<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 2000
REGISTRATION NO. 333-89179
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KNOLOGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 58-2424258
(State or of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Identification No.) Classification Code Number)
</TABLE>
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(706) 645-8553
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
CHAD S. WACHTER
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
KNOLOGY, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA 31833
(706) 645-8553
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service)
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Copies to:
DAVID E. BROWN, JR.
ALSTON & BIRD LLP
601 PENNSYLVANIA AVE., N.W.
NORTH BUILDING, 11TH FLOOR
WASHINGTON, D.C. 20004
(202) 756-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
KNOLOGY, INC.
[KNOLOGY LOGO]
6,258,036 SHARES OF SERIES A PREFERRED STOCK
This prospectus relates to the 6,258,036 shares of Series A preferred
stock, $0.01 par value per share, of KNOLOGY, Inc., which are issuable upon the
exercise of options distributed by ITC Holding Company, Inc. on February 4, 2000
to ITC Holding option holders. The distribution of options was made in
connection with the distribution by ITC Holding Company of all of its 43,211,531
shares of Series A preferred stock, which was approximately 90% of the capital
stock, of KNOLOGY, Inc. to ITC Holding stockholders.
This prospectus also relates to the common stock into which our Series A
preferred stock is convertible.
NEITHER OUR SERIES A PREFERRED STOCK NOR OUR COMMON STOCK IS TRADED ON ANY
STOCK EXCHANGE OR QUOTED ON THE NASDAQ STOCK MARKET OR ANY OTHER ESTABLISHED
TRADING MARKET.
THE SECURITIES BEING DISTRIBUTED PURSUANT THIS PROSPECTUS INVOLVE A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE
HEADING "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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APRIL , 2000
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 19
THE DISTRIBUTION............................................ 20
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION............................................. 24
NO MARKET FOR OUR STOCK..................................... 30
DIVIDEND POLICY............................................. 30
SELECTED CONSOLIDATED FINANCIAL DATA........................ 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................ 33
OUR BUSINESS................................................ 47
MANAGEMENT.................................................. 78
CERTAIN TRANSACTIONS AND RELATIONSHIPS...................... 90
PRINCIPAL STOCKHOLDERS...................................... 97
DESCRIPTION OF CAPITAL STOCK................................ 100
LEGAL MATTERS............................................... 106
EXPERTS..................................................... 106
WHERE YOU CAN FIND MORE INFORMATION......................... 107
INDEX TO OUR CONSOLIDATED FINANCIAL STATEMENTS.............. F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights more detailed information and financial statements
contained later in this prospectus. This summary does not contain all of the
information that you should consider with respect to owning the shares or
options. You should read the entire prospectus carefully, especially the risks
of holding the shares discussed under "Risk Factors."
KNOLOGY, INC.
We are a rapidly-growing facilities-based provider of bundled broadband
communications services to residential and small business customers in the
southeastern United States. Our current service offerings include cable
television, local and long-distance telephone and high-speed Internet access,
which we also refer to throughout this prospectus as video, voice and data
services. We deliver our services through advanced hybrid fiber/coaxial networks
and believe that our capability to deliver multiple services to any given
customer provides us with a competitive advantage. Our strategy is to become the
leading single-source provider of video, voice and data services to residential
and small business customers in each of our markets by offering individual or
bundled service options through our integrated network, which includes "last
mile" connectivity. We believe that we are one of the first facilities-based
providers of bundled video, voice and data services to focus on the residential
and small business markets in the United States, and that we are the first
competitive provider of these services in our target markets. For the year ended
December 31, 1999, we generated revenues of approximately $66.7 million.
Our initial hybrid fiber/coaxial networks are in select mid-sized markets
in the southeastern United States, including: Huntsville and Montgomery,
Alabama; Panama City, Florida; Augusta and Columbus, Georgia; and Charleston,
South Carolina. We entered these markets based on specific criteria, including
favorable demographic profiles, population densities and our ability to be the
first provider of bundled broadband services. In each of these markets, we
provide a full suite of analog and digital cable television, local and
long-distance telephone and high-speed Internet access services. We also
currently provide local telephone services and broadband services throughout the
Georgia/Alabama border area known as the valley, which includes Lanett and
Valley, Alabama and West Point, Georgia.
We plan to continue to expand our network into additional mid- to
large-sized markets in the southeastern United States. We have been awarded a
franchise in Knoxville, Tennessee, and have applied for franchises in Nashville,
Tennessee and in Lexington and Louisville, Kentucky. If we are awarded these
franchises, our total market territory will increase from approximately 645,000
homes to more than 1.25 million homes. We plan to selectively expand into new
markets thereafter. Our strategy is to capitalize on competitive opportunities
in selected markets where factors such as market demographics and the aging
infrastructure of the incumbent service providers' network facilities combine to
create a particularly attractive opportunity to develop, own and operate
advanced hybrid fiber/coaxial networks.
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Our advanced hybrid fiber/coaxial networks are designed with sufficient
capacity to meet the growing demand for high-speed and high-bandwidth video,
voice and data services. Our networks also have a significant amount of excess
capacity that will be available for the introduction of new products. To
optimize the utilization of our network and our return on invested capital, we
also provide access to our networks and various network-related services to
other telecommunications carriers. We refer to these services as broadband
carrier services. Other Internet service providers lease our broadband carrier
services to provide high-speed Internet access, and other telephone companies
also lease our broadband carrier services.
Because we deliver a variety of services to our customers, we report the
total number of connections for video, voice and data services. For example, a
single customer who purchases cable television, local telephone and Internet
access services would count as three connections. From December 31, 1997 to
December 31, 1999, the number of connections for video, voice and data services
increased more than 142% from 57,234 to 138,713, including through acquisitions.
As of December 31, 1999, our network passed 305,773 homes and we had a total of
138,713 connections for video, voice and data services, including 36,879 on-net
connections. For the year ended December 31, 1999, video, voice and data
services accounted for 53%, 43% and 4% of our consolidated revenue,
respectively.
We have extensive operating experience in the video, voice and data
services industries and in the design, development and construction of
telecommunications facilities, including more than five years of experience
operating advanced broadband networks and more than 100 years of experience
operating and upgrading telephone networks. Our management team is led by Rodger
Johnson, our Chief Executive Officer, and Campbell Lanier, our Chairman and the
Chairman of ITC Holding Company, Inc. Our equity sponsors include funds
associated with J. H. Whitney & Co., SCANA Communications Holdings, The
Blackstone Group, South Atlantic and AT&T Ventures.
STRATEGY
Our goal is to become the leading provider of broadband communication
services to residential and small business customers in our target markets. To
achieve this objective, we are pursuing the following strategies:
- exploit the "last mile" bottleneck;
- continue constructing advanced interactive broadband networks;
- be first to market broadband communications services;
- target attractive mid-sized markets; and
- provide broadband carrier services.
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We are incorporated in the State of Delaware. Our principal executive
offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833, and
our telephone number is (706) 645-8553. We maintain a website at www.knology.com
where general
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information about our business is available. The contents of our website are not
a part of this prospectus.
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
We have determined that we will need substantial capital in the near future
to fund our planned upgrades and expansion, as discussed in more detail below
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations." As described in that section, we intend to seek
additional capital through private and public equity and debt financings. We
determined that our access to capital in the private equity market and our
ability to achieve a higher per share value would be enhanced if we no longer
had a single stockholder, ITC Holding, holding 90% of our capital stock.
ITC Holding distributed the stock of KNOLOGY it held to eliminate the large
block of KNOLOGY stock while allowing ITC Holding stockholders to maintain
directly the interest in KNOLOGY that they held indirectly before the
distribution. ITC Holding also distributed KNOLOGY options to ITC Holding option
holders so they could maintain the economic value of their ITC Holding options,
which otherwise would have been diluted as a result of the stock distribution.
