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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 333-43339
KNOLOGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 58-2203141
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
KNOLOGY HOLDINGS, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-8553
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X* No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated herein by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
is not applicable as no public market exists for the voting stock of the
registrant.
As of February 28, 1999, there were 394 shares of the registrant's
Common Stock outstanding and 49,852 shares of the registrant's Preferred Stock
outstanding.
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* The Company does not have any class of equity securities registered
under the Securities Exchange Act of 1934 and files periodic reports
with the Securities and Exchange Commission pursuant to contractual
obligations with third parties.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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EXPLANATORY NOTE
Our parent company, KNOLOGY, Inc., has filed a registration statement on
Form S-1 with the Securities and Exchange Commission (Registration No.
333-89179). We are amending our annual report on Form 10-K for the year ended
December 31, 1998 to make conforming changes.
This Form 10-K/A presents information relating to our 1998 fiscal year and
does not include any updated information or discuss any recent developments
occurring after the original filing of our 1998 Form 10-K in March 1999.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS .......................................................... 1
ITEM 2. PROPERTIES......................................................... 35
ITEM 3. LEGAL PROCEEDINGS.................................................. 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 36
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................... 37
ITEM 6. SELECTED FINANCIAL DATA............................................ 39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 45
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE................................... 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 45
ITEM 11. EXECUTIVE COMPENSATION............................................. 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................... 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K............................................... 56
SIGNATURES......................................................................... 62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................... F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT
SCHEDULES.................................................................... S-1
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF OUR SENIOR MANAGEMENT
MAY, FROM TIME TO TIME, MAKE CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING OUR
OPERATIONS, PERFORMANCE AND OTHER DEVELOPMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT
OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK
FACTORS" AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS FACTORS
WHICH MAY BE IDENTIFIED FROM TIME TO TIME IN OUR OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION OR IN THE DOCUMENTS WHERE SUCH
FORWARD-LOOKING STATEMENTS APPEAR. UNLESS OTHERWISE INDICATED, DOLLAR AMOUNTS
OVER $1 MILLION HAVE BEEN ROUNDED TO ONE DECIMAL PLACE AND DOLLAR AMOUNTS LESS
THAN $1 MILLION HAVE BEEN ROUNDED TO THE NEAREST THOUSAND.
PART I
ITEM 1. BUSINESS
We were formed in November 1995. ITC Holding, a diversified
telecommunications company, owns 85% of our stock. We receive services from
and/or provide services to various companies that may be deemed related
parties, including Interstate Telephone Company, Valley Telephone Company,
InterCall, Inc., MindSpring Enterprises, Inc. and ITCDeltaDeltaCom, Inc. These
relationships and services are described in detail under the caption "Certain
Relationships and Related Transactions." We believe that the transactions with
these companies and others that may be deemed related parties are
representative of arms-length transactions.
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. 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 year ended December 31, 1998, video, telephone and high-speed
Internet services and other revenue accounted for 86.1%, 12.8%, and 1.1%,
respectively, of consolidated revenue. Other revenue consisted principally of
revenue from broadband carrier services and video production services.
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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 plan to expand to
additional mid-sized cities in the southeastern United States.
We launched our services in these areas as follows:
- We began offering all of our bundled services in Montgomery
and Columbus in 1995. The previous owner offered cable
television service in these markets prior to 1995.
- We began offering all of our bundled services in Panama City
in 1997. The previous owner offered cable television service
in the market prior to 1997.
- We began offering cable television service in Huntsville in
1998. The previous owner offered cable television service in
the market prior to 1998.
See the text under the caption above "Management's Discussion and
Analysis of Financial Condition and Results of Operation" for a discussion of
the acquisition and/or the development of these networks.
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 December 31, 1998, we had approximately 84,117 revenue
generating service connections.
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AS OF DECEMBER 31,
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1997 1998
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Connections (1)
Video..................................................... 37,716 77,744
Telephone................................................. 129 5,615
Internet.................................................. 113 758
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Total Connections........................................... 37,958 84,117
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Marketable Homes Passed (2)................................. 125,823 232,202
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Video Penetration (3)....................................... 30.0% 33.5%
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(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) 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.
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(3) Video penetration represents video connections as a percentage of marketable
home passed.
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.
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 uninterruptable 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 enough people to permit a network plant to serve an
average of 70 homes per mile;
- 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.
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- - 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 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
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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.
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 Landline Telephone. Traditional telephone service is
provided by local landline 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 central office 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.
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 mobile
telephone switch, which in turn connects to the local landline telephone
network. 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 mobile switch. The mobile
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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
uninterruptable power source battery back-ups to allow service to continue in a
power outage.
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 Business Telecom,
Inc. and other telecommunications service providers. Business Telecom and
ITCDeltaDeltaCom provide leased facilities and other services which allow us to
offer long distance services to our customers. In addition to granting access to
their network facilities, Business Telecom and ITCDeltaDeltaCom provide call
switching services and operator and directory assistance. We have a minimum
purchase commitment of $50,000 with Business Telecom which we have always met or
surpassed. We do not have a minimum purchase commitment with ITCDeltaDeltaCom.
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
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for access to the Internet or wait to connect through a port leased by an
Internet service provider.
ITCDeltaDeltaCom provides us with the technical Internet services that
allow us to offer Internet access to our customers. ITCDeltaDeltaCom is an
affiliate of our company and of ITC Holding. We believe that the terms of our
agreements with ITCDeltaDeltaCom 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 primarily from one supplier. If this supplier is unable to meet our
needs and we are unable to identify an alternate source of 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.
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
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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 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.
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
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Our interactive broadband networks currently serve:
- Montgomery, Alabama;
- Columbus, Georgia;
- Augusta, Georgia;
- Charleston, South Carolina; and
- Panama City, Florida.
We provide video, telephone and Internet services over a
broadband network in these cities. 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.
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:
- large enough to support a network plant to service 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
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
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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.
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
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
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
</TABLE>
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- ---------------
(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 pursuant to the
Telecommunications Act of 1996. The terms of this interconnection agreement have
been approved by the Georgia, Alabama, Florida and South Carolina state public
utility commissions. This agreement with BellSouth expires in April 2000 and is
discussed in "Risk Factors -- Loss of interconnection arrangements could impair
our telephone service."
Approvals of other state public utility commissions will be required in
connection with our provision of telephone service in other states. The
Telecommunications Act 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."
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
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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.
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. Certain of our cable
television competitors may have exclusive arrangements with cable programming
vendors, which could prevent us from offering certain programming on our cable
television systems. In addition, some of these competitors own their own
programming content and may try to 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.
The 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
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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.
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 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.
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 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.
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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.
Wireless telephone service such as cellular and PCS currently is viewed
by consumers as a supplement to, not a replacement for, traditional land line
telephone service. Wireless service generally is more expensive than land line
local 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
wireline 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.
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.
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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.
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;
- leased access terms and conditions;
- ownership of cable systems;
- customer service requirements;
- television broadcast signal carriage and retransmission
consent;
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- technical standards; and
- cable equipment compatibility.
Additionally, the legislation encouraged competition with existing cable
television systems by:
- allowing municipalities to own and operate their own cable
television systems without a franchise;
- preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional
franchises covering an existing cable system's service area;
and
- prohibiting the common ownership of cable systems and 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 expires 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
- 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
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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 deregulates 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.
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
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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 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
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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 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 municipalities and co-ops, to provide cable operators and
telecommunications carriers with nondiscriminatory access to
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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 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"
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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 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. 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;
- 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
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<PAGE> 25
operator services.
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
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.
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 will be
available in all of our markets by the end of 1999. Number portability
benefits our competitive local exchange carrier operations. At this time, we are
unable to predict the impact, if any, of possible number portability delays or
complications in our service territories.
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. We expect that we will be
required to start contributing to the fund 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. Moreover, 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
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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;
- 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
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- 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 may take future
steps to facilitate competitors' access to local loops for purposes of digital
subscriber line deployment. Having better collocation arrangements at incumbent
local exchange carriers' central offices benefits our competitive local exchange
operations. However, the FCC's advanced services proceeding, inasmuch as it
primarily benefits digital subscriber line providers who compete 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.
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. 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
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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 December 31, 1998, 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.
RISK FACTORS
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.
WE HAVE LOST MONEY ON OUR OPERATIONS TO DATE, AND WE EXPECT TO LOSE MORE MONEY
DURING THE NEXT SEVERAL YEARS.
As of December 31, 1998, we had an accumulated deficit of $54.2
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
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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.
LOSS OF OTHER COMPANIES' TELEPHONE BILLING AND INFORMATION SERVICES COULD IMPAIR
OUR TELEPHONE SERVICES.
We depend on Interstate Telephone Company, a subsidiary of InterCall,
Inc., and others for telephone information and processing systems to monitor
costs, bill customers, fill customer orders and achieve operating efficiencies.
As we increase our telephone services, our dependence on billing and information
systems will increase significantly. Any inability to adequately identify all of
our information and processing needs, or to obtain upgraded systems as
necessary, could have a material adverse impact on the ability to expand our
telephone business and on our results of operations and financial condition.
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. While we are currently in negotiations with BellSouth to renew this
agreement, it may not be renewed on favorable terms or at all, since BellSouth
is our competitor. The Telecommunications Act of 1996 creates incentives for
BellSouth and other regional Bell operating companies to give us access to their
facilities by prohibiting them from providing long distance services until they
have opened their local markets to competition, which requires interconnection
arrangements. BellSouth and the other companies may be less accommodating to us
once they are permitted to offer long distance service.
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 service;
- additional access lines per household; and
- billing and collection services.
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.
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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.
WE DEPEND UPON A VERY SMALL NUMBER OF SUPPLIERS FOR CERTAIN MATERIALS.
We purchase customer premises equipment and plant materials from a
small number of outside vendors. We currently purchase each customer premises
component from a single vendor and have one or two suppliers for plant
materials. If one or more suppliers cannot meet our needs as we continue to
build our network, we could experience delays and increased costs in the
expansion of our network.
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. 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. 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 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
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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.
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.
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, all in the southeastern United States. Our networks are built in small
to mid-sized markets that we believe will grow and allow us to grow with them. 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.
A LIMITED NUMBER OF STOCKHOLDERS CONTROL OUR COMPANY, AND THEIR INTERESTS MAY
CONFLICT WITH THE INTERESTS OF OUR DEBT HOLDERS.
As of January 31, 1999, InterCall Inc., a wholly-owned subsidiary of
ITC Holding, owned approximately 85.4% and AT&T Venture Fund II, L.P. and
related funds owned approximately 14.3% of our outstanding capital stock. As a
result, these stockholders are in a position to control matters requiring
approval by our stockholders, including the election of a majority of the
directors and the approval of significant corporate matters, including certain
change-of-control transactions. In addition, certain decisions concerning our
operations or financial structure may present conflicts of interest between such
shareholders or management and the holders of our senior discount notes. For
example, if we encounter financial difficulties or are unable to pay our debts
as they mature, the interests of such shareholders and management might conflict
with those of the holders of the notes. In addition, such shareholders and
management may have an interest in pursuing transactions that, in their
respective judgments, could enhance their equity investment, even though such
transactions might involve risk to the holders of the notes.
WE COULD BE DAMAGED BY THE LOSS OF OUR KEY PERSONNEL.
Our business is currently managed by a small number of key management and
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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 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.
Employees
As of February 28, 1999, we had 569 full-time employees of which 118
are customer service representatives, 183 are technicians or others performing
installation, maintenance and repair on our networks, 128 are involved
principally in sales and marketing, 54 are involved in matters relating to
construction of our networks and 86 have management or administrative
responsibilities.
