsolidated subsidiary..... 0 0 1,078,831 6,249,356 0 0 0
---------- ---------- ---------- ---------- ------------ ------------ ------------
Fixed charges ................ $ 149,717 $ 555,815 $1,088,764 $6,261,787 $ 42,771,058 $ 31,513,926 $ 35,651,939
========== ========== ========== ========== ============= ============= ============
Ratio of earnings to fixed
charges ...................... 23.71 2.89 3.57 1.03 -- -- --
Insufficient earnings to
cover fixed charges .......... -- -- -- -- 27,389,517 13,004,836 53,693,528
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF KNOLOGY, INC.
KNOLOGY Holdings, Inc.
Interstate Telephone Company
Valley Telephone Company
Globe Telecommunications, Inc.
ITC Globe, Inc.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC 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 part of this registration
statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 27, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration Statement of
Knology, Inc. on Form S-1 (No. 333-89179) of our report dated December 7,
1998 on the financial statements of Cable Alabama Corp. appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 27, 1999
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
Each of the undersigned directors and officers of KNOLOGY, Inc. hereby
constitutes and appoints Rodger L. Johnson and Chad Wachter, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, from such person and in each person's name,
place and stead, in each person's name and behalf in the capacities indicated
below, to sign Amendment No. 3 to the Registration Statement on Form S-1
(Registration No. 333-89179) for KNOLOGY, Inc. (the "Amended Registration
Statement") any and all amendments (including post-effective amendments) to the
Amended Registration Statement or any registration statement relating to the
Amended Registration Statement or any and all amendments to KNOLOGY Holdings,
Inc.'s annual report on Form 10-K for the year ended December 31, 1999 and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
any of them, or his, her or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
This Power of Attorney is valid as of its execution, until its withdrawal.
Dated as of December 22, 1999
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ---------- -----
<S> <C>
/s/ Rodger L. Johnson President, Chief Executive Officer and Director
- ------------------------------
Rodger L. Johnson
/s/ Robert K. Mills Chief Financial Officer (Principal Financial and
- ------------------------------ Accounting Officer)
Robert K. Mills
/s/ Campbell B. Lanier, III Chairman of the Board of Directors
- ------------------------------
Campbell B. Lanier, III
/s/ William H. Scott, III Director
- ------------------------------
William H. Scott, III
/s/ Richard Bodman Director
- ------------------------------
Richard Bodmam
/s/ Alan A. Burgess Director
- ------------------------------
Alan A. Burgess
/s/ Donald W. Burton Director
- ------------------------------
Donald W. Burton
/s/ L. Charles Hilton, Jr. Director
- ------------------------------
L. Charles Hilton, Jr.
/s/ Donald W. Weber Director
- ------------------------------
Donald W. Weber
</TABLE>