See the section under the caption "The Distribution" for a fuller
discussion of the background and reasons for the distribution. Please also
review carefully the information under the caption "The Distribution -- Option
Distribution" for a fuller description of the rationale for the option
distribution and the terms of the option distribution.
TERMS OF THE DISTRIBUTION
In the distribution, ITC Holding distributed to its stockholders and option
holders all of the 43,211,531 shares of our Series A preferred stock and options
to purchase 6,258,036 shares of our Series A preferred stock held by ITC
Holding. The distribution was made on February 4, 2000 for option holders and on
February 7, 2000 for stockholders.
In the distribution, option holders received an option to purchase 1.09153
shares of our Series A preferred stock, for every option to purchase one share
of common stock of ITC Holding that they owned with a cash payment of $4.75 per
share for any options to purchase a fractional share of Series A preferred
stock.
The aggregate exercise price of the KNOLOGY options each holder received
was 18.6704% of the exercise price of the holder's ITC Holding option. This
percentage was determined by the ITC Holding board of directors as of the time
of the distribution based upon the percentage of the value of ITC Holding
attributable to KNOLOGY. The exercise price of each ITC Holding option was
decreased to 81.3296% of its original exercise price.
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KNOLOGY STOCK AND OPTIONS DISTRIBUTED IN THE DISTRIBUTION CANNOT EASILY BE
TRANSFERRED
The securities that you received in the distribution are not traded on any
stock exchange or quoted on the Nasdaq Stock Market or any other established
trading market. They are also subject to restrictions on transfer described
below under the caption "Description of Capital Stock."
THE DISTRIBUTION MAY HAVE INCOME TAX CONSEQUENCES TO YOU
The following summarizes the material federal income tax consequences of
the distribution. You should review this section carefully.
Material Federal Income Tax Consequences of the Option Distribution to ITC
Holding Option Holders
The tax treatment of the option holders was not the subject of the IRS
rulings.
We have received an opinion from Arthur Andersen LLP, KNOLOGY's independent
accountants, in connection with the issuance of the KNOLOGY options.
The tax opinion provides as follows:
1. What was the federal tax effect of the distribution of KNOLOGY stock
options to ITC Holding employees who held ITC Holding incentive stock options?
- The distribution of KNOLOGY stock options to ITC Holding employees
holding ITC Holding incentive stock options was not a taxable event.
- The KNOLOGY stock options distributed were more likely than not incentive
stock options. In the case of incentive stock options that do not
subsequently become nonqualified, there will be a taxable event at the
time the stock underlying the options is sold based upon the difference
between the fair market value of the stock at the date of sale and the
exercise price. Alternative minimum tax may also apply when incentive
stock options are exercised.
- If the IRS were to recharacterize the KNOLOGY stock options as
nonqualified options, the holder will have taxable income at the date of
exercise for the difference between the fair market value of the stock at
the date of exercise and the exercise price.
- Even if the KNOLOGY stock options distributed are incentive stock
options, they will become nonqualified options on May 4, 2000 (three
months after the distribution). The conversion to a nonqualified stock
option will not be a taxable event. With a nonqualified stock option, the
holder will have taxable income at the date of exercise for the
difference between the fair market value of the stock at the date of
exercise and the exercise price.
2. What was the federal tax effect of the distribution of KNOLOGY stock
options to KNOLOGY employees who hold ITC Holding incentive stock options?
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- The distribution of KNOLOGY stock options to KNOLOGY employees holding
ITC Holding incentive stock options was not a taxable event.
- The KNOLOGY options distributed should be incentive stock options. In the
case of incentive stock options that do not subsequently become
nonqualified, there will be a taxable event at the time the stock
underlying the options is sold based upon the difference between the fair
market value of the stock at the date of sale and the exercise price.
Alternative minimum tax may also apply when incentive stock options are
exercised.
- If the IRS were to recharacterize the KNOLOGY stock options as
nonqualified options, the holder will have taxable income at the date of
exercise for the difference between the fair market value of the stock at
the date of exercise and the exercise price.
3. What was the federal tax effect of the distribution of the KNOLOGY stock
options to nonemployees and employees of ITC Holding and KNOLOGY holding
nonqualified stock options?
- The distribution of KNOLOGY stock options to nonemployees and employees
holding nonqualified stock options of ITC Holding was not a taxable
event.
- The KNOLOGY stock options are treated as nonqualified stock options. With
a nonqualified stock option, the holder will have taxable income at the
date of exercise for the difference between the fair market value of the
stock at the date of exercise and the exercise price.
Based on the existing Internal Revenue Code and tax regulations, Arthur
Andersen LLP has issued a "more likely than not" opinion on whether the options
are incentive stock options in the first item above and a "should" opinion on
whether the options are incentive stock options in the remaining items above.
Arthur Andersen LLP is not able to issue a "will" opinion since the Internal
Revenue Code, regulations, or guidance issued by the Internal Revenue Service
(including revenue rulings and revenue procedures) are not identical to facts
and circumstances pertaining to the transactions of ITC Holding and KNOLOGY.
However, Arthur Andersen LLP is unaware of the IRS making an argument
inconsistent with its opinion in the context of a transaction such as the
distribution. In addition, since the Internal Revenue Code, regulations, or
guidance issued by the Internal Revenue Service (including revenue rulings and
revenue procedures) do not specify whether or not a particular regulation
applies to the specifics of the distribution, and the IRS may interpret the
regulation as applying to the distribution, Arthur Andersen is not able to
provide a "should" opinion on whether the options are incentive stock options in
the first item above.
The potential tax consequences for holders of options and the related risks
are discussed in detail below under the caption "Material Federal Income Tax
Consequences of the Distribution." That section also contains a discussion of
the tax treatment of incentive stock options and nonqualified stock options.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data. The
summary financial data set forth below should be read in conjunction with the
section of the prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations", our financial statements and
related notes, and other financial data included elsewhere in this prospectus.
See note 1 to our financial statements regarding the reorganization.
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998(A) 1999
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STATEMENT OF OPERATIONS DATA:
Operating revenues........................................ $ 17,633,313 $ 45,132,522 $ 66,720,929
Operating expenses:
Cost of services........................................ 3,121,108 16,796,593 26,964,519
Selling, operations and administrative.................. 9,498,461 33,266,292 45,960,263
Depreciation and amortization........................... 2,781,800 17,326,895 40,970,149
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Total operating expenses......................... 15,401,369 67,389,780 113,894,931
------------ ------------ ------------
Operating income (loss)................................... 2,231,944 (22,257,258) (47,174,002)
------------ ------------ ------------
Other expense, net........................................ (2,048,506) (18,645,199) (32,837,223)
------------ ------------ ------------
Income (loss) before minority interest, income tax
(provision) benefit and cumulative effect of a change in
accounting principle.................................... 183,438 (40,902,457) (80,011,225)
Minority interest......................................... -- 13,294,079 3,267,653
Income tax (provision) benefit............................ (1,010,779) 5,631,618 19,697,270
Cumulative effect of a change in accounting principle..... -- (582,541) --
------------ ------------ ------------
Net income (loss)......................................... (827,341) (22,559,301) (57,046,302)
Subsidiary preferred stock dividends...................... (4,193,276) (1,424,222) (1,744,703)
------------ ------------ ------------
Net income (loss) attributable to common stockholders..... $ (5,020,617) $(23,983,523) $(58,791,005)
============ ============ ============
PER SHARE DATA:
Basic and diluted net income (loss) attributable to common
stockholders............................................ $ (50,206.17) $(239,835.23) $ (11.45)
Basic and diluted weighted average number of common shares
outstanding............................................. 100 100 5,132,653
OTHER FINANCIAL DATA:
Capital expenditures...................................... $ 1,727,079 $120,227,057 $ 87,386,231
Cash provided by operating activities..................... 3,680,116 23,035,488 2,235,335
Cash used in investing activities......................... (22,223,940) (34,586,803) (29,316,194)
Cash provided by financing activities..................... 18,726,407 16,083,187 29,740,547
EBITDA(b)................................................. 2,509,854 8,564,129 2,829,134
Ratio of earnings to fixed charges(c)..................... 1.03 -- --
Insufficient earnings to cover fixed charges.............. -- $ 27,608,378 $ 76,743,572
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $(1,240,180) $ 49,965,918 $ 15,664,483
Property and equipment, net................................ 11,260,846 211,885,668 273,896,831
Total assets............................................... 30,196,492 374,680,811 400,333,810
Long-term debt, including accrued interest................. -- 276,178,820 331,012,181
Total liabilities.......................................... 6,656,317 314,414,049 357,684,385
Minority interest.......................................... -- 3,267,653 --
Retained earnings (accumulated deficit).................... 3,181,179 (20,802,344) (79,593,349)
Total stockholders' equity................................. 23,540,175 54,512,149 37,923,360
</TABLE>
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(a) See note 9 to our financial statements, Cable Alabama acquisition, for
further information regarding presentation.