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ITEM 2. PROPERTIES
The Company owns or leases property in the following locations:
<TABLE>
<CAPTION>
LEASE/
LOCATION ADDRESS OWN PRIMARY USE
- -------- ------- ------ -----------
<S> <C> <C> <C>
West Point, GA 1241 O.G. Skinner Drive Own Corporate Admin. Offices
West Point, GA 312 West 8th Street Lease Corporate Construction Offices
West Point, GA 206 West 9th Street Lease Network Operations Center
West Point, GA 1201 O.G. Skinner Drive Lease Production Studio & Training Facility
Montgomery, AL 3173 Taylor Road Lease Admin. Offices
Montgomery, AL 1450 Ann Street Lease Headend & Technical Offices
Montgomery, AL 2630 Zelda Road Lease Technical Offices
Montgomery, AL 4142-A Carmichael Road Lease Sales Offices
Columbus, GA 1701 Boxwood Place Lease Admin. Offices & Headend
Columbus, GA 6440 West Hamilton Park Drive Lease Sales Offices
Panama City, FL 13200 P.C.B. Pkwy. Lease Admin. Offices & Headend
Panama City, FL 2325 Frankfort Avenue Lease Sales Offices
Panama City, FL 2143 Sherman Avenue Lease Construction Offices
Augusta, GA 3714 Wheeler Road Own Admin. Offices & Headend
Charleston, SC 4506 Dorchester Rd. Own Admin. Offices & Headend
Huntsville, AL 2401 10th St. Own Admin. Offices & Headend
Madison, AL 915 Miller Blvd. Madison Own Construction Office
</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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-30-
<PAGE> 34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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.
As of February 28, 1999, we had 394 shares of our common stock
outstanding held of record by one stockholder, and 49,852 shares of our
preferred stock outstanding held of record by 13 stockholders.
DIVIDENDS
We have never declared or paid any cash dividends on our capital stock
and do not anticipate paying cash dividends on our capital stock in the
foreseeable future. It is the current policy of our board of directors 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.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1995 and January 1996, in connection with its initial
capitalization, we 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 our 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.
We are a party to a stockholders' agreement dated December 8, 1995, as
amended, with all of our stockholders. No party to the stockholders' agreement
could transfer any of our capital stock, rights or options held by such party to
third parties without having offered rights of first refusal to purchase such
securities to us.
In May 1996, in connection with a private placement of its preferred
stock, we 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, other stockholders and
us entered into an agreement among stockholders, 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 AT&T
Venture Fund I, L.P. owned more than 5% of our equity securities, to elect one
director designated by each such 5% stockholder.
In February 1997, we 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, we signed a letter of intent with SCANA Communications,
whereby SCANA agreed to provide us 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, we
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. We repaid the promissory note in October 1997 with a portion of
the proceeds from the offering and the private placement described below.
In October 1997, we 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, $5.0 million and $5.0 million of preferred stock, respectively, in the
equity private placement.
In October 1997, we 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, we acquired Beach Cable, Inc., a cable television
system in Panama City, Florida. L. Charles Hilton, Jr., the founder and sole
stockholder of Beach Cable, received 2,485 shares of our 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
shares of our preferred stock. In July 1998, ITC Holding acquired shares of our
preferred stock in exchange for $100 in cash and ITC Holding common stock valued
at $1,600 per share for each share of our preferred stock exchanged. ITC Holding
purchased 21,551 shares of our preferred stock of from several stockholders,
including all of the preferred stock owned by South Atlantic and SCANA
Communications in the exchange.
-31-
<PAGE> 35
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial and
operating data. The selected financial and operating data as of and for the
year ended December, 31, 1994, the four months ended April 30, 1995, the eight
months ended December 31, 1995 and the years ended December 31, 1996, 1997 and
1998 have been derived from our audited financial statements and the audited
financial statements of Montgomery Cablevision and Entertainment, Inc. The
selected financial and operating data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto
included elsewhere in this report. The financial and operating data for periods
after April 28, 1995 (the date we acquired Montgomery Cablevision and
Entertainment, the owner and operator of the Montgomery system), are not
comparable to the financial and operating data for prior periods as a result of
the amortization of the cost in excess of net assets in connection with the
acquisition of the Montgomery system, and the acquisition of the Columbus
system on September 29, 1995. See notes 1 and 2 to our Consolidated Financial
Statements included elsewhere in this report.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (A) SUCCESSOR COMPANY (A)
-------------------------- ------------------------------------------------------------
EIGHT
YEAR FOUR MONTHS MONTHS YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, APRIL 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995 (B) 1996 1997 1998
------------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................ $ 2,111,952 $ 857,161 $ 2,196,998 $ 5,334,183 $ 10,355,068 $ 25,770,427
Operating expenses:
Cost of Service ....................... 1,042,186 409,325 1,029,959 2,513,693 4,758,730 11,854,733
Selling, Operations, Administrative ... 1,020,088 290,607 1,502,688 3,883,738 7,392,540 25,393,015
Depreciation and amortization ......... 768,496 259,336 745,004 1,640,025 3,715,184 12,367,374
----------- --------- ----------- ----------- ------------ ------------
Total operating expenses ............ 2,830,770 959,268 3,277,651 8,037,456 15,866,454 49,615,122
----------- --------- ----------- ----------- ------------ ------------
Operating loss .......................... (718,818) (102,107) (1,080,653) (2,703,273) (5,511,386) (23,844,695)
----------- --------- ----------- ----------- ------------ ------------
Other income and expenses ............... (155,417) (21,878) (549,169) (795,478) (3,580,147) (18,834,891)
----------- --------- ----------- ----------- ------------ ------------
Loss before minority interest
and income tax benefit ................ (874,235) (123,985) (1,629,822) (3,498,751) (9,091,533)
(42,679,586)
Minority interest ....................... -- -- 109,837 -- --
Income tax benefit ...................... -- -- 334,451 373,323 -- 6,785,691
----------- --------- ----------- ----------- ------------ ------------
Cumulative Effect of Change in
Accounting Principle .................. -- -- -- -- --
(582,541)
Net loss ................................ (874,235) (123,985) (1,185,534) (3,125,428) (9,091,533)
(36,476,436)
Preferred stock dividends ............... (591,175) (230,407) -- -- -- --
----------- --------- ----------- ----------- ------------ ------------
Net loss after preferred stock
dividends ............................. $(1,465,410) $(354,392) $(1,185,534) $(3,125,428) $ (9,091,533) $(36,476,436)
=========== ========= =========== =========== ============ ============
PER SHARE DATA:
Net loss per share (c) .................. $ 1.05 $ 1.53(c) $ 2.10 $ 4.87
Weighted average common share
equivalents outstanding ............... 1,128,000 2,043,900(c) 4,325,250 7,488,450
OTHER FINANCIAL DATA:
Capital expenditures .................... $ 717,325 $ 42,504 $ 1,291,080 $14,416,135 $ 39,625,408 $111,272,219
Net cash provided by (used in)
operating activities .................. 82,590 144,076 (742,928) (1,998,007) (1,266,688) 18,868,797
Net cash used in investing
activities ............................ (717,325) (42,504) (1,744,816) (14,441,268) (267,983,480) (18,646,551)
Net cash provided by (used in)
financing activities .................. 596,947 (104,889) 2,771,619 16,221,873 272,778,281 (1,507,319)
EBITDA (d) .............................. 124,836 157,229 (207,068) (1,123,248) (1,925,235) (11,275,227)
Ratio of earnings to fixed
charges (e) ........................... -- -- -- -- -- --
OTHER OPERATING DATA:
Cable subscribers ....................... 14,219 18,169 37,716 77,744
Average monthly cable revenue
per subscriber ........................ $ 25.47 $ 26.71 $ 29.20 $ 36.14
Homes passed ............................ 124,773 232,202
Cable penetration level (f).............. 30.2% 33.5%
</TABLE>
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<PAGE> 36
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY (A) SUCCESSOR COMPANY (A)
------------ ---------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ........................ $(3,559,715) $ 3,498,482 $ (3,201,202) $ 226,830,160 $ 52,705,437
Property and equipment, net ............ 4,833,142 6,976,268 21,477,209 62,567,736 195,496,617
Total assets ........................... 4,987,354 19,346,317 29,941,745 316,198,100 332,550,650
Total liabilities ...................... 4,734,947 12,992,682 15,743,318 262,073,186 315,075,364
Minority interest ...................... -- 84,479 -- -- --
Accumulated deficit .................... (6,056,198) (1,185,534) (4,310,962) (13,402,495) (49,878,931)
Total stockholders' equity ............. 252,407 6,269,156 14,198,427 51,637,954 14,988,326
</TABLE>
- ---------------------
(a) "Successor Company" refers to us and our subsidiaries. We initially
capitalized as a limited liability company in March 1995, were established for
the purpose of acquiring Montgomery Cablevision and Entertainment Company. The
acquisition of Montgomery Cablevision and Entertainment, which was accounted for
as a purchase, was consummated on April 28, 1995, and we acquired the remaining
minority interest in Montgomery Cablevision and Entertainment in January 1996.
See note 1 to our Consolidated Financial Statements included elsewhere in this
report.
(b) Includes the operations of the Columbus system from September 29, 1995. The
acquisition of the Columbus system was accounted for as a purchase.
(c) Net loss per share is computed using the weighted average number of shares
of common stock and dilutive common stock equivalent shares from convertible
preferred stock (using the if converted method). As we have 394 shares of common
stock outstanding, the preferred stock is assumed to be converted for purposes
of this calculation. The Montgomery Cablevision and Entertainment net losses per
share are not shown, as they are not comparable with the Successor Company's.
All options and warrants have been excluded from the calculation of net loss per
share as they are anti-dilutive.
(d) EBITDA represents earnings before preferred stock dividends, interest
expense, interest income, income taxes, depreciation and amortization. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA is not a
measurement of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flow as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
(e) Earnings consist of income before minority interest, preferred stock
dividends, income taxes, plus fixed charges. Fixed charges consist of interest
charges and amortization of debt issuance costs and the portion of rent expense
under operating leases representing interest (estimated to be 1/3 of such
expense). Earnings were insufficient to cover fixed charges for the year
December 31, 1994, the four months ended April 30, 1995, the eight months ended
December 31, 1995 and the years ended December 31, 1996, 1997, and 1998 by
$874,235, $123,985, $1,629,822, $3,498,751, $9,091,533, and $43,262,127,
respectively.
(f) Determined by dividing the number of subscribers by the number of homes
passed. Because we do not begin to market our services in an area until our
network has been expanded and we typically need 60 to 90 days once marketing has
commenced to build our subscriber base, our penetration rate is adversely
affected during rapid expansion of the networks.
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<PAGE> 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report on Form 10-K contains certain forward-looking
statements that involve risks and uncertainties. In addition, members of our
senior management may, from time to time, make certain forward-looking
statements concerning our operations, performance and other developments. Our
actual results could differ materially from those anticipated in such
forward-looking statements as a result of various factors, Including those set
forth under the caption "Business--Risk Factors" and elsewhere in this annual
report on Form 10- K, as well as factors which may be identified from time to
time in our other filings with the Securities and Exchange Commission or in
documents where such forward-looking statements appear.
The following is a discussion of our consolidated financial condition
and results of operations for the three years ended December 31, 1998 and
certain factors that are expected to affect our prospective financial condition.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto and other financial data included
elsewhere in this Form 10-K.
GENERAL
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.
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<PAGE> 38
We have been providing cable television service since 1995, telephone
and high-speed Internet access services since 1997 and broadband carrier
services since 1998. We own, operate and manage interactive broadband networks
in the five metropolitan areas of Montgomery, Alabama; Columbus and Augusta,
Georgia; Panama City, Florida and Charleston, South Carolina; and we plan to
expand to additional mid-sized cities in the southeastern United States. In
addition, we provide traditional analog 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 began providing cable television service by acquiring cable television
systems in Montgomery, Alabama and Columbus, Georgia in 1995 and using these
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, we 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, we 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, we 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, we 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.
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 86.1% of our consolidated revenues for the year ended
December 31, 1998.
- 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 12.8% of our consolidated
revenues for the year ended December 31, 1998.
- 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 1.1% of our consolidated revenues for the year
ended December 31, 1998.
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 24.6% of our operating expenses for the year ended
December 31, 1998. 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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<PAGE> 39
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.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as of December 31,
1997 and 1998:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Connections(1)
Video..................................................... 37,716 74,744
Telephone................................................. 129 5,615
Internet.................................................. 113 758
------- -------
Total Connections........................................... 37,958 84,117
======= =======
Marketable Passings......................................... 125,823 232,202
======= =======
</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.
The following table sets forth financial data as a percentage of operating
revenues for the years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1997 1998
---- ----
<S> <C> <C>
Operating revenues........................................ 100% 100%
--- ---
</TABLE>
-36-
<PAGE> 40
<TABLE>
<S> <C> <C>
Operating expenses:
Cost of services 46 46
Selling, operating and administrative 72 99
Depreciation and amortization........................... 35 48
---- ----
Total........................................... 153 193
---- ----
Operating income (loss)................................... (53) (93)
Other income and expenses................................. (35) (73)
---- ----
Income (loss) before minority interest, income tax
(provision) benefit and cumulative effect of a change in
accounting principle.................................... (88) (166)
Income tax (provision) benefit............................ 0 26
Cumulative effect of change in accounting principle....... 0 (2)
---- ----
Net income (loss)......................................... (88)% (142)%
==== ====
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Our operating revenues increased $15.4 million, or 149.0%
from $10.4 million for the year ended December 31, 1997 to $25.8 million for the
year ended December 31, 1998. Our increased revenues resulted primarily from:
- - added subscribers in 1998 due to the extension of our broadband
networks in the Montgomery, Columbus, and Panama City markets,
- - our offering of services in the Augusta and Charleston markets at the
end of the third quarter of 1998; and
- - our acquisition of the Beach Cable, TTE and Cable Alabama systems in
December 1997, June 1998 and October 1998, respectively (see Note 9 to
our consolidated financial statements filed as part of this Form 10-K).
Expenses. Our operating expenses, excluding depreciation and
amortization, increased $25.1 million, or 205.0%, from $12.2 million for the
year ended December 31, 1997 to $37.2 million for the year ended December 31,
1998. Cost of services were $11.9 million in 1998 compared to $4.8 million in
1997. Selling, operating, and administrative expenses were $25.4 million and
$7.4 million, respectively, for such periods. The increases in our cost of
services and selling, operating, and administrative expenses is consistent with
our growth in revenues due to the expansion of our operations and the increase
in the number of employees in connection with such expansion and growth into new
markets.
Our depreciation and amortization increased from $3.7 million for the
year ended December 31, 1997 to $12.4 million for the year ended December 31,
1998, due to a significant increase in property, plant, equipment and intangible
assets resulting from the expansion of our networks, the acquisition of the
Beach Cable, TTE and Cable Alabama systems and the purchase of buildings,
computers and office equipment at the corporate and subsidiary locations.
Our interest expense increased from $6.2 million for the year ended
December 31, 1997 to $28.7 million for the year ended December 31, 1998. The
increase in interest expense reflects the accrual of a full year of the interest
expense attributable to the senior discount notes issued in October 1997.
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<PAGE> 41
INTEREST INCOME. Interest income increased from $2.8 million for the
year ended December 31, 1997 to $9.6 million for the year ended December 31,
1998, and reflects primarily interest income from the investment of certain
proceeds received from the issuance of the senior discount notes in October
1997.
Income Tax (Provision) Benefit. We recorded an income tax benefit of
$6.8 million for the year ended December 31, 1998. This income tax benefit
results from our utilizing net tax losses under a tax sharing agreement with ITC
Holding. (See Note 6 to our consolidated financial statements filed as part of
this Form 10-K).
CHANGE IN ACCOUNTING PRINCIPLE. We recorded a cumulative effect of a
change in accounting principle of $583,000 representing the write-off of
pre-operating and organizational costs that were previously capitalized (See
Note 2 to our consolidated financial statements filed as part of this Form
10-K).
NET LOSS. We incurred a net loss for the year ended December 31,
1998 of $36.5 million compared to a net loss of $9.1 million for the year
ended December 31, 1997. We expects our net losses to continue to
increase as we continue to expand our business. See "Business--Risk
Factors."
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES. Our operating revenues increased $5.1 million, or 94%, from
$5.3 million for the year ended December 31, 1996 to $10.4 million for the year
ended December 31, 1997. The increased revenues resulted primarily from
additional subscribers in 1997 as we extended our broadband networks in the
Montgomery and Columbus markets. During 1997, the Montgomery and Columbus
networks were extended to pass approximately 56,000 additional homes. The
additional homes reached by the extension of the Montgomery and Columbus
networks combined with our marketing and sales efforts resulted in approximately
15,270 new subscribers being added to our customer base during 1997.
EXPENSES. Our operating expenses, excluding depreciation and
amortization, increased $5.8 million or 90%, from $6.4 million for the year
ended December 31, 1996, to $12.2 million for the year ended December 31, 1997.
Cost of services were $4.8 million in 1997 compared to $2.5 million in 1997.
Selling, operations and administrative expenses were $7.4 million and $3.9
million in 1997 and 1996, respectively. The increases in our cost of services
and selling, operations and administrative expenses reflect our expansion of our
broadband networks in the Montgomery and Columbus markets, the significant
increase in the number of employees in connection with such expansion and the
planned growth of the business into new markets in the southeastern United
States.
Our depreciation and amortization increased from $1.6 million for the
year ended December 31, 1996 to $3.7 million for the year ended December 31,
1997, reflecting a significant increase in capital expenditures during 1997 to
expand the Montgomery and Columbus networks.
Interest expense increased from $1.1 million for the year ended
December 31, 1996 to $6.2 million for the year ended December 31, 1997. The
increased expense reflects the accrual of interest expense attributable to our
senior discount notes issued in October 1997.
INTEREST INCOME. Interest income increased from $46,000 for the year
ended December 31, 1996 to $2.8 million for the year ended December 31, 1997,
and reflects primarily the interest income from the investment of certain
proceeds received from the sale of our senior discount notes in October 1997.
NET LOSS. We incurred a net loss for the year ended December
31, 1997 of $9.1 million compared to a net loss of $3.1 million for the year
ended December 31, 1996. We expect our net losses to continue to
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increase as we continue to expand our business. See "Business--Risk
Factors."
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, we had working capital of $52.7 million,
compared to $226.8 million as of December 31, 1997.
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. Net cash provided by (used in) operations totaled
$(2.0) million, $(1.3) million and $18.9 million for the years ended December
31, 1996, 1997 and 1998, respectively. 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;
- - amortization of notes discount
- - loss on disposition of assets;
- - cumulative effect of an accounting change.
Net cash used for investing activities was $14.4 million, $268.0 million and
$18.6 million for the years ended December 31, 1996, 1997 and 1998,
respectively. 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 $39.7 million of capital expenditures, $14.3 million for the purchase of the
Panama City cable system and a $39.7 million increase in construction related
payables. In 1998, our investing activities consisted primarily of $111.3
million of capital expenditures (including inventory), $67.7 million for the
acquisition of the Huntsville, Alabama cable system and $0.8 million for an
investment in ClearSource, Inc. These investing activities are offset by
$161.6 million in proceeds from the sale of short-term investments.
Net cash flow from financing activities was cash provided of $16.2
million, cash provided of $272.8 million and cash used of $1.5 million for the
years ended December 31, 1996, 1997 and 1998, respectively. Net cash flow from
financing activities was cash provided of $16.2 million, cash provided of
$272.8 million and cash used of $1.5 million for the years ended December 31,
1996, 1997 and 1998, respectively. Cash flow from financing activities in 1996
included $10.9 million of additional infusion of equity and $4.3 million of
repayments from affiliates. Cash flow from financing activities in 1997
included $257.3 million in proceeds from the issuance of senior discount notes
and $42.8 million of additional infusion of equity, offset by $29.9 million of
repayment of debt. Cash used in financing activities in 1998 included $1.5
million in expenditures related to the issuance of debt.
FUNDING TO DATE
On October 22, 1997, we 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, our ability our to:
- - incur indebtedness;
- - pay dividends;
- - prepay subordinated indebtedness;
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- - redeem capital stock;
- - make investments;
- - engage in transactions with stockholders and affiliates;
- - create liens;
- - sell assets; and
- - engage in mergers and consolidations.
If we fail to comply with these covenants, our 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 our
ability to incur additional indebtedness by requiring compliance with specified
leverage ratios, it permits us and our 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 up to $50 million of
additional secured indebtedness. Upon a change of control, as defined in the
indenture, we 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.
Each unit in the offering also consisted of a warrant to purchase 0.003734
shares of our preferred stock at an exercise price of $0.01 per share.
In connection with the units offering, we completed an equity private
placement, in which we 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 we incurred to
finance the purchase of our cable television systems in Montgomery, Alabama and
Columbus, Georgia in 1995. ITC Holding subsequently repurchased all shares of
our preferred stock owned by Century Telephone, South Atlantic and SCANA during
1998.
On December 22, 1998, we 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 us 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 our 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 our leverage
ratio. The credit facility contains a number of covenants including, among
others, covenants limiting our ability and the ability of our 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. We are currently in
compliance with these covenants. Should we not be in compliance with the
covenants in the future, we 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 our company, as defined in the credit facility agreement,
would constitute a default under the covenants. To date, no funds have been
drawn against the credit facility.
FUTURE FUNDING
Our business requires substantial investment to finance capital
expenditures and related expenses, to expand and/or upgrade the interactive
broadband networks, to fund subscriber equipment and to maintain the quality of
our networks. We currently expect to spend approximately $94 million for capital
expenditures during 1999, including the planned expansion and/or upgrade of the
Montgomery, Columbus, Panama City, Augusta, Charleston and Huntsville networks.
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 customer premise equipment, 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 our existing 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
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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. 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.
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 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 by the middle of the fourth quarter 1999. This plan covers:
- 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.
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<PAGE> 46
We are addressing our year 2000 plan with respect to our internal
operations in six phases:
- an awareness phase, in which we inventory and evaluate our
systems, components and other significant infrastructure;
- an assessment phase, in which we identify those elements that
reasonably could be expected to be affected by year 2000
problems;
- a remediation phase, in which we remediate or replace
equipment that we believe will fail to operate properly in the
year 2000;
- a testing and validation phase, in which we test the
remediation and replacement conducted and validate its
ability;
- an implementation phase, in which we add our new or updated
equipment to our current systems; and
- a contingency phase, in which we develop contingency plans for
our at-risk business functions.
We have completed the awareness, assessment, remediation and contingency phases
of our plan for all of our services and systems. We have substantially completed
the testing and validation and implementation phases for all of these 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 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 before the end of the year.
We expect to have any remaining non-compliant systems in compliance before the
end of 1999.
Costs
To date, we have incurred approximately $450,000 of costs in connection
with our year 2000 plan, and we anticipate spending approximately $150,000 in
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.
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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. We have only one switch, through which we route all
of our telephone data transmissions. A team of specialists
from an 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. To date, no funds have been drawn against our credit
facility. However, any borrowings under our credit facility which are based on
either prime rate or federal funds rate plus applicable margin or LIBOR plus
applicable margin would be subject to market conditions. Any changes in these
rates would affect the rate at which we could borrow funds under our 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 is incorporated by reference to pages F-1 through F-22 and S-1
through S-2 herein.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are listed below. Our directors are elected
at the annual meeting of stockholders. Our executive officers are appointed at
the first meeting of our board of directors after each annual meeting of
stockholders. Directors and executive officers are elected to serve until they
resign or are removed, or are otherwise disqualified to serve, or until their
successors are elected and qualified. The ages of the persons set forth below
are as of December 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
---- --- ------------------------
<S> <C> <C>
William E. Morrow.............. 36 Chief Executive Officer and Director
Rodger L. Johnson.............. 50 President, Chief Operating Officer
Marcus R. Luke, Ph.D........... 43 Chief Technology Officer
Felix L. Boccucci, Jr.......... 41 Chief Financial Officer and
Vice President of Business Development
James T. Markle................ 39 Vice President of Network Operations
Bret T. McCants................ 39 Vice President of Network Construction
and Maintenance
</TABLE>
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<PAGE> 48
<TABLE>
<S> <C> <C>
Peggy B. Warner................ 47 Vice President of Marketing and Carrier Sales
Ancel A. Hamilton, Jr.......... 49 Vice President of Strategic Planning
Chad S. Wachter................ 32 Vice President, General Counsel and Secretary
Campbell B. Lanier, III (1).... 48 Chairman of the Board of Directors
Richard Bodman................. 60 Director
Donald W. Weber (2)............ 62 Director
Donald W. Burton(2)............ 54 Director
L. Charles Hilton, Jr (1)...... 67 Director
William H. Scott, III (2)...... 51 Director
Alan A. Burgess (1)........... 63 Director
</TABLE>
- ----------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Stock Option Committee.