(b) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. While EBITDA should not be construed as a
substitute for operating income (loss) as a measure of performance or as a
better measure of liquidity than cash flows from operating activities, which
are determined in accordance with generally accepted accounting principles,
it is a measure commonly used in our industry and is included herein because
we believe EBITDA provides relevant and useful information to our investors.
Since the elements of EBITDA are determined using the accrual basis of
accounting and EBITDA excludes the effects of capital and financing related
costs, investors should use it to analyze and compare companies on the basis
of operating performance. We utilize and have disclosed EBITDA to provide
additional information with respect to our ability to meet future debt
service, capital expenditures and working capital requirements; to incur
additional indebtedness; and to fund continuing growth. EBITDA may not
necessarily be calculated comparably with similarly titled measures for
other companies. Additionally, we do not currently believe that there are
any legal or functional requirements that limit management's discretionary
use of funds depicted by EBITDA.
(c) Earnings consist of income before preferred stock dividends, income taxes,
plus fixed charges. Fixed charges consist of interest charges and the
portion of rent expense under operating leases representing interest, which
is estimated to be 1/3 of such expense.
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RISK FACTORS
The securities being distributed pursuant to this prospectus involve a high
degree of risk, including those risks described below.
WE HAVE LOST MONEY ON OUR OPERATIONS TO DATE, AND WE EXPECT TO LOSE MORE MONEY
DURING THE NEXT SEVERAL YEARS.
As of December 31, 1999, we had an accumulated deficit of $79.6 million. We
expect to incur net losses and negative cash flow during the next several years
as we build our networks. Our ability to generate profits and positive cash flow
will depend in large part on our ability to obtain 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.
THE SIGNIFICANT AMOUNT OF DEBT WE HAVE COULD HARM OUR BUSINESS.
As of December 31, 1999, we had $331 million of debt, including accrued
interest, and our stockholders' equity was $37.9 million. We anticipate that we
will incur more debt as we expand our existing networks and move into new
markets in the future.
Our debt could adversely affect our business in a number of ways, as:
- we have to spend a significant amount of our available funding to pay
interest and repay principal on debt;
- we may have trouble obtaining future financing;
- we may have limited flexibility in planning for or reacting to changes in
our business;
- we may have more debt relative to our competitors, which may place us at
a disadvantage; and
- we may be more vulnerable to any economic downturn.
Our earnings were not sufficient to cover our fixed charges in 1999. We
will need to grow and generate profits in order to generate the cash to repay
our debt. If we cannot meet our debt payments, we may need to seek additional
financing or sell some of our assets, which would adversely affect our business,
operations and the value of our company.
RESTRICTIONS ON OUR BUSINESS IMPOSED BY OUR DEBT AGREEMENTS COULD LIMIT OUR
GROWTH OR ACTIVITIES.
Our indenture and credit facility agreements place operating and financial
restrictions on us and our subsidiaries. These restrictions affect our and our
subsidiaries' ability to:
- incur additional debt;
- create liens on our assets;
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- use the proceeds from any sale of assets; and
- make distributions on or redeem our stock.
In addition, our credit facility requires us to maintain certain financial
ratios. These limitations may affect our ability to finance our future
operations or to engage in other business activities that may be in our
interest. If we violate any of these restrictions, we could be in default under
one or both of these agreements and be required to repay our debt immediately
rather than at the maturity of the debt.
FAILURE TO OBTAIN ADDITIONAL FUNDING WOULD LIMIT OUR ABILITY TO EXPAND OUR
BUSINESS.
We expect to spend approximately $200 million during the next three years
to expand or upgrade our Panama City, Augusta, Charleston and Huntsville
networks. In addition we plan to expand into new cities where we do not
currently have networks. If we expand to these new cities, we estimate the cost
of constructing and implementing networks in additional cities at approximately
$75 million to $100 million per 100,000 homes. 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. We may not be able to obtain
additional funding from other sources, such as banks, on favorable terms or at
all. If we cannot obtain sufficient funds we may be required to defer or abandon
our expansion plans, which could limit our growth and prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
WE MAY ENCOUNTER DIFFICULTIES EXPANDING INTO ADDITIONAL MARKETS.
To expand into additional cities we will have to obtain pole attachment
agreements, construction permits, franchises and other regulatory approvals.
Delays in receiving the necessary construction permits and in conducting the
construction itself have adversely affected our schedule in the past and could
do so again in the future. Further, we may face resistance from competitors who
are already in these markets. A competitor may oppose or delay our franchise
application or our request for pole attachment space. These difficulties could
harm the development of our business in new markets.
COMPETITION FROM OTHER TELEVISION PROVIDERS COULD CAUSE US TO LOSE SUBSCRIBERS.
To be successful, we will need to attract cable television subscribers away
from our competitors. We often are not the first cable television provider in
our markets, and we have to compete with other companies that have long-standing
customer relationships with the residents in these areas. Some of our
competitors have other competitive advantages over us, such as greater
experience, resources, marketing capabilities and name recognition. In addition,
a continuing trend toward business combinations and alliances in the cable
television area and in the telecommunications industry as a whole may create
significant new competitors for us. In providing television service, we
currently compete with AT&T Cable Services, Comcast Cable Communications, Time
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Warner Cable, Mediacom and Charter Communications, Inc. We also compete with
satellite television providers DirecTV and Echostar. Our other competitors
include:
- other cable television providers;
- broadcast television stations;
- other satellite television companies;
- wireless cable services; and
- private satellite dishes.
We expect in the future to compete with telephone companies providing cable
television service within their service areas.
New legislation will allow satellite providers to offer local programming.
This could reduce our current advantage over satellite providers in this area
and hurt our ability to attract and maintain subscribers.
COMPETITION FROM OTHER TELEPHONE SERVICE PROVIDERS COULD CAUSE US TO LOSE
CUSTOMERS.
In providing local and long distance telephone services, we compete with
the incumbent local phone company in each of our markets. We are not the first
provider of telephone services in most of our markets, and we have to convince
people in our markets to switch from other telephone companies to us. BellSouth
is the incumbent local phone company and is a particularly strong competitor in
our current markets and throughout the southeastern United States where we hope
to expand. We also compete with long distance phone companies such as AT&T, MCI
WorldCom and Sprint. Our other competitors include:
- independent or competitive local exchange carriers, which are local phone
companies other than the incumbent phone company that provide local
telephone services and access to long distance services over their own
networks or over networks leased from other companies;
- regional Bell operating companies other than BellSouth;
- wireless telephone carriers; and
- utility companies.
COMPETITION FROM OTHER PROVIDERS OF INTERNET SERVICES COULD CAUSE US TO LOSE
SUBSCRIBERS OR HINDER THE GROWTH OF OUR INTERNET SERVICES.
Providing Internet access services is a rapidly growing business and
competition is increasing in each of our markets. Some of our competitors have
competitive advantages over us, such as greater experience, resources, marketing
capabilities and stronger name recognition.