WILLIAM E. MORROW has been Chief Executive Officer and director since
February 1997. Mr. Morrow serves as a director of ClearSource Inc. From August
1996 to February 1997, Mr. Morrow served as Senior Vice President and General
Manager of Network Alliances for UtiliCom Networks. From March 1985 to August
1996, Mr. Morrow served in various capacities at Central and South West Corp.
including Marketing, Area Management, Governmental/Regulatory Lobbyist and
Ventures/Business Development. From December 1993 to August 1996 he served as
Founder and Managing Director of CSW Communications. While at CSW
Communications, Mr. Morrow oversaw the company's energy management services over
a 750 MHz two-way broadband network, the construction, maintenance, operation
and marketing of long-haul fiber capacity, and the design, construction,
operation and marketing of competitive access services.
RODGER L. JOHNSON was named as our President and Chief Operating
Officer effective April 1999. Prior to joining us, Mr. Johnson had served as
President and Chief Executive Officer, as well as a Director, of Communications
Central Inc., a provider of 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.
MARCUS R. LUKE, PH.D. has served as our Chief Technology Officer of the
Company since August 1997. Prior to this he served as our Vice President of
Network Construction 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 us, Dr. Luke served as Southeast Division Construction Manager
for TCI from July 1993 to May 1995. From July 1987 to June 1993, he served as
Area Technical Manager for TCI's southeast area, which included Montgomery. Dr.
Luke worked for Storer Communications Inc. from 1985 to 1987 as Vice President
of Engineering. Prior to 1985, he spent 12 years in various engineering and
management positions with Storer Communications Inc.
FELIX L. BOCCUCCI, JR. is currently serving as our Chief Financial
Officer and has served as our Vice President of Business Development since
August 1997. He served as Chief Financial Officer, Treasurer and Secretary from
November 1995 through August 1997. In addition, he currently serves as 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
controller in charge of Contel's Eastern Region Telephone Operations comprising
13 companies in twelve states.
BRET T. MCCANTS has served as our Vice President of Network Services
since April 1997. Prior to joining us, Mr. McCants was a co-founder of CSW
Communications. From January 1996 to April 1997 he served as Director of
Operations for CSW Communications and from 1994 to 1996 he participated in the
development and managed the deployment of interactive energy management
equipment to homes in Laredo, Texas. Prior to joining CSW Communications, he
served in various capacities with Central Power and Light Company including as
Corporate Manager of Commercial and Small Industrial Marketing from 1992 to
1994, and as Business Manager from 1990 to 1992. From 1982 to 1990, Mr. McCants
also held several positions in the Sales, Marketing and Engineering departments
at Central Power and Light Company.
ANCEL A. HAMILTON, JR. has been our Vice President of Strategic
Planning since October 1998 and he served as our Vice President of Operations
from October 1997 through October 1998. From June 1994 to October 1997, Mr.
Hamilton served as Vice President--Operations for InterCall where he managed
call center and network operations. From June 1991 to June 1994, Mr. Hamilton
served as General Manager--Information Services for SCANA Corporation, where he
managed all facets of the information systems function including computer
operations, programming and customer support. From 1983 until 1991, Mr. Hamilton
served in numerous marketing and sales positions with International Business
Machines Corporation, primarily in the electric utility and government arenas.
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JAMES T. MARKLE joined us in March 1999 as Vice President of Network
Operations. Prior to joining us, 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.
PEGGY B. WARNER joined us as Vice President of Marketing and Carrier
Sales in January 1998. 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.
CHAD S. WACHTER has served as our General Counsel and Secretary
since 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 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.
CAMPBELL B. LANIER, III has been one of our director since November
1995 and was elected Chairman of the Board in June 1998. Mr. Lanier serves as
Chairman of the Board and Chief Executive Officer of ITC Holding and served as a
director of the corporate predecessor of ITC Holding from its inception in May
1985. He is Chairman of the Board and a director of ITCDeltaDeltaCom, as well as
a director of MindSpring, National Vision Associates, Ltd. (a full service
optical retailer) and K&G Men's Centers, Inc., Mr. Lanier serves as Vice
Chairman of the Board of AvData and Chairman of the Board of Powertel, Inc. He
served as Chairman of the Board of AvData from June 1988 to September 1990. Mr.
Lanier has served as a Managing Director of South Atlantic Private Equity Fund
IV, Limited Partnership since 1997.
RICHARD BODMAN has been one of our directors since June of 1996.
Mr. Bodman is currently the Managing General Partner of AT&T Ventures. From
August 1990 to May 1996, Mr. Bodman served as Senior Vice President of
Corporate Strategy and Development for AT&T. Mr. Bodman also is currently a
director of the following public companies: Internet Security Systems, Inc.,
Tyco International Inc., Reed Elsevier and NHP, Inc.
DONALD W. WEBER has been one of our directors 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 Powertel, Inc.,
HeadHunter.NET, Inc., Pegasus Communications Corporation, a media and
communications company and HIE, Inc., a health care software provider.
DONALD W. BURTON has been one of our directors 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
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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, ITCDeltaDeltaCom, 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 we acquired
the Beach Cable System in December 1997. Mr. Hilton has been elected to serve a
one-year term as a member of our board of directors pursuant to the Beach Cable
System acquisition agreement. Mr. Hilton was the founder and sole stockholder of
Beach Cable, Inc., and served as its Chief Executive Officer from 1991 to
December 1997. Since 1958, Mr. Hilton has served as Chairman and Chief Executive
Officer of Gulf Asphalt Corporation, a general construction firm. Mr. Hilton has
been a partner in the law firm of Hilton, Hilton, Kolk & Roesch since 1984, and
currently serves as Chief Executive Officer of Hilton, Inc., a family
corporation which owns and operates various commercial buildings in Bay County,
Florida. He also is a member of the board of directors of several private
companies.
WILLIAM H. SCOTT, III has been one of our directors since November
1995. Mr. Scott has served as President of ITC Holding since December 1991 and
has been a director of ITC Holding since May 1989. Mr. Scott is a director of
several ITC Companies, including ITC Holding, PowerTel, Inc., AvData,
ITCDeltaDeltaCom, and MindSpring. From 1989 to 1991, he served as Executive Vice
President of the corporate predecessor of ITC Holding. From 1985 to 1989, Mr.
Scott was an officer and director of Async Corporation. Between 1984 and 1988,
Mr. Scott held several offices with SouthernNet, including Chief Operating
Officer, Chief Financial Officer, and Vice President--Administration. He was a
director of SouthernNet from 1984 to 1987.
ALAN A. BURGESS has been one of our directors in 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 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.
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.
DIRECTOR COMPENSATION
Our directors receive no directors' fees. Our directors are reimbursed
for their reasonable out-of-pocket travel expenditures incurred. 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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<PAGE> 51
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
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 Form 10-K.
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<PAGE> 52
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
YEAR(1) SALARY BONUS OPTIONS(2) COMPENSATION(3)
------- --------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C>
William E. Morrow 1998 $ 134,539 $ 76,800 105,000 $ 8,014
President and Chief Executive 1997 $ 102,462(5) $ 22,602 45,000 $ 24,526
Officer(4)
James K. McCormick 1998 $ 110,962 $ 4,800 37,500 $ 35,819
Chief Financial Officer(11) 1997 $ 30,770(6) $ 17,609 15,000 $ 33,700
Felix L. Boccucci, Jr. 1998 $ 98,250 $ 33,385 7,500 $ --
Vice President of Business 1997 $ 92,430 $ 9,473 -- $ 36,159(8)
Development(7) 1996 $ 84,015 $ 46,102 16516.5 $ 68,464(9)
Bret T. McCants 1998 $ 101,494 $ 29,926 30,000 $ 5,041
Vice President of Network 1997 $ 58,847(10) $ 21,177 10,500 $ 35,535
Construction and Maintenance
Marcus R. Luke 1998 $ 97,307 $ 31,275 22,500 $ 4,800
Chief Technology Officer 1997 $ 90,292 $ 6,102 -- $ 5,111
1996 $ 72,547 $ 7,102 6,405 $ 5,076
</TABLE>
- ---------------
(1) Most of the named executive officers were initially employed by us
during 1997 or are in a different position with us than the position
held by such named executive officer in 1996.
(2) All options are exercisable for shares of our common stock.
(3) Includes car allowances, relocation expenses and premiums on life
insurance.
(4) Mr. Morrow has served as our President and Chief Executive Officer
since the resignation of Mr. Walker in February 1997.
(5) Reflects amounts paid to Mr. Morrow based on an annual salary rate of
approximately $120,000.
(6) Reflects amounts paid to Mr. McCormick based on an annual salary rate
of approximately $100,000.
(7) Mr. Boccucci served as our Chief Financial Officer, Treasurer and
Secretary from November 1995 through August 1997.
(8) Includes grants of ITC Holding capital stock valued at $30,789 at the
time of grant.
(9) Includes grants of ITC Holding capital stock valued at $63,448 at the
time of grant.
(10) Reflects amounts paid to Mr. McCants based on an annual salary rate of
approximately $90,000.
(11) Mr. McCormick resigned his position in February 1999.
INCENTIVE COMPENSATION 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 7,000,000 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 450,000 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
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<PAGE> 53
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.
At December 31, 1998, we had options to purchase 6,313,476 shares of
common stock outstanding pursuant to the stock option plan.
OPTION GRANTS
The following table sets forth information with respect to grants of
stock options to the named executive officers during the fiscal year ended
December 31, 1998. No stock appreciation rights have been granted.
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<PAGE> 54
OPTION GRANTS DURING 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
--------------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO POTENTIAL REALIZED VALUE AT
UNDERLYING EMPLOYEES ASSUMED ANNUAL RATES OF STOCK
OPTIONS IN FISCAL EXERCISE EXPIRATION PRICE APPRECIATION
NAME GRANTED YEAR(2) PRICE GRANT DATE DATE FOR OPTION TERM(3)
- ---- ---------- ----------- -------- ---------- ---------- -----------------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Morrow 105,000 18.6% $ 10 February 4, February 4, $ 660,450 $ 1,673,700
President and Chief 1998 2008
Executive Officer
James K. McCormick 37,500 5.8% $ 10 February 4, February 4, $ 237,875 $ 562,500
Chief Financial Officer 1998 2008
(Now cancelled)
Felix L. Boccucci, Jr. 7,500 1.3% $ 10 February 4, February 4, $ 47,175 $ 119,550
Vice President of 1998 2008
Business
Development(4)
Bret T. McCants 30,000 5.3% $ 10 February 4, February 4, $ 188,700 $ 478,200
Vice President of 1998 2008
Network Construction
and Maintenance
Marcus R. Luke 22,500 4.0% $ 10 February 4, February 4, $ 141,525 $ 358,650
Chief Technology 1998 2008
Officer
</TABLE>
- ---------------
(1) All options are exercisable for shares of common stock and are granted
under the stock option plan. Such options generally vest over five
years unless such person's employment with the Company is terminated,
in which case options that have not vested at that time will
terminate.
(2) Based on 565,374 options granted in fiscal 1998.
(3) These amounts are based on compounded annual rates of stock price
appreciation of five and ten percent over the 10-year term of the
options, are mandated by rules of the Securities and Exchange
Commission and are not indicative of expected stock price performance.
Actual gains, if any, on stock option exercises are dependent on
future performance of the Common Stock, overall market conditions, as
well as the option holders' continued employment throughout the
vesting period. The amounts reflected in this table may not
necessarily be achieved or may be exceeded.
(4) Mr. Boccucci served as our Chief Financial Officer, Treasurer and
Secretary from November 1995 through August 1997.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
None of the named executive officers exercised stock options during the
fiscal year ended December 31, 1998. Since our common stock is not traded, we
have no presently available estimates of the market value of such shares at
December 31, 1998. No stock appreciation rights have been granted.
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<PAGE> 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at February 28,
1999, regarding beneficial ownership of our capital stock of the Company by:
- - each person known by us to beneficially own more than 5% of our
outstanding capital stock;
- - each of our executive officers;
- - each of our directors; and
- - all directors and executive officers as a group.
The information as to beneficial ownership has been furnished by our
stockholders, directors and executive officers and, unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND TOTAL SHARES OF
NAMES AND ADDRESS OF NATURE OF SHARES CAPITAL STOCK
BENEFICIAL OWNERS AND DIRECTORS BENEFICIALLY OWNED(1)(2) OUTSTANDING(2)
- ------------------------------- ------------------------ ---------------
<S> <C> <C>
InterCall Inc (3)......................................... 6,384,750 84.5%
AT&T Venture Funds(4)..................................... 1,066,950 14.1
Richard Bodman(4)......................................... 1,066,950 14.1
Felix L. Boccucci, Jr.(5)(8)(9)........................... 11,400 *
William E. Morrow(8)(9)................................... 3,000 *
James McCormick(7)(8)(9).................................. 3,000 *
Marcus R. Luke(6)(8)(9)................................... 6,525 *
James T. Markle........................................... -- *
Bret McCants(8)(9)........................................ 1,200 *
Peggy A. Warner........................................... -- *
Rodger L. Johnson.......................................... -- *
Ancel A. Hamilton, Jr.(8)(9).............................. -- *
Peggy B. Warner(9)........................................ -- *
Chad S. Wachter(9)........................................ -- *
Campbell B. Lanier (10)................................... 6,384,750 84.5%
Donald W. Weber........................................... -- *
Donald W. Burton.......................................... -- *
L. Charles Hilton, Jr..................................... -- *
William H. Scott, III..................................... -- *
Alan A. Burgess........................................... -- *
All executive officers and directors as a group
(17 persons)(5)(6)(8)..................................... 1,092,075 14.4%
</TABLE>
- --------------------
* Less than one percent.
(1) We have 394 shares of common stock outstanding issued to a former
employee under the stock option plan. Our preferred stock is assumed to
be converted using a ratio of 150:1 preferred stock to common stock for
the purpose of this table.
(2) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended, a person is deemed to be the beneficial owner, for
purposes of this table, of any shares of capital stock if such person
has or shares voting power or investment power with respect to such
security, or has the right to acquire beneficial ownership at any time
within 60 days from January 31, 1999. As used herein, "voting power" is
the power to vote or direct the voting of shares and "investment power"
is the power to dispose or direct the disposition of shares. Each share
of capital stock owned represented in this table represents a share of
our common stock, including options to purchase 9,909.9 shares of
Common Stock granted to Mr. Boccucci and an option to purchase 3,285
shares of our common stock granted to Mr. Luke which are currently
exercisable.
(3) The address of Intercall Inc. is 1211 O.G. Skinner Drive, West Point,
Georgia 31833. Intercall is a wholly owned subsidiary of ITC Holding.
(4) The address of each of the AT&T Venture Funds and of Mr. Bodman is 2
Wisconsin Circle, #610, Chevy Chase, Maryland 20815. Includes 543
shares owned by Venture Fund I, L.P., of which Venture Management I, a
general partnership, is the general partner, of which Mr. Bodman is the
managing general partner; 4,886 shares owned by AT&T Venture Fund II,
L.P., of which Venture Management, L.L.C. is the general partner, of
which Mr. Bodman is a manager; includes 256 shares owned by Special
Partners Fund, L.P., of which Venture Management III, L.L.C. is the
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<PAGE> 56
general partner, of which Mr. Bodman is a manager; and includes 1,428
shares owned by Special Partners Fund International, L.P., of which the
investment general partner is Venture Management III, L.L.C., of which
Mr. Bodman is a manager. Each of the respective AT&T Venture Funds has
sole voting and investment power with respect to the shares
beneficially owned by such fund.
(5) Includes options to purchase 9,909.9 shares of our common stock which
are currently exercisable.
(6) Includes options to purchase 3,825 shares of our common stock which are
currently exercisable.
(7) Mr. McCormick has shared voting and investment power with respect to
such shares with his wife.
(8) Does not include options to purchase 25,080, 14,106.6, 150,000, 52,500
40,500, 37,500, 37,500, and 30,000 shares of our common stock held by
Messrs. Luke, Boccucci, Morrow, McCants, Hamilton, Warner and Wachter
respectively, which are not exercisable within 60 days from January 31,
1998.
(9) The address of each of Messrs. Hilton, Lanier, Scott, Walker, Boccucci,
Luke, Morrow, McCants, Hamilton, Wachter and Ms. Warner is c/o KNOLOGY
Holdings, Inc., 1241 O.G. Skinner Drive, West Point, Georgia 31833.
(10) These are the shares owned by Intercall, Inc.
ITC Holding Company, Inc formed us in November 1995. As of January 31,
1999, ITC Holding, through a wholly-owned subsidiary named InterCall, Inc.,
owned approximately 84.4% of the capital stock of our company. 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 ITCDeltaDeltaCom, Inc., Interstate Telephone Company, Valley Telephone
Company 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 serve as executive officers and directors and
are shareholders in affiliated companies. Campbell B. Lanier, III is Chairman
of the Board and Chief Executive Officer of ITC Holding and William II. Scott,
(I) is an officer and director of ITC Holding. Messrs. Lanier and Scott are
also officers and directors of several ITC Holding subsidiaries. Donald W.
Burton is a director of ITC Holding and several of its subsidiaries. Richard
Bodman is the managing general partner of AT&T Ventures, which controls the
AT&T venture funds that own approximately 14.1% of KNOLOGY Holdings. Felix
Rommuddi, our Vice President of Business Development, served as an executive
officer of ITC Holding prior to October 1997 and currently serves as Chief
Financial Officer of Interstate Telephone and Valley Telephone. As of December
31, 1998, Campbell P. 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.
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.
ITCDeltaDeltaCom 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 ITCDeltaDeltaCom with
time switching, programming and other services worth $525,368, $386,842 and
$639,568, respectively. As of March 15, 1999, Mr. Lanier owned
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<PAGE> 57
approximately 16% of ITCDeltaDeltaCom. Messrs. Lanier and Scott serve as
executive officers and directors of ITCDeltaDeltaCom and Mr. Burton serves as a
director of ITCDeltaDeltaCom.
We received cellular services in 1996, 1997 and 1998 worth $137,389,
$118,064 and $342,696, respectively, from Powertel, Inc., and we provided
switching, programming and other services to Powertel during this time worth
$572,659, $519,956 and $593,221. As of March 12, 1999, ITC Holding owned
approximately 27.5% of Powertel.
We provided services to InterCall, our parent company and a
wholly-owned subsidiary of ITC Holding, in 1996, 1997 and 1998 worth $449,861,
$477,405 and $737,204, respectively.
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. As of December 31, 1998, ITC
Holding, through InterCall, owned approximately 18.8% of MindSpring.
We received services in 1996, 1997 and 1998 worth $77,714, $196,981
and $476,646, respectively, from Interstate Telephone Company, a wholly-owned
subsidiary of ITC Holding.
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 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, we recorded $102,000 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. In 1996,
1997 and 1998 this company charged us approximately $222,000, $221,000 and
$628,000, respectively, for insurance services.
During 1998, we leased office space to ITCDeltaDeltaCom and Powertel,
for which we received approximately $234,000 of lease income.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1995 and January 1996, in connection with its initial
capitalization, we 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 our 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.
We are a party to a stockholders' agreement dated December 8, 1995, as
amended, with all of our stockholders. No party to the stockholders' agreement
could transfer any of our capital stock, rights or options held by such party to
third parties without having offered rights of first refusal to purchase such
securities to us.
In May 1996, in connection with a private placement of its preferred
stock, we 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
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<PAGE> 58
$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, other stockholders and us entered into an agreement among
stockholders, 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 AT&T Venture Fund I, L.P. owned more
than 5% of our equity securities, to elect one director designated by each such
5% stockholder.
In February 1997, we 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, we signed a letter of intent with SCANA Communications,
whereby SCANA agreed to provide us 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, we
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. We repaid the promissory note in October 1997 with a portion of
the proceeds from the offering and the private placement described below.
In October 1997, we 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, $5.0 million and $5.0 million of preferred stock, respectively, in the
equity private placement.
In October 1997, we 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, we acquired Beach Cable, Inc., a cable television
system in Panama City, Florida. L. Charles Hilton, Jr., the founder and sole
stockholder of Beach Cable, received 2,485 shares of our 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
shares of our preferred stock. In July 1998, ITC Holding acquired shares of our
preferred stock in exchange for $100 in cash and ITC Holding common stock valued
at $1,600 per share for each share of our preferred stock exchanged. ITC Holding
purchased 21,551 shares of our preferred stock of from several stockholders,
including all of the preferred stock owned by South Atlantic and SCANA
Communications in the exchange.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A)(1) The following Consolidated Financial Statements of the
Company and independent auditor's report are included in Item 8 of this Form
10-K.
Report of Independent Public Accountants.
Company's Consolidated Balance Sheets as of December 31, 1997
and 1998.
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.
Consolidated Statements of Stockholders' (Deficit) Equity for
the Years Ended December 31, 1996, 1997 and 1998.
Notes to Consolidated Financial Statements.
(A)(2) The following financial statement schedule is filed as part
of this report and is attached hereto as pages S-1 and S-2.
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<PAGE> 60
Independent Auditor's Report on the Financial Statement
Schedules.
Schedule II--Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission either have been included
in the Consolidated Financial Statements of the Company or the notes thereto,
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
(A)(3) The following exhibits are either provided with this Form
10-K or are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated December 5, 1997, by and among
KNOLOGY Holdings, Inc., KNOLOGY of Panama City, Inc., Beach Cable,
Inc. and L. Charles Hilton (Filed as Exhibit 2.1 to the Registration
Statement on Form S-4, File No. 333-43339 (the "Form S-4") and
incorporated herein by reference).
2.2+ Purchase Agreement between Cable Alabama Corporation and Knology of
Huntsville, Inc., dated as of October 19, 1998.
3.1 Certificate of Amendment of Certificate of Incorporation of KNOLOGY
Holdings, Inc. (Filed as Exhibit 3.1 to the Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference).
3.2 Amended and Restated Bylaws of KNOLOGY Holdings, Inc. (Filed as
Exhibit 3.2 to the Form S-4 and incorporated herein by
reference).
3.3 Certificate of Amendment to Certificate of Designation of Preferred
Stock. (Filed as Exhibit 3.2 to the Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference).
4.1 Indenture dated as of October 22, 1997 between KNOLOGY Holdings,
Inc. and United States Trust Company of New York, as Trustee,
relating to the 11-7/8% Senior Discount Notes Due 2007 of KNOLOGY
Holdings, Inc. (Filed as Exhibit 4.1 to the Form S-4 and
incorporated herein by reference).
4.2 Registration Rights Agreement, dated October 22, 1997, between
KNOLOGY Holdings, Inc., the Placement Agents and SCANA
Communications, Inc. (Filed as Exhibit 4.2 to the Form S-4 and
incorporated herein by reference).
4.3 Form of Senior Discount Note (contained in Indenture filed as
Exhibit 4.1).
4.4 Form of Exchange Note (contained in Indenture filed as Exhibit 4.1).
10.1 Unit Purchase Agreement, dated as of October 16, 1997 between
KNOLOGY Holdings, Inc. and SCANA Communications, Inc. (Filed as
Exhibit 10.1 to the Form S-4 and incorporated herein by reference).