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In providing Internet access services, we compete with:
- traditional dial-up Internet service providers;
- providers of satellite-based Internet services;
- other long distance telephone companies; and
- cable television companies.
Other technologies also offer high-speed, high capacity connections to the
Internet. We will compete with companies offering broadband connections such as
DirecPC, one of the principal providers of satellite-based Internet services in
the United States; long distance telephone companies such as AT&T and MCI
WorldCom; traditional dial-up Internet service providers; and cable modem
services such as Excite@Home, a joint venture among several major cable
companies.
OUR PROGRAMMING COSTS ARE INCREASING, WHICH COULD REDUCE OUR CASH FLOW AND
OPERATING MARGINS.
Programming has been our largest single operating expense item and we
expect this to continue. In recent years, the cable industry has experienced a
rapid increase in the cost of programming, particularly sports programming. This
increase may continue and we may not be able to pass programming costs increases
on to our customers. In addition, as we increase the channel capacity of our
systems and add programming to our basic and expanded basic programming tiers,
we may face additional market constraints on our ability to pass programming
costs on to our customers. The inability to pass programming cost increases on
to our customers would have an adverse impact on our cash flow and operating
margins.
PROGRAMMING EXCLUSIVITY IN FAVOR OF OUR COMPETITORS COULD ADVERSELY AFFECT THE
DEMAND FOR OUR CABLE SERVICES.
We obtain our programming by entering into contracts or arrangements with
cable programming vendors. A cable programming vendor may enter into an
exclusive arrangement with one of our cable television competitors. This would
create a competitive advantage for the cable television competitor by
restricting our access to programming. Each of AT&T Cable Services, Comcast
Cable Communications and Time Warner Cable has entered into exclusivity
arrangements with the WeB channel, which is the distribution channel for WB
programming, in different markets. We provide programming in each of these
markets as well, and these exclusivity arrangements restrict our access to
programming. Limiting our ability to offer certain programming on our cable
television systems may adversely affect the demand for our cable services.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH, OUR BUSINESS WILL BE HARMED.
Our ability to grow will depend, in part, upon our ability to:
- successfully implement our strategy;
- evaluate markets;
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- secure financing;
- construct facilities;
- obtain any required government authorizations; and
- hire and retain qualified personnel.
In addition, as we increase our service offerings and expand our targeted
markets, we will have additional demands on our customer support, sales and
marketing, administrative resources and network infrastructure. If we cannot
effectively manage our growth, our business and results of operations will be
harmed.
ACQUISITIONS AND JOINT VENTURES COULD STRAIN OUR BUSINESS AND RESOURCES.
If we acquire existing companies or networks, or enter into joint ventures,
we may be subject to:
- miscalculation of the value of the acquired company or joint venture;
- diversion of resources and management time;
- difficulties in integration of the acquired business or joint venture
with our operations;
- relationship issues as a result of changes in management;
- additional liabilities or obligations as a result of the acquisition or
joint venture; and
- additional financial burdens or dilution incurred with the transaction.
Additionally, ongoing consolidation in the telecommunications industry may
be shrinking the number of attractive acquisition targets.
WE OPERATE OUR NETWORKS UNDER FRANCHISES THAT ARE SUBJECT TO NON-RENEWAL OR
TERMINATION, EITHER OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Our networks generally operate pursuant to franchises, permits or licenses
typically granted by a municipality or other state or local government
controlling the public rights-of-way. Often, franchises are terminable if the
franchisee fails to comply with material terms of the franchise order or the
local franchise authority's regulations. Further, franchises generally have
fixed terms and must be renewed periodically. Local franchising authorities may
resist granting a renewal if they consider either past performance or the
prospective operating proposal to be inadequate. Our franchises for Montgomery,
Columbus, Panama City, Augusta, Charleston, Huntsville, Knoxville and the
Georgia/Alabama border area will expire in March 2005, March 2009, July 2007,
January 2013, April 2013, March 2006, April 2010 and January 2013, respectively.
If one of our franchises is not renewed or terminated, our business will be
harmed.
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IF WE ARE NOT ABLE TO OBTAIN AND RENEW OUR FRANCHISES IN A TIMELY MANNER AND ON
ACCEPTABLE TERMS AND CONDITIONS, OUR BUSINESS WILL BE HARMED.
Our business depends on our ability to obtain and renew our franchises in a
timely manner and on acceptable terms and conditions. We cannot predict whether
we will obtain franchises in new cities on terms that will make construction of
a network and provision of broadband communications services economically
attractive for us.
SINCE WE OPERATE OUR SYSTEMS UNDER FRANCHISES THAT ARE NON-EXCLUSIVE, LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE MORE
COMPETITION FOR US IN OUR MARKETS.
Our franchises are non-exclusive. The local franchising authorities can
grant franchises to competitors who may build networks in our market areas. This
could adversely affect our growth and our profitability.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE REGULATORY CONSTRAINTS OR
REQUIREMENTS ON OUR BUSINESS, WHICH COULD INCREASE OUR EXPENSES.
Local franchise authorities can impose regulatory constraints by local
ordinance or as part of a grant or renewal of a franchise. They also may impose
customer service or other requirements. This would increase our expenses in
operating our business.
LOSS OF ACCESS TO OTHER COMPANIES' NETWORKS COULD IMPAIR OUR TELEPHONE SERVICE.
We rely on other companies to provide:
- communications capacity between our facility that switches telephone
calls and our local networks;
- long distance telephone services;
- space at areas along our network or in switching centers to locate
equipment. Since for efficiency reasons our equipment needs to be located
near and often connected to similar equipment operated by other
providers, which is called co-location, available space can be quite
limited;
- special network services for Internet transport requirements.
We purchase these services from two primary vendors, Business Telecom, Inc.
and ITC DeltaCom, both of which compete with us. We have a minimum annual
purchase commitment of $50,000 with Business Telecom. We do not have a minimum
purchase commitment with ITC DeltaCom. If we lost services from either of these
companies, we would have to find another entity that could provide these
services for us and may have to pay more for the same services or meet a higher
minimum purchase commitment. Further, if either of these companies reduced our
access to its facilities because that company did not have the capacity to
provide these services to us, our business would be harmed.
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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 June 2000. This
agreement may not be renegotiated on favorable terms, since BellSouth is our
competitor. We do not plan to renew our interconnection agreement and we will
have to negotiate another interconnection agreement with BellSouth. The
renegotiated agreement could be on terms less favorable than our current terms.
It is generally expected that the Telecommunications Act of 1996 will
continue to undergo considerable interpretation and implementation over the next
several years, which could have a negative impact on our interconnection
agreement with BellSouth. Our ability to compete successfully in the provision
of services will depend on the timing of such implementing regulations and
whether they are favorable to us.
CHANGES IN DEMAND FOR OUR TELEPHONE SERVICES COULD HARM OUR BUSINESS.
We could be affected by changes in demand for our local and long distance
telephone services, including:
- traditional telephone services;
- premium telephone services;
- additional access lines per household;
- billing and collection services; and
- local competition in the Georgia/Alabama border area.
Any downturn in demand will harm our business, profitability and growth
prospects. In addition, recent price decreases and promotional activities by
major long distance carriers could have a material adverse impact on our cash
flow and margins.
WE DO NOT KNOW THE DEMAND FOR OUR BUNDLED COMMUNICATIONS SERVICES.
Our plan to provide bundled broadband communications services is fairly new
and untested. It could be unsuccessful due to:
- competition;
- pricing;
- regulatory uncertainties; or
- operating and technical difficulties.
In addition, the demand for some of our planned broadband communications
services, either alone or as part of a bundle, cannot readily be determined. Our
business could be adversely affected if demand for bundled services is
materially lower than we expect.
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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 OUR CABLE EQUIPMENT.
Since the cable equipment industry is a consolidated industry, there are
relatively few manufacturers of cable equipment. We purchase digital cable
equipment from a supplier who has informed us that it may decide not to sell
equipment to us in some new markets. If we are unable to resolve this issue, or
if we are unable to secure an alternate source of digital cable equipment on
equivalent terms, our ability to expand into these markets may be impaired.