10.2 Warrant Agreement, dated as of October 22, 1997, between KNOLOGY
Holdings, Inc. and United States Trust Company of New York
(including form of Warrant Certificate) (Filed as Exhibit
10.2 to the Form S-4 and incorporated herein by reference).
10.3 Warrant Registration Rights Agreement, dated as of October 22, 1997,
between KNOLOGY Holdings, Inc. and United States Trust
Company of New York (Filed as Exhibit 10.3 to the Form S-4
and incorporated herein by reference).
10.4 Lease Agreement dated April 15, 1996 by and between D.L. Jordan and
American Cable Company, Inc. (Filed as Exhibit 10.5 to the Form S-4 and
incorporated herein by reference).
10.5 Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power
Company and Beach Cable, Inc. (Filed as Exhibit 10.7 to the Form S-4 and
incorporated herein by reference).
10.6* Telecommunications Facility Lease and Capacity Agreement, dated September
10, 1996, by and between Troup EMC Communications, Inc. and Cybernet
Holding, Inc. (Filed as Exhibit 10.16 to the Form S-4 and
incorporated herein by reference).
</TABLE>
<PAGE> 61
<TABLE>
<S> <C>
10.7 Master Pole Attachment Agreement dated January 12, 1998 by and
between South Carolina Electric and Gas and KNOLOGY Holdings, Inc.
d/b/a/ KNOLOGY of Charleston (Filed as Exhibit 10.17 to the Form S-4
and incorporated herein by reference).
10.8 License Agreement dated September 29, 1995 by and between Montgomery
Cablevision and Entertainment, Inc. and American Communications
Services of Montgomery, Inc. (Filed as Exhibit 10.22 to the Form S-4
and incorporated herein by reference).
10.9* License Agreement dated January 17, 1996 by and between American
Cable, Inc. and American Communication Services of Columbus, Inc.
(Filed as Exhibit 10.23 to the Form S-4 and incorporated herein by
reference).
10.10 Addendum to License Agreement dated April 21, 1997 by and between
American Cable, Inc. and American Communication Services of
Columbus, Inc. (Filed as Exhibit 10.24 to the Form S-4 and
incorporated herein by reference).
10.11 Lease Agreement, dated December 5, 1997 by and between The Hilton
Company and KNOLOGY of Panama City, Inc. (Filed as Exhibit 10.25 to
the Form S-4 and incorporated herein by reference).
10.12 Billing and Collection Services Agreement dated April 2, 1997 by and
between Interstate Telephone Company and Cybernet Holding, Inc.
(Filed as Exhibit 10.26 to the Form S-4 and incorporated herein by
reference).
10.13 Certificate of Membership with National Cable Television
Cooperative, dated January 29, 1996, of Cybernet Holding, Inc.
(Filed as Exhibit 10.34 to the Form S-4 and incorporated herein by
reference).
10.14 Stockholders' Agreement among KNOLOGY Holdings, Inc. and Certain
Stockholders Thereof dated as of December 8, 1995 (Filed as Exhibit
10.35 to the Form S-4 and incorporated herein by reference).
10.15 Amendment No. 1 to Stockholders' Agreement dated as of January 25, 1996
(Filed as Exhibit 10.36 to the Form S-4 and incorporated herein by
reference).
10.16 Amendment No. 2 to Stockholders' Agreement dated as of April 18, 1996
(Filed as Exhibit 10.37 to the Form S-4 and incorporated herein by
reference).
10.17 Amended and Restated Agreement Among Shareholders Among KNOLOGY
Holdings, Inc. and Certain Shareholders thereof dated as of July 28,
1997 (Filed as Exhibit 10.38 to the Form S-4 and incorporated herein
by reference).
10.18+ Ordinance No. 99-16 effective March 16, 1999 between Columbus consolidated
Government and KNOLOGY of Columbus, Inc.
10.19 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990 (Filed as
Exhibit 10.44 to the Form S-4 and incorporated herein by reference).
10.20 Ordinance No. 50-76 (Montgomery, Alabama) (Filed as Exhibit 10.45 to the
Form S-4 and incorporated herein by reference).
10.21 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990 (Filed
as Exhibit 10.45.1 to the Form S-4 and incorporated herein by
reference).
10.22 Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995 (Filed as
Exhibit 10.46 to the Form S-4 and incorporated herein by reference).
10.23 Resolution No. 92-7 (Panama City Beach, Florida) dated July 23, 1992
(Filed as Exhibit 10.47 to the Form S-4 and incorporated herein by
reference).
</TABLE>
<PAGE> 62
<TABLE>
<S> <C>
10.24 License (Bay County, Florida) dated January 5, 1993 (Filed as Exhibit 10.48
to the Form S-4 and incorporated herein by reference).
10.25 Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997
(Filed as Exhibit 10.49 to the Form S-4 and incorporated herein by
reference).
10.26 Resolution No. 2075 (Bay County, Florida) dated November 18, 1997 (Filed as
Exhibit 10.50 to the Form S-4 and incorporated herein by reference).
10.27 Ordinance No. 5999 (Augusta, Georgia) dated January 20, 1998 (Filed as
Exhibit 10.53 to the Company's 1997 Annual Report on Form 10-K).
10.28 Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998 (Filed
as Exhibit 10.54 to the Company's 1997 Annual Report on Form 10-K).
10.30+ Ordinance No. 98054 (Mount Pleasant, South Carolina) dated March 9, 1999.
10.31+ Franchise Agreement (Charleston County, South Carolina) dated December 15, 1998.
10.32+ Ordinance No. 1998-47 (North Charleston, South Carolina) dated May 28, 1998.
10.33+ Ordinance No. 1998-77 (Charleston, South Carolina) dated April 28, 1998.
10.34+ Ordinance No. 98-5 (Columbia County, Georgia) dated August 18, 1998.
10.35+* Switching Agreement dated May 1, 1998 between Interstate Telephone Company and
KNOLOGY Holdings, Inc.
10.36+ Network Access Agreement dated July 1, 1998 between SCANA Communications, Inc.,
f/k/a MPX Systems, Inc. and KNOLOGY Holdings, Inc.
10.37+ Internet Access Contract dated September 1, 1998 between ITC DeltaCom
Communications, Inc. and KNOLOGY Holdings, Inc.
10.38+* Collocation Agreement for Multiple Sites dated on or about June 1998 between
Interstate FiberNet, Inc. and KNOLOGY Holdings, Inc.
10.39+* Lease Agreement dated October 12, 1998 between Southern Company Services, Inc.
and KNOLOGY Holdings, Inc.
10.40+ 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+ License Agreement dated March 3, 1998 between BellSouth Telecommunications, Inc.
and KNOLOGY Holdings, Inc.
10.44+ Pole Attachment Agreement dated February 18, 1998 between KNOLOGY Holdings, Inc.
and Georgia Power Company.
10.46+ Assignment Agreement dated March 4, 1998 between Gulf Power Company and Knology
of Panama City, Inc.
10.47 Adoption Agreements dated March 1, 1999 between KNOLOGY Holdings, Inc. and
BellSouth Telecommunications, Inc.
10.48+* Lease Switching Agreement between South Carolina Net for TTE and KNOLOGY
Holdings, Inc.
</TABLE>
<PAGE> 63
<TABLE>
<S> <C>
10.50+* Carrier Services Agreement dated September 30, 1998 between Business Telecom,
Inc. and KNOLOGY Holdings, Inc.
10.51+* Reseller Services Agreement dated September 9, 1998 between Business Telecom,
Inc. and KNOLOGY Holdings, Inc.
10.52+* Private Line Services Agreement dated September 10, 1998 between BTI
Communications Corporation and KNOLOGY Holdings, Inc.
10.53+ Credit Facility Agreement between First Union National Bank, First Union
Capital Markets Corp. and KNOLOGY Holdings, Inc. dated December 22,
1998.
10.54+ Ordinance No. 284 (Cedar Grove, Florida) dated June 9, 1998.
10.55 License Agreement dated January 5, 1993 between County Commissioners of Bay
County Florida and Beach Cable, Inc. (Filed as Exhibit 10.48 to the
Form S-4 dated December 24, 1997 and incorporated herein by reference.)
10.56+ Ordinance No. 647 (Lynn Haven, Florida) dated May 12, 1998 between Knology
of Panama City, Inc. and the City of Lynn Haven.
10.57+ Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998 between Knology
of Panama City, Inc. and the City of Panama City.
10.58+ Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997
between Panama City Beach, Florida and KNOLOGY Holdings, Inc.
12.1+ Statement regarding Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of KNOLOGY Holdings, Inc. (Filed as Exhibit 21.1 to the Form 10-Q
for the quarter ended September 30, 1998 and incorporated herein by reference).
23.1 Consent of Arthur Andersen LLP.
27.1+ Financial Data Schedule.
</TABLE>
- ----------------------
+ Previously filed with KNOLOGY Holdings, Inc.'s Form 10-K for the year ended
December 31, 1998.
* Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
<PAGE> 64
(B) REPORTS ON FORM 8-K.
On February 17, 1998, we filed a Current Report on Form 8-K to report
the acquisition on December 5, 1997 of Beach Cable, Inc. and to include the
relevant financial statements of KNOLOGY of Panama City, Inc., including our
relevant pro forma financial information.
On November 9, 1998, we filed a Current Report on Form 8-K to report
the acquisition on October 30, 1998 of Cable Alabama Corporation. On January
13, 1999 a form 8-K/A was filed to include the relevant financial statements of
Cable Alabama Corporation, including our relevant pro forma financial
information.
(C) EXHIBITS
We hereby file as part of this Form 10-K/A the Exhibits listed in the
Index to Exhibits.
(D) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
inapplicable or the information required to be set forth therein is provided in
our Consolidated Financial Statements or notes thereto.
-61-
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of the 30th day
of March, 1999.
KNOLOGY HOLDINGS, INC.
By: /s/ Rodger L. Johnson
-------------------------------------
Roger L. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Campbell B. Lanier, III Chairman of the Board and Director December 8, 1999
- --------------------------------------
Campbell B. Lanier, III
/s/ Rodger L. Johnson President, Chief Executive Officer December 8, 1999
- -------------------------------------- and Director (Principal executive officer)
Rodger L. Johnson
/s/ Robert K. Mills Chief Financial Officer, Vice President December 8, 1999
- -------------------------------------- and Treasurer (Principal financial officer
Robert K. Mills and principal accounting officer)
/s/ Donald W. Burton
- -------------------------------------- Director December 8, 1999
Donald W. Burton
/s/ William H. Scott, III
- -------------------------------------- Director December 8, 1999
William H. Scott, III
/s/ Donald W. Weber
- -------------------------------------- Director December 8, 1999
Donald W. Weber
</TABLE>
-62-
<PAGE> 66
<TABLE>
<S> <C> <C>
/s/ Richard Bodman
- -------------------------------------- Director December 8, 1999
Richard Bodman
/s/ L. Charles Hilton, Jr.
- -------------------------------------- Director December 8, 1999
L. Charles Hilton, Jr.
/s/ Alan A. Burgess
- -------------------------------------- Director December 8, 1999
Alan A. Burgess
</TABLE>
-63-
<PAGE> 67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
KNOLOGY HOLDINGS, INC.