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 DAMAGED BY THE LOSS OF OUR KEY PERSONNEL.
Our business is currently managed by a small number of key management and
operating personnel. We do not have any employment agreements with, nor do we
maintain "key man" insurance on, these or any other employees. As we have
numerous new employees resulting from our recent growth, we are particularly
dependent upon our management and longer-term employees who are familiar with
our company and our needs and can train our new hires.
SINCE OUR BUSINESS IS CONCENTRATED IN SPECIFIC GEOGRAPHIC LOCATIONS, OUR
BUSINESS COULD BE HURT BY A DEPRESSED ECONOMY IN THESE AREAS.
We provide our services to areas in Alabama, Georgia, Florida and South
Carolina, which are all in the southeastern United States. Our networks are
built in small to mid-sized markets. A stagnant or depressed economy in the
southeastern United States could affect all of our markets, and our entire
business and profitability would be damaged.
OUR SERVICE NETWORK OR OTHER FACILITIES COULD BE DAMAGED BY NATURAL CATASTROPHE.
Our success depends on the efficient and uninterrupted operation of our
communications services. Our networks are attached to poles and other structures
in our service areas, and our ability to provide service depends on the
availability of electric power. A tornado, hurricane, flood or other
catastrophic event in one of these areas could damage
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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.
WE COULD BE HURT BY FUTURE INTERPRETATION OR IMPLEMENTATION OF REGULATIONS.
The current communications and cable legislation is complex and in many
areas sets forth policy objectives to be implemented by regulation.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' capacity available to other Internet service providers,
such as telephone companies. AT&T recently announced that it would open its
systems to competing Internet service providers, including EarthLink, with which
it already has entered into an agreement. Certain local franchising authorities
are considering or have already approved similar open access requirements. If
regulators decide to require us to provide competing telephone or Internet
service providers with access to our broadband networks, much of the competitive
advantage we have from owning our own networks could be eliminated. Competing
Internet service providers could stream video over their systems, in direct
competition with our programming services. Our interconnection agreements, which
we depend on to reach users who are not our customers, are subject to regulation
by the FCC 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 CERTAIN 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. Certain venture funds are significant
stockholders and also have representatives on our board of directors. When the
interests of ITC Holding, other ITC Holding companies or these venture funds
differ from ours, the ITC Holding companies and the venture funds act in their
own respective best interests, which could be adverse to our interests.
SOME OF OUR MAJOR STOCKHOLDERS OWN STOCK IN OUR COMPETITORS AND MAY HAVE
CONFLICTS OF INTEREST WITH RESPECT TO THOSE COMPANIES AND US.
Campbell B. Lanier, the chairman of our board of directors and one of our
major stockholders, owns approximately 16% of the outstanding stock of ITC
DeltaCom. South Atlantic Venture Funds, another one of our major stockholders,
owns approximately 4.4% of ITC DeltaCom. Additionally, AT&T venture funds own
approximately 6.4% of our stock. When the interests of one of our competitors
differs from ours, these
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stockholders may support our competitor or take other actions that could
adversely affect our interests.
A SMALL NUMBER OF STOCKHOLDERS CONTROL A SIGNIFICANT PORTION OF OUR STOCK.
Approximately 19.5% of our outstanding voting stock is beneficially owned
by Campbell B. Lanier, the chairman of our board of directors, and members of
Mr. Lanier's family. Our directors and executive officers as a group
beneficially own 36.6% of our outstanding voting stock. Further, AT&T venture
funds, SCANA Communications Holdings, Inc., J. H. Whitney IV, L.P., The
Blackstone Group venture funds and South Atlantic funds beneficially own
approximately 6.8%, 10.5%, 12.2%, 9.1% and 7.4% of our outstanding voting stock,
respectively. As a result, these stockholders will have a significant voting
power with respect to the ability to:
- elect our directors;
- amend our certificate of incorporation or bylaws; or
- effect a merger, sale of assets or other corporate transaction.
The extent of ownership by these stockholders may also discourage a
potential acquirer from making an offer to acquire us. This could reduce the
value of our stock.
WE HAVE ENTERED INTO A STOCKHOLDERS AGREEMENT WITH OUR SERIES B PREFERRED
STOCKHOLDERS AND SOME OUR SERIES A PREFERRED STOCKHOLDERS THAT GIVES THEM RIGHTS
OF FIRST REFUSAL AND PREEMPTIVE RIGHTS WHICH MAY IT MAKE IT MORE FOR DIFFICULT
FOR US TO ISSUE OUR SECURITIES TO NEW INVESTORS.
We have entered into a stockholders' agreement with our Series B preferred
stockholders and some of our Series A preferred stockholders. This stockholders'
agreement gives those stockholders rights of first refusal to and rights to
subscribe when we offer additional stock in the future. The subscription right
may inhibit our ability to conduct sales of our securities to strategic
investors and limit our ability to dilute the interests of the Series B
stockholders.
THE FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING OPTION
HOLDERS ARE NOT COVERED BY IRS RULINGS AND ARE SUBJECT TO UNCERTAINTY.
Uncertainty relating to a tax opinion. The tax treatment of the ITC
Holding option holders was not the subject of any IRS rulings. A tax opinion
merely represents the opinion giver's best judgment with respect to the probable
outcome and may be incorrect.
The tax opinion contains qualifications and therefore is subject to
uncertainty. The opinion we have received from Arthur Andersen LLP, KNOLOGY's
independent accountants, in connection with the proposed issuance of the KNOLOGY
options is a "more likely than not" opinion on whether the options are incentive
stock options in one case addressed by the opinion and a "should" opinion on
whether the options are incentive stock options in the remaining cases. The
opinion is therefore subject to uncertainty. Arthur Andersen LLP is not able to
issue a more certain "will" opinion
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since the Internal Revenue Code, regulations, or guidance issued by the Internal
Revenue Service are not identical to facts and circumstances pertaining to the
distribution. In addition, since the Internal Revenue Code, regulations, or
guidance issued by the Internal Revenue Service, including revenue rulings and
revenue procedures, do not specify whether or not a particular regulation
applies to the specifics of the distribution, and the IRS may interpret the
regulation as applying to the distribution, Arthur Andersen is not able to
provide a "should" opinion on whether the options are incentive stock options in
one of the cases addressed by the opinion.
The tax opinion identifies a risk of recharacterization of the tax
treatment of the KNOLOGY stock options. If the tax opinion is incorrect and
the options ultimately are recharacterized by the IRS as nonqualified stock
options, the tax treatment of the option will change. A taxable event would
occur when the option is exercised rather than when the underlying stock is
sold.
Incentive stock options may become nonqualified three months after the
distribution. Any distributed KNOLOGY incentive stock options held by other than
KNOLOGY employees three months after the distribution (on May 4, 2000) will
become nonqualified stock options. With a nonqualified option, the holder will
have taxable income at the date of exercise for the difference between the fair
market value of the stock at the date of exercise and the exercise price.
OUR TAX SEPARATION AGREEMENT WITH ITC HOLDING MAY LIMIT OUR ABILITY TO RAISE
EQUITY FUNDING OR CONDUCT ACQUISITIONS FOR STOCK, AND BREACH OF THIS AGREEMENT
COULD SUBJECT US TO SUBSTANTIAL DAMAGES.
In connection with our spin-off by ITC Holding, which was completed on
February 7, 2000, we entered into a tax separation agreement with ITC Holding.
In the agreement, we made representations and covenants that impose limitations
on our future actions. Because we could have substantial liability, up to $50
million, under the tax separation agreement if we breach our representations and
covenants, we could be discouraged from entering into transactions that might
result in a breach. We might not pursue any transaction that would be presumed
to be part of a plan or series of related transactions which results in any
cumulative 50% change of ownership within the four-year period beginning two
years before the date of our spin-off by ITC Holding. Transactions that could
involve a possible breach include an actual or constructive change of control,
exceeding limits on the raising of equity capital or the use of our stock to
acquire other companies. We may have to forego some growth opportunities that
may occur during the two years subsequent to the spin-off, until February 7,
2002, because of our representations and covenants.