Report of Independent Public Accountants................................................................... F-1
Consolidated Balance Sheets--December 31, 1998 and 1999.................................................... F-2
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996................. F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the Years Ended
December 31, 1998, 1997 and 1996........................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
KNOLOGY Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY
HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31,
1998 and 1997 and the related consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for each of the years in the
three-year 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 financial statements referred to above present fairly, in
all material respects, the financial position of KNOLOGY Holdings, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 19, 1999
F-1
<PAGE> 69
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,859,508 $ 6,144,581
Marketable securities 66,231,397 227,880,923
Accounts receivable:
Trade, less allowance for doubtful accounts of $393,767 and
$108,529 in 1998, and 1997, respectively 5,108,491 1,607,859
Affiliate (Note 2) 6,785,691 0
Deferred tax assets (Note 6) 0 0
Prepaid expenses 430,811 37,060
------------- -------------
Total current assets 83,415,898 235,670,423
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Cable system and installation equipment 153,878,352 56,909,159
Test and office equipment 5,784,363 1,628,485
Automobiles and trucks 2,952,912 837,490
Production equipment 857,028 297,286
Land 2,449,269 0
Buildings 10,239,696 1,936,035
Inventory, less allowance for shrinkage of $180,000 and $30,000 in
1998 and 1997, respectively 32,142,503 5,806,320
Leasehold improvements 599,441 324,270
------------- -------------
208,903,564 67,739,045
Less accumulated depreciation and amortization (13,406,947) (5,171,309)
------------- -------------
Property, plant and equipment, net (Note 2) 195,496,617 62,567,736
------------- -------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net of accumulated amortization of
$4,156,946 in 1998 and $817,471 in 1997, respectively (Note 2) 52,606,063 17,896,146
Investment (Note 2) 825,072 0
Other 207,000 63,795
------------- -------------
Total assets $ 332,550,650 $ 316,198,100
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE> 70
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $ 12,174 $ 25,094
Accounts payable 6,366,923 5,817,733
Accounts payable--affiliate (Note 8) 0 452,346
Accrued liabilities 22,215,281 1,638,042
Unearned revenue 2,116,083 907,048
------------- -------------
Total current liabilities 30,710,461 8,840,263
NONCURRENT LIABILITIES:
Long-term notes payable (Note 3) 122,070 120,804
Long-term accrued interest payable 21,036,541 3,201,688
Bonds payable, net of discount of $180,893,708 and $194,189,569 in
1998 and 1997, respectively 263,206,292 249,910,431
------------- -------------
315,075,364 262,073,186
Total liabilities ------------- -------------
DEFERRED TAX LIABILITIES, NET OF ALLOWANCE OF $14,588,370 AND $4,165,308
IN 1998 AND 1997, RESPECTIVELY (NOTE 6) 0 0
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 5) ------------- -------------
2,486,960 2,486,960
WARRANTS (NOTE 3) ------------- -------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value per share; 100,000 and
50,000 shares authorized, 49,852 and 49,985 shares issued and
outstanding in 1998 and 1997, respectively (Note 7) 499 500
Common stock, $.01 par value per share; 16,000,000 and 200,000 shares
authorized, 394 and 0 shares issued and outstanding in 1998 and
1997, respectively (Note 7) 4 0
Additional paid-in capital 64,864,366 65,060,712
Accumulated deficit (49,878,931) (13,402,495)
Unrealized gains (losses) on marketable securities (Note 2) 2,388 (20,763)
------------- -------------
Total stockholders' equity 14,988,326 51,637,954
------------- -------------
Total liabilities and stockholders' equity $ 332,550,650 $ 316,198,100
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 71
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES $ 25,770,427 $ 10,355,068 $ 5,334,183
OPERATING EXPENSES:
Cost of services 11,854,733 4,758,730 2,513,693
Selling, operations and administrative 25,393,015 7,392,540 3,883,738
Depreciation and amortization 12,367,374 3,715,184 1,640,025
------------ ------------ ------------
Total Operating Expenses 49,615,122 15,866,454 8,037,456
------------ ------------ ------------
OPERATING LOSS (23,844,695) (5,511,386) (2,703,273)
------------ ------------ ------------
OTHER INCOME AND EXPENSES:
Interest income 9,639,050 2,774,909 46,221
Interest expense (28,676,035) (6,226,023) (1,055,498)
Affiliate interest income (Note 8) 0 0 273,799
Other income (expense), net 202,094 (129,033) (60,000)
------------ ------------ ------------
Total Other Expenses (18,834,891) (3,580,147) (795,478)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (42,679,586) (9,091,533) (3,498,751)
INCOME TAX BENEFIT (NOTE 2) 6,785,691 0 373,323
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (35,893,895) (9,091,533) (3,125,428)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE - write-off of
capitalized start-up costs (Note 2) (582,541) 0 0
------------ ------------ ------------
NET LOSS $(36,476,436) $ (9,091,533) $ (3,125,428)
============ ============ ============
Basic and diluted LOSS PER SHARE
(Note 2):
Weighted average shares outstanding--7,488,450,
4,325,250, and 2,043,900 shares in 1998, 1997,
and 1996, respectively $ (4.87) $ (2.10) $ (1.53)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 72
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED STOCK COMMON STOCK (LOSS) GAIN TOTAL
--------------- -------------- ADDITIONAL ON STOCKHOLDERS'
PAID-IN ACCUMULATED MARKETABLE (DEFICIT)
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES EQUITY
------ ------ ------ ------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 7,520 $ 75 0 $ 0 $ 7,454,615 $ (1,185,534) 0 $ 6,269,156
Issuance of preferred stock, net
of related offering expenses 11,054,603 0 0 11,054,699
of $379,701 9,572 96 0
Net loss 0 0 0 0 0 (3,125,428) 0 (3,125,428)
------ ----- --- --- ------------ ------------ -------- ------------
BALANCE AT DECEMBER 31, 1996 17,092 171 0 0 18,509,218 (4,310,962) 0 14,198,427
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
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)
------ ----- --- --- ------------ ------------ -------- ------------
BALANCE AT DECEMBER 31, 1997 49,985 $ 500 0 $ 0 $ 65,060,712 $(13,402,495) $(20,763) $ 51,637,954
====== ===== === === ============ ============ ======== ============
Issuance of common stock under
stock options 0 0 394 4 3,148 0 0 3,152
BeachCable purchase price
adjustment (134) (1) 0 0 (199,494) 0 0 (199,495)
Net loss 0 0 0 0 0 (36,476,436) 0 (36,476,436)
Unrealized gain on marketable
securities 0 0 0 0 0 0 23,151 23,151
------ ----- --- --- ------------ ------------ -------- ------------
BALANCE AT DECEMBER 31, 1998 49,851 $ 499 394 $ 4 $ 64,864,366 $(49,878,931) $ 2,388 $ 14,988,326
====== ===== === === ============ ============ ======== ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 73
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (36,476,436) $ (9,091,533) $ (3,125,428)
--------------- --------------- ---------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 12,367,374 3,715,184 1,640,025
Amortization of bond discount 13,295,861 2,386,856 0
Loss on disposition of assets 61,559 23,464 21,370
Cumulative affect of accounting change 582,542 0 0
Deferred income tax benefit 0 0 (373,323)
Changes in current assets and liabilities:
Accounts receivable (10,286,324) (721,396) (512,337)
Prepaid expenses (393,750) 244,199 (180,950)
Accounts payable 96,844 4,302,245 (39,648)
Accrued liabilities and interest 38,412,092 163,317 293,394
Unearned revenue 1,209,035 243,007 278,757
Other 0 1,345 133
--------------- --------------- ---------------
Total adjustments 55,345,233 10,358,221 1,127,421
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 18,868,797 (1,266,688) (1,998,007)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements $ (111,272,219) $ (39,625,408) $ (14,416,135)
Acquisitions, net (67,732,864) 0 0
Organizational cost expenditures (251,815) (470,923) (20,133)
Liquidation (purchase) of investments, net 161,649,526 (227,956,301) (5,000)
Investment in ClearSource, Inc. (825,072) 0 0
Proceeds from sales of property 32,075 69,152 0
Other (246,182) 0 0
--------------- --------------- ---------------
Net cash used in investing activities (18,646,551) (267,983,480) (14,441,268)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short-term borrowings (11,654) (29,903,385) (160,900)
Expenditures related to issuance of debt and consummation of
credit facility (1,498,817) 0 0
Proceeds from issuance of common stock 3,152 0 0
Proceeds from issuances of debt and short-term borrowings, net of
discount and issue costs on bonds 0 257,370,383 1,258,238
Proceeds from issuance of preferred stock, net of related
offering expenses 0 42,824,323 10,868,699
Proceeds from issuance of warrants 0 2,486,960 0
(Advances to) repayments from affiliate 0 0 4,255,836
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (1,507,319) 272,778,281 16,221,873
--------------- --------------- ---------------
NET (DECREASE) INCREASE IN CASH (1,285,073) 6,061,489 (217,402)
CASH AT BEGINNING OF PERIOD 6,144,581 83,092 300,494
--------------- --------------- ---------------
CASH AT END OF PERIOD $ 4,859,508 $ 6,144,581 $ 83,092
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 10,911 1,543,125 $ 1,016,039
=============== =============== ===============
Cash paid during the period for income taxes $ 0 $ 0 $ 0
=============== =============== ===============
Details of acquisitions
Property, plant and equipment $ 30,133,876 $ 4,756,005 $ 0
Intangible Assets 37,598,988 2,796,139 0
Liabilities Assumed 0 (3,824,644) 0
Preferred stock issued 0 (3,727,500) 0
--------------- --------------- ---------------
Net cash paid for acquisitions $ 67,732,864 $ 0 $ 0
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 74
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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") owns and
operates advanced hybrid fiber-coaxial networks and provides
residential and business customers broadband communications services,
including analog and digital cable television, local and long distance
telephone, 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 expand 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 to result in profitability, there can be
no assurance that growth in the Company's revenue or customer base
will continue or that the Company will be able to achieve or sustain
profitability and/or positive cash flow.
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-7
<PAGE> 75
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with
an original maturity date of three months or less to be cash
equivalents. Cash and cash equivalents are stated at cost, which
approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as
available-for-sale securities, as defined by the Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Unrealized holding gains
and losses are reflected as a net amount in a separate component of
stockholders' equity until realized. For the purpose of computing
realized gains and losses cost is identified on a specific
identification basis. Securities available for sale at December 31,
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>
<S> <C>
Buildings 25 years
Cable system and installation equipment 7-10 years
Production equipment 7 years
Test and office equipment 3-7 years
Automobiles and trucks 5 years
Leasehold improvements 5 years
</TABLE>
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and
certain plant construction materials. These items are transferred to
cable system and installation equipment when installed.
Interest is capitalized in connection with the construction of the
company's broadband 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 and 1997, $2,468,941 and
$676,160 of interest cost was capitalized, respectively. No interest
was capitalized prior to 1997.
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 as of December 31, 1998 and 1997 are as follows:
F-8
<PAGE> 76
<TABLE>
<CAPTION>
Amortization Period
1998 1997 (Years)
-------------------------------------------------------
<S> <C> <C> <C>
Goodwill $ 10,914,834 $ 9,875,262 40
Subscriber base 34,863,072 0 3
Debt issuance costs 9,382,124 7,883,307 4 - 10
Noncompete agreement 1,500,000 0 3
Organizational costs 0 955,048
Other 102,979 0 10-15
-----------------------------
56,763,009 18,713,617
Less: accumulated amortization 4,156,946 817,471
-----------------------------
Intangibles and other, net $ 52,606,063 $ 17,896,146
=============================
</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 non-governmental entities expense costs of start-up
activities, including pre-operating, pre-opening and organization
activities, as the costs are incurred. Adoption of this statement
resulted in a cumulative effect of accounting change, net of the
change of $582,541 or $.08 per basic and diluted share.
LONG-LIVED ASSETS
In 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS
No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and cost in
excess of net assets acquired related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to
be disposed of. The effect of adopting SFAS No. 121 was not material.
The Company periodically reviews the values assigned to long-lived
assets such as inventory, property and equipment, and cost in excess
of net assets acquired to determine whether any impairments are other
than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
INVESTMENT
At December 31, 1998, the investment represents the Company's 11%
ownership in ClearSource, Inc. ClearSource was formed during 1998 to
build and operate advanced broadband networks offering a bundle of
communications services to residential business customers. The
Company's investment in ClearSource 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
$576,000, $158,000 and $165,000 of advertising expense is recorded in
the Company's statements of operations for the years ended December
31, 1998, 1997 and 1996, respectively.
F-9
<PAGE> 77
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
one or two 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).