WE ARE NO LONGER ABLE TO RELY ON ITC HOLDING FOR ACCESS TO CAPITAL.
When we were a subsidiary of ITC Holding, we had access to capital that we
may not have as a stand-alone company. Since the spin-off was completed on
February 7, 2000, we no longer have access to capital through ITC Holding, and
it is less likely that ITC Holding will be willing to provide financing to us or
enter into other transactions
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with us. In the past, ITC Holding has contributed equity to us and has lent
money to us. We can no longer rely on financing from ITC Holding, and we must
depend on our own resources.
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.
NO TRADING MARKET EXISTS FOR OUR SECURITIES, AND OUR SECURITIES ARE SUBJECT TO
TRANSFER RESTRICTIONS.
Our stock is not traded on any stock exchange or quoted on the Nasdaq Stock
Market or any other established trading market, and no market makers currently
make a market in our stock. We do not expect that an active public market for
our stock will develop after the distribution. In addition, all shares of our
stock are subject to transfer restrictions. If one of our stockholders decides
to sell his shares of our stock, he must first offer those shares to us to
purchase before he can offer the shares to a third party. With the lack of an
active public market for our stock and our rights of first refusal on the sale
of our stock, your ability to sell our securities will be limited.
ALTHOUGH OUR STOCK IS NOT PUBLICLY TRADED, THE VALUE OF OUR STOCK COULD BE HURT
BY SUBSTANTIAL PRICE FLUCTUATIONS.
The value of our capital stock could be subject to sudden and material
increases and decreases, even though it is not publicly traded. The value of our
stock could fluctuate in response to:
- our quarterly operating results;
- changes in our business;
- changes in the market's perception of our bundled services;
- changes in the businesses or market perceptions of our competitors; and
- changes in general market or economic conditions.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the value of
securities of many companies. The changes often appear to occur without regard
to specific operating performance. The value of our capital stock could increase
or decrease based on change of this type. These fluctuations could materially
reduce the value of our stock.
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IF WE ISSUE MORE STOCK IN FUTURE OFFERINGS, THE PERCENTAGE OF OUR STOCK THAT OUR
STOCKHOLDERS OWN WILL BE DILUTED.
As of February 29, 2000, we had 6,476 shares of common stock, 48,462,499
shares of Series A preferred stock and 21,180,131 shares of Series B preferred
stock outstanding. We also had outstanding on that date options to purchase
7,138,104 shares of common stock and 5,830,446 shares of Series A preferred
stock as well as warrants to purchase 994,962 shares of Series A preferred
stock. Future stock issuances also will reduce the percentage ownership of our
current stockholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Our Business," as well as other places in this prospectus.
Statements in this document that are not historical facts are "forward-looking
statements." Such forward-looking statements include those relating to:
- plans to develop future networks and upgrade facilities;
- the market opportunity presented by markets we have targeted;
- future business developments;
- the current and future markets for our services and products;
- our anticipated capital expenditures;
- our anticipated sources of capital;
- the effects of regulatory reform on our business;
- competitive and technological developments;
- possible acquisitions and alliances; and
- projected revenues, liquidity, interest costs and income.
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. The most significant of
these risks, uncertainties and other factors are discussed under "Risk Factors"
beginning on page 6. We caution you to carefully consider these risks and not to
place undue reliance on our forward-looking statements.
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THE DISTRIBUTION
TERMS OF THE DISTRIBUTION
In the distribution, ITC Holding distributed to its stockholders and option
holders all of its 43,211,531 shares of our Series A preferred stock and options
to purchase 6,258,036 shares of our Series A preferred stock. ITC Holding no
longer owns any shares of our capital stock or options to purchase any of our
stock.
Rationale of the Option Distribution. The ITC Holding options were all
issued to employees of ITC Holding or its subsidiaries and, in a few cases, to
nonemployee directors or consultants, in connection with the performance of
services. Pursuant to the terms of the ITC Holding options, adjustments are to
be made to maintain the value of the options if a transaction such as the
distribution of our stock by ITC Holding occurs.
ITC Holding determined that, with respect to each option holder, the
adjustment for the distribution would take the form of
- the distribution of an option to purchase 1.09153 shares of our Series A
preferred stock for each option to purchase one share of ITC Holding
common stock held prior to the distribution, and
- the adjustment of the exercise price of the options to purchase the ITC
Holding common stock held prior to the distribution such that the
aggregate spread in the options to purchase ITC Holding stock and the
options to purchase our stock is equal to the aggregate spread in the
options to purchase the ITC Holding stock immediately prior to the
distribution. The aggregate spread means the aggregate difference between
the exercise price and the fair market value of the stock underlying the
options at the time of the distribution.
The ITC Holding Option Holders. The holders of outstanding ITC Holding
options at the time of the distribution were generally current and former
employees of ITC Holding, its various subsidiaries or its former subsidiaries. A
few options were held by current or former nonemployee directors or consultants
to ITC Holding, its subsidiaries or its former subsidiaries.
ITC Holding did not wish its employees and other option holders to suffer
dilution in the value of their options as a result of the distribution, or to
create an incentive for option holders to exercise their ITC Holding options
prior to the distribution. ITC Holding therefore made a special distribution of
the KNOLOGY options to ITC Holding option holders and adjusted the exercise
price of ITC Holding options held prior to the distribution.
Terms of the Option Distribution. ITC Holding is distributed to each of
the 861 ITC option holders as of December 15, 1999 an option to purchase 1.09153
shares of our Series A preferred stock for each option to purchase one share of
ITC Holding common stock then outstanding. The exercise price of each of these
options was determined by ITC Holding by multiplying the percentage of ITC
Holding's value attributed to us for purposes of the distribution, 18.6704%, by
the exercise price of the ITC option to which the KNOLOGY option relates. This
determination was made under the ITC Holding
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option plan or option agreements under the authority of the ITC Holding board of
directors, and any authorized committee of that board, to make appropriate
adjustments under that plan or option agreements. The option agreements
evidencing the KNOLOGY options distributed in the distribution reflected this
determination.
The percentage of the value of ITC Holding attributable to us for purposes
of the distribution was 18.6704%. Accordingly, the exercise price of each
KNOLOGY option is 18.6704% of the exercise price of the holder's ITC Holding
option. The exercise price of the ITC Holding option has been decreased by that
amount to 81.3296% of its original exercise option price.
ITC Holding did not issue any fractional interests in our options as part
of the distribution. Cash in the amount of $4.75 per share was paid in lieu of
fractional options.
Since the option holder is intended to have the same economic value and
rights after the distribution as before, the provisions of the KNOLOGY option
being distributed resembles closely those of the ITC Holding option held prior
to the distribution. The option terms for vesting and expiration of each
individual KNOLOGY option match the terms of the existing ITC Holding option to
which it related. KNOLOGY options relating to older ITC Holding options
generally are more fully vested and expire sooner, and KNOLOGY options relating
to more recently granted ITC Holding options generally are less fully vested and
expire later.
The KNOLOGY, Inc. spin-off plan. The KNOLOGY options are covered by a
stock option plan, the KNOLOGY, Inc. spin-off plan, created solely for the
options covered by the distribution. The KNOLOGY, Inc. spin-off plan is
substantively the same as the ITC Holding stock option plan under which the ITC
Holding stock options were granted. The plan is solely for holders of
outstanding but unexercised ITC Holding options who received options in the
distribution. We have 6,258,036 shares of our Series A preferred stock reserved
for use under the plan. The effective date of the plan was December 22, 1999.
For purposes of the KNOLOGY, Inc. spin-off plan, an optionee who is
employed by or provides services to ITC Holding or ITC DeltaCom, Inc. or any of
their respective or any of its affiliates immediately following the distribution
and who continues to be employed by or provide services to such company or any
of its affiliates following the distribution will not be considered to have
terminated employment with our company.
No option granted under the KNOLOGY, Inc. spin-off plan is transferable by
an optionee, and each option is exercisable during an optionee's lifetime only
by the optionee. Our board of directors will adjust the number of shares of
stock reserved under the KNOLOGY, Inc. spin-off plan, the number of shares of
stock underlying options granted under the plan and the exercise price of such
options to reflect any recapitalization, reclassification, stock split, stock
dividend or a similar transaction.
If we agree to sell substantially all of our assets or agree to a merger,
consolidation, or other corporate transaction in which our stock is converted
into another security, and the transaction agreement does not provide for the
assumption or substitution of the options granted under the KNOLOGY, Inc.
spin-off plan, our board of directors may
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decide to cancel the options granted under the plan. If our board of directors
cancels these options, an optionee will receive the same consideration he or she
otherwise would receive as one of our shareholders in connection with such
transaction, as if he or she had exercised his or her options.
Our board of directors may amend the KNOLOGY, Inc. spin-off plan from time
to time to the extent that the board deems the amendment necessary or
appropriate. Our board of directors will not have the right unilaterally to
modify, amend or cancel any option that has been granted unless
- the optionee consents in writing to the modification, amendment or
cancellation; or
- there is a dissolution or liquidation of KNOLOGY or a sale or merger
as described above.
Acquisition of the KNOLOGY options by ITC Holding. As discussed above,
the economic effect of the option distribution was essentially to split the ITC
Holding options held prior to the distribution into two parts, a modified ITC
Holding option and a KNOLOGY option that collectively have the same value as the
ITC Holding option held prior to the distribution. However, ITC Holding does not
have the power to grant KNOLOGY options and had to obtain them from KNOLOGY to
carry out the option distribution.
In many spin-offs, the parent company owns 100% of the subsidiary being
spun off and simply causes the subsidiary to issue options to the parent
company's option holders. In this case, since KNOLOGY has stockholders other
than ITC Holding, ITC Holding purchased the options from KNOLOGY for fair value.
ITC Holding, through its subsidiary InterCall, acquired the KNOLOGY options
that it distributed to you by converting a loan to KNOLOGY into options. In
December 1999, InterCall, an ITC Holding subsidiary, entered into a loan
agreement with KNOLOGY under which InterCall loaned KNOLOGY approximately $29.7
million. The note issued under the loan agreement provided that InterCall could
elect, in lieu of repayment, to convert the amount outstanding under the note
into options to purchase shares of KNOLOGY Series A preferred stock. Prior to
the distribution the entire amount of the note was converted into options to
purchase 6,258,036 shares of KNOLOGY Series A preferred stock. InterCall
distributed the KNOLOGY options to ITC Holding, which then distributed them to
ITC Holding option holders in the distribution.
As mentioned above, ITC Holding needed to set an appropriate exercise price
for each KNOLOGY option to effect the allocation of the aggregate exercise price
of the ITC Holding option held prior to the distribution over the modified ITC
Holding option and a KNOLOGY option. ITC Holding also needed to ensure that the
option terms for vesting and termination for each individual KNOLOGY option, and
all the other provisions of the option, matched the terms of ITC Holding options
held prior to the distribution to which they relate. The note therefore provides
that ITC Holding has the
22
<PAGE> 26
right to specify the terms of the KNOLOGY options, including the exercise price
and option terms for vesting and termination.
Residual Note. When InterCall converted its loan into KNOLOGY options and
assigned them to ITC Holding, ITC Holding received a residual note which
provides that KNOLOGY will pay to ITC Holding any proceeds received by KNOLOGY
from the exercise of KNOLOGY options distributed in the option distribution. In
the event of a cashless exercise of any of the KNOLOGY options, KNOLOGY must pay
to ITC Holding in cash an amount equal to the exercise price. InterCall paid
$4.75 for each share subject to a KNOLOGY option, which is the value placed on
the shares underlying the options for purposes of the distribution, as discussed
above. The parties agreed as part of the conversion transaction that KNOLOGY
would pay the option exercise prices to ITC Holding when they were received by
KNOLOGY. The residual note evidences this agreement. Under the residual note no
amount is due to ITC Holding from KNOLOGY in the event of an option expiring or
terminating.
ACCOUNTING TREATMENT
Since ITC Holding has already paid the fair value per share when the
options were purchased, ITC Holding will be entitled to the proceeds when the
options are exercised. When the options are exercised, KNOLOGY will receive the
proceeds and will issue the shares to the option holder. KNOLOGY will then remit
the proceeds to ITC Holding simultaneous with the exercise of the option. If no
cash proceeds are received by KNOLOGY because the option holder elects a
cashless exercise, KNOLOGY will remit the exercise price of the options to ITC
Holding in cash.
If the exercise price is paid in cash or if a cashless exercise is elected
and the option holder tenders KNOLOGY shares held for six months or more as
consideration for the exercise price of the options, KNOLOGY will not record
compensation expense but will record the fair value of shares received as
consideration for the exercise price as treasury stock with a corresponding
decrease in cash which results from the remittance of cash to ITC Holding for
the exercise price of the options. Additionally, KNOLOGY will record a
reclassification between par value of preferred stock and additional paid in
capital upon exercise of the options.
If a cashless exercise is elected and the option holder tenders KNOLOGY
shares held for six months or less or tenders no shares as consideration for the
exercise price of the options, KNOLOGY will record treasury stock for the fair
value of shares received or retained (when no shares are tendered) and a
corresponding decrease in cash which results from the remittance of cash to ITC
Holding for the exercise price of the options. KNOLOGY will also record
compensation expense by increasing paid in capital for the value of the net
shares received by the optionee. Additionally, KNOLOGY will record a
reclassification between par value of preferred stock and additional paid in
capital upon exercise of the options.
The six month time period related to the KNOLOGY shares that may be
tendered as consideration for cashless exercises of the KNOLOGY options will
include periods prior to the reorganization and distribution in which the option
holder held ITC Holding
23
<PAGE> 27
shares because the shareholder's interest in KNOLOGY was indirectly held through
their ownership of ITC Holding.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION
The following discusses the material federal income tax consequences of the
distribution for recipients or KNOLOGY options. The discussion is based on the
Internal Revenue Code of 1986, as amended, all applicable U.S. Treasury
regulations under the Internal Revenue Code, administrative rulings and judicial
authority, all as of the date of this registration statement. All of these
authorities are subject to change, and any change could affect the continuing
validity of this discussion. This discussion does not cover all federal income
tax consequences that may apply to all categories of option holders. All option
holders should consult their own tax advisors regarding the particular federal,
foreign, state and local tax consequences to them of the distribution and
exercise of options.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING OPTION
HOLDERS
OVERVIEW
Background of ITC Holding Stock Options. ITC Holding historically granted
options to purchase stock of ITC Holding to its employees and directors in
connection with the performance of services. Almost all of the ITC Holding
options were granted under ITC Holding's employee and director option plans. All
of the ITC Holding options were either incentive stock options or nonqualified
stock options, as defined in the Internal Revenue Code and tax regulations.
Employees of ITC Holding or its subsidiaries generally were granted incentive
stock options, whereas directors and other nonemployees of ITC Holding were
granted nonqualified stock options.
Incentive Stock Options and Nonqualified Stock Options. The only material
difference between an incentive stock option and an nonqualified stock option is
the way it is taxed. Incentive stock options are generally not taxed to the
recipient as normal compensation, even though they are compensatory in nature.