Effective August 1998, the Company will be included in the
consolidated federal income tax return of its parent company, ITC
Holding Company, Inc. (See Note 7 - Capital Transactions). The Company
and its subsidiaries file separate state income tax returns. Under a
tax sharing arrangement, the Company recorded an income tax benefit
and an affiliate receivable in the amount of $6,785,691 for the
utilization of net operating losses included in the consolidated tax
return.
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." That
statement requires the disclosure of basic net income (loss) per share
and diluted net income (loss) per share. Basic net income (loss) per
share is computed by dividing net income (loss) available to common
shareholders by the weighted-average number of common shares
outstanding during the period. As the Company has no 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.
F-10
<PAGE> 78
3. LONG-TERM DEBT
Long-term debt at December 31, 1998, and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Senior Discount Notes, with a face value of $444,100,000, bearing interest
at 11.875% beginning October 15, 2002, payable semi-annually beginning
April 15, 2003 with principal and any unpaid interest due October 15, 2007 $ 263,206,292 $ 249,910,431
Troup capitalized lease obligation, at a rate of 10%, payable in
quarterly installments of $6,304 through December 2006, secured 134,244 145,898
------------- -------------
263,340,536 250,056,329
Less current maturities 12,174 25,094
------------- -------------
$ 263,328,362 $ 250,031,235
============= =============
</TABLE>
Following are maturities of long-term debt for each of the next five
years as of December 31, 1998:
<TABLE>
<S> <C> <C>
1999 $ 12,174
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, 1998 and 1997 are estimated to be approximately
$280,803,977 and $253,781,000, respectively, based on a valuation
technique that considers cash flows discounted at current rates.
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 subsidiary's
"consolidated adjusted cash flow" as defined in the credit facility
agreement. In connection with the initiation of the revolving credit
facility, the Company incurred $1,255,681 in related costs which are
being amortized on a straight-line basis over its five year term.
F-11
<PAGE> 79
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 have 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, 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 received
warrants to purchase 753 shares of the Company's preferred stock. On
October 24, 1997, the Company repaid all of these borrowings.
On May 13, 1997, the Company obtained a $3 million bridge loan
facility from First National Bank of West Point (the "Bridge
Facility") to provide additional liquidity until long-term financing
could be arranged. Interest accrued at the prime rate (as announced by
SunTrust Bank, Atlanta) plus .5% per annum on all outstanding
principal amounts, plus accrued but unpaid interest. As amended on
September 18, 1997, the Bridge Facility was payable on demand, with a
final maturity date of December 15, 1997. On December 15, 1997, the
Company repaid all of these borrowings.
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> <C>
1999 $ 212,517
2000 133,243
2001 118,367
2002 110,165
2003 107,248
---------
Total minimum lease payments $ 681,540
=========
</TABLE>
Total rental expense for all operating leases was approximately
$181,000, $75,000 and $70,000, the years ended December 31, 1998, 1997
and 1996, respectively.
F-12
<PAGE> 80
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.
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal
proceedings pending against the Company which would have a material
adverse effect on the financial position, results of operations, or
liquidity of the Company.
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The significant components of deferred tax assets and
liabilities as of December 31, 1998, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,924 $ 7,221 $ 3,875
Deferred bond interest 12,919 0 0
Other 1,395 279 92
Valuation allowance (14,588) (4,165) (2,475)
-------- -------- --------
Total deferred tax assets 8,650 3,335 1,492
Deferred tax liabilities--depreciation and amortization
(8,650) (3,335) (1,492)
-------- -------- --------
Net deferred tax liabilities 0 0 0
Portion included in current assets 0 0 0
-------- -------- --------
Net deferred 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 Company, Inc. (See Note 7 - Capital Transactions). The Company
and its subsidiaries file separate state income tax returns. Under a
tax sharing arrangement, the Company recorded an income tax benefit
and an affiliate receivable in the amount of $6,785,691 for the
utilization of net operating losses included in the consolidated tax
return. The Company has available, at December 31, 1998, 1997 and
1996, unused operating loss carryforwards of approximately $8,924,000,
$7,221,000 and $3,875,000, respectively, expiring in various years
from 2005 to 2013, unless utilized. Management has recorded a
valuation allowance of approximately $14,588,000, $4,165,000 and
$2,475,000 in 1998, 1997 and 1996, respectively, on these operating
loss carryforwards, the majority of which contain limitations on
utilization.
F-13
<PAGE> 81
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at statutory rate (34)% (34)% (34)%
State income taxes, net of federal benefit
(5) (4) (2)
Prior year actualization 4 3 (6)
Benefit from tax sharing agreement (16) 0 0
Goodwill 0 1 (1)
Deferred tax valuation allowance 35 34 32
-- -- --
(16)% 0% (11)%
== == ==
</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 Company, Inc. ("ITC") made an offer to
acquire outstanding shares of the Company in exchange for $100 in cash
and ITC 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 (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 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 was returned to the Company as part of
a purchase price adjustment. The amount of the consideration paid in
excess of the par value, net of expenses incurred in connection with
each issuance, is included in additional paid-in capital on the
accompanying balance sheets. Each share of convertible preferred stock
is automatically convertible into common stock on a 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
F-14
<PAGE> 82
$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 compensation
plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting methodology required by APB Opinion No. 25
must make pro forma disclosures of net income and, if presented,
earnings per share as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation
plans under APB Opinion No. 25, under which no compensation cost has
been recognized by the Company. However, the Company has computed, for
pro forma disclosure purposes, the value of all options for shares of
the Company's common stock to employees of the Company using the
minimum value option pricing model and the following weighted average
assumptions in 1998, 1997 and 1996:
F-15
<PAGE> 83
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate 5.42% 6.43% 6.31%
Expected dividend yield 0% 0% 0%
Expected lives SEVEN YEARS Seven years Seven years
Expected forfeiture rate 7% 7% 7%
</TABLE>
The weighted average fair value of options granted was $10.21, $8.44
and $8 for 1998, 1997 and 1996, respectively. The total value of
options for the Company's stock granted to employees of the Company
during 1998, 1997 and 1996 was computed as approximately $1,832,224,
$304,000 and $154,000, 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 have increased
as follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
------------- -------------
<S> <C> <C>
Net loss for the years ended December 31,
1998 $ (36,476,436) $ (36,766,159)
1997 $ (9,091,533) $ (9,188,862)
1996 $ (3,125,428) $ (3,155,917)
Earnings per share for the years ended December 31,
1998 $ (4.87) $ (4.91)
1997 $ (2.10) $ (2.12)
1996 $ (1.53) $ (1.54)
</TABLE>
A summary of the status of the Company's stock option plan at December
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 PER
SHARES SHARE
------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995 $
Granted 75,442 8.00
Forfeited (22,645) 8.00
-------
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 --
=======
</TABLE>
F-16
<PAGE> 84
<TABLE>
<CAPTION>
Exercisable shares as of December 31:
<S> <C> <C>
1998 30,006 8.00
======
1997 6,606 8.00
======
1996 0
======
</TABLE>
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, 1998, 1997 and 1996, the
Company recorded $102,000, $31,000, and $24,000, respectively, in
selling, operations, and administrative expenses related to these
services. In the opinion of management, the methodology used to
calculate the amounts charged to the Company is reasonable.
Additionally, during 1997, ITC Holding paid several invoices related
to the construction of the Company's building. At December 31, 1997,
there is approximately $419,000 related to these payments included in
Accounts Payable--Affiliate in the Company's balance sheet.
Certain of ITC Holding's other wholly-owned or majority-owned
subsidiaries provide the Company with various services and/or receive
services provided by the Company. These entities include Interstate
Telephone Company, which provides switching and billing telephone
services; ITC DeltaCom, Inc., which provides wholesale long-distance
and related services and which leases capacity on certain of its fiber
routes; and InterCall, Inc., which provides conference calling
services. ITC Holding also holds equity investments in the following
entities which do business with the Company: PowerTel, Inc., which
provides cellular services, and MindSpring Enterprises, Inc.
("MindSpring"), which is a regional provider of Internet access. In
management's opinion, the Company's transactions with these affiliated
entities are representative of arm's-length transactions.
For the years ended December 31, 1998, 1997 and 1996, the Company
received services from these affiliated entities in the amounts of
$1,681,000, $247,000, and $48,000, respectively, which are reflected
in cost of services and selling, operations, and administrative
expenses in the Company's statements of operations. In addition, in
1997 and 1996, the Company received services from these affiliated
entities in the amount of $13,000 and $11,000, 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. Approximately $234,000 of lease income related to these
transactions are recorded as other income in the Company's statement
of operations for the year ended December 31, 1998.
F-17
<PAGE> 85
In December 1996 and 1997, the Company invested $5,000 and $55,000,
respectively, in an airplane co-owned by ITC Holding and several of
its subsidiaries and other affiliated entities.
Advances to affiliate which were outstanding for the majority of 1996
represent excess funds from the issuance of the Company's convertible
preferred stock which were loaned to ITC Holding at an annual interest
rate of 7%. The Company recorded interest income of approximately
$274,000 for the year ended December 31, 1996, on these advances, of
which approximately $1,000 is reflected as interest
receivable--affiliate in the accompanying balance sheets as of
December 31, 1996. The advances were repaid in December 1996.
Relatives of the stockholders of ITC Holding are stockholders and
employees of the Company's insurance provider. The costs charged to
the Company for insurance services were approximately $386,000,
$134,000 and $36,000 for the years ended December 31, 1998, 1997 and
1996, 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 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. 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 following unaudited pro forma results
of operations for the years ended December 31, 1998 and 1997 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.
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 and among the
Company, KNOLOGY of Panama City, Inc., Beach Cable, and L. Charles
Hilton, Jr., the sole stockholder of Beach Cable, under
F-18
<PAGE> 86
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 merged company, now KNOLOGY of Panama City has been included in
the consolidated financial statements since December 5, 1997. The
following unaudited pro forma results of operations for the years
ended December 31, 1998 and 1997 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>
1998 1997
------------ ------------
<S> <C> <C>
Operating revenues $ 35,987,109 $ 26,288,684
Income before extraordinary items (45,959,350) (22,972,184)
Net income (46,541,891) (22,972,184)
Earnings per share (a) (6.22) (5.31)
</TABLE>
(a) Earnings per share is computed using 7,488,450 and
4,325,250 as number of shares outstanding in 1998
and 1997, respectively.
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS 131, "Disclosures
about segments of an Enterprise and Related Information," which
established revised standards for the reporting of financial and
descriptive information about operating segments in financial
statements.
The Company owns and operates advanced hybrid fiber-coaxial networks
and provides residential and business customers broadband
communications services, including analog and digital cable
television, local and long distance telephone, data and broadband
carrier services ("BCS"). Data services include high-speed Internet
access via cable modems. BCS includes local transport services such as
local Internet transport, special access, local private line, and
local exchange transport services.
While management of the Company monitors the revenue generated from
each of the various broadband services, operations are managed and
financial performance is evaluated based upon the delivery of 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
F-19
<PAGE> 87
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>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cable Television $22,193,992 $10,319,495 $5,334,183
Telephone 3,289,660 16,490 0
Data and BCS 286,775 19,083 0
----------- ----------- ----------
Consolidated Revenues $25,770,427 $10,355,068 $5,334,183
=========== =========== ==========
</TABLE>
F-20
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing
standards, the financial statements of KNOLOGY Holdings, Inc. included in this
Annual Report on Form 10-K and have issued our report thereon dated February 19,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II--Valuation
and Qualifying Accounts ("Schedule II") is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial
statements. The Schedule II has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 30, 1999
S-1
<PAGE> 89
SCHEDULE II
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
(SUCCESSOR COMPANY)
AND KNOLOGY OF MONTGOMERY, INC.
(PREDECESSOR COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED 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) (1,018,134)
---------- ---------- ----------
Allowance for doubtful accounts,
balance at end of year $ 23,342 $ 108,528 $ 393,766
========== ========== ==========
</TABLE>
S-2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 19, 1999 included in this Form 10-K/A. It should be noted that
we have not audited any financial statements of the company subsequent to
December 31, 1998 or performed any audit procedures subsequent to the date of
our report.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
December 8, 1999