Instead, upon the eventual sale of the underlying stock acquired as a result of
exercise of the option, the employee recognizes capital gain for the excess of
the sales price over the exercise price as long as the shares acquired through
an incentive stock option are held for at least one year following exercise and
are not disposed of until at least two years after the option is granted. If the
holding periods for an incentive stock option are not satisfied, the employee
recognizes taxable ordinary income to the extent that the value of the stock at
the date of exercise exceeds the exercise price. In the case where incentive
stock option treatment is attained, the difference between the value of the
stock at the date of exercise and the exercise price is treated as a preference
item that increases taxable income for alternative minimum tax purposes.
In order to qualify for this favorable tax treatment, the employee must
meet certain requirements. Specifically, Section 422(a) of the Internal Revenue
Code provides that the holder of the incentive stock option must be an employee
of the corporation, or a
24
<PAGE> 28
parent or subsidiary corporation, issuing or assuming a stock option to which
Section 424(a) of the Internal Revenue Code applies at all times during the
period beginning on the date the option is granted and ending on the day 3
months before the date of such exercise. If the option holder does not meet the
employment requirement, then the incentive stock option becomes an nonqualified
stock option.
A nonqualified stock option is any option that does not satisfy the
statutory requirements of an incentive stock option. The recipient of a
nonqualified stock option generally recognizes normal compensation equal to the
difference between the fair market value of the underlying stock and the
exercise price of the option on the date the nonqualified stock option is
exercised.
ITC Holding and KNOLOGY Employees. Each ITC Holding option holder
received options to acquire shares of KNOLOGY Series A preferred stock. As a
result, employees of ITC Holding hold options to purchase stock of both ITC
Holding and KNOLOGY, and employees of KNOLOGY hold options to purchase stock of
both ITC Holding and KNOLOGY.
At the time of the spin-off of KNOLOGY from ITC Holding, employment
relationships of incentive stock option holders changed. Employees of KNOLOGY
ceased to be employees of a subsidiary of ITC Holding, since KNOLOGY is no
longer an ITC Holding subsidiary. Additionally, employees of ITC Holding or its
subsidiaries other than KNOLOGY remained employees of ITC Holding and its
subsidiaries, but ceased to be employees of the parent company of KNOLOGY, since
ITC Holding is no longer the parent company of KNOLOGY.
TAX TREATMENT OF OPTION DISTRIBUTION; TAX OPINION
No IRS Ruling Obtained Regarding Tax Treatment. ITC Holding received
rulings from the IRS that the distribution of KNOLOGY stock to ITC Holding
stockholders as described to the IRS would qualify as a tax-free spin-off under
Section 355 of the Internal Revenue Code. The tax treatment of the option
holders was not the subject of these IRS rulings.
Tax Opinion Obtained Regarding Tax Treatment. We received an opinion from
Arthur Andersen LLP, KNOLOGY's independent accountants, in connection with the
proposed issuance of the KNOLOGY options. The entire description of tax
consequences for holders of the stock options discussed below is based on that
opinion.
A tax opinion merely represents the opinion giver's best judgment with
respect to the probable outcome and is not binding on the IRS or the courts.
Positions contrary to the tax opinion may be taken by the IRS and a court
considering the issues may hold contrary to the opinion. In addition, the tax
opinion is premised on the accuracy of factual representations and assumptions.
If those factual representations or assumptions are or become incorrect in any
material respect, the opinion may cease to apply. Arthur Andersen has disclaimed
any obligation to advise us of any new developments in the application or
interpretation of the federal income tax laws subsequent to the date of the
opinion or to update the opinion in the future.
25
<PAGE> 29
Assumptions Underlying the Tax Opinion. Among other things, ITC Holding
advised us, and the opinion assumed, that almost all ITC Holding options were
granted under ITC Holding's employee and director option plans and that all ITC
Holding options were granted in connection with the performance of services. ITC
Holding advised us, and the tax opinion assumed, that ITC Holding made a
reduction of the aggregate exercise prices of the ITC Holding options in
connection with the distribution of the options to purchase our stock in
proportion to the relative fair market values of ITC Holding and KNOLOGY stock.
In addition, ITC Holding advised us, and the tax opinion assumed, that the terms
of the KNOLOGY options, other than with respect to exercise price, would be the
same as the terms of the corresponding ITC Holding options.
Discussion and Conclusions of the Tax Opinion Regarding the Distribution of
KNOLOGY Stock Options. The tax opinion provides as follows:
1. WHAT WAS THE FEDERAL TAX EFFECT OF THE DISTRIBUTION OF KNOLOGY STOCK OPTIONS
TO ITC HOLDING EMPLOYEES WHO HOLD ITC HOLDING INCENTIVE STOCK OPTIONS?
The distribution of KNOLOGY stock options to ITC Holding employees holding
ITC Holding incentive stock options was not a taxable event.
The KNOLOGY stock options distributed were more likely than not incentive
stock options. In the case of incentive stock options that do not subsequently
become nonqualified, there will be a taxable event at the time the stock
underlying the options is sold based upon the difference between the fair market
value of the stock at the date of sale and the exercise price. Alternative
minimum tax may also apply when incentive stock options are exercised.
If the IRS were to recharacterize the KNOLOGY stock options as nonqualified
options, the holder will have taxable income at the date of exercise for the
difference between the fair market value of the stock at the date of exercise
and the exercise price.
Even if the KNOLOGY stock options distributed are incentive stock options,
they will become nonqualified options three months after the distribution (on
May 4, 2000). The conversion to a nonqualified stock option will not be a
taxable event. With a nonqualified stock option, the holder will have taxable
income at the date of exercise for the difference between the fair market value
of the stock at the date of exercise and the exercise price.
2. WHAT WAS THE FEDERAL TAX EFFECT OF THE DISTRIBUTION OF KNOLOGY STOCK OPTIONS
TO KNOLOGY EMPLOYEES WHO HOLD ITC HOLDING INCENTIVE STOCK OPTIONS?
The distribution of KNOLOGY stock options to Knology employees holding ITC
Holding incentive stock options was not a taxable event.
The KNOLOGY options distributed should be incentive stock options. In the
case of incentive stock options that do not subsequently become nonqualified,
there will be a taxable event at the time the stock underlying the options is
sold based upon the difference between the fair market value of the stock at the
date of sale and the exercise
26
<PAGE> 30
price. Alternative minimum tax may also apply when incentive stock options are
exercised.
If the IRS were to recharacterize the KNOLOGY stock options as nonqualified
options, the holder will have taxable income at the date of exercise for the
difference between the fair market value of the stock at the date of exercise
and the exercise price.
3. WHAT WAS THE FEDERAL TAX EFFECT OF THE DISTRIBUTION OF THE KNOLOGY STOCK
OPTIONS TO NONEMPLOYEES AND EMPLOYEES OF ITC HOLDING AND KNOLOGY HOLDING
NONQUALIFIED STOCK OPTIONS?
The distribution of KNOLOGY stock options to nonemployees and employees
holding nonqualified stock options of ITC Holding was not a taxable event.
The KNOLOGY stock options will be treated as nonqualified stock options.
With a nonqualified stock option, the holder will have taxable income at the
date of exercise for the difference between the fair market value of the stock
at the date of exercise and the exercise price.
Based on the existing Internal Revenue Code and tax regulations, Arthur
Andersen LLP has issued a "more likely than not" opinion on whether the options
are incentive stock options in the first item above and a "should" opinion on
whether the options are incentive stock options in the remaining items above.
Arthur Andersen LLP is not able to issue a "will" opinion since the Internal
Revenue Code, regulations, or guidance issued by the Internal Revenue Service,
which includes revenue rulings and revenue procedures, are not identical to
facts and circumstances pertaining to the transactions of ITC Holding and
KNOLOGY. However, Arthur Andersen LLP is unaware of the IRS making an argument
inconsistent with its opinion in the context of a transaction such as the
distribution. In addition, since the Internal Revenue Code, regulations, or
guidance issued by the Internal Revenue Service, which includes revenue rulings
and revenue procedures, do not specify whether or not a particular regulation
applies to the specifics of the distribution, and the IRS may interpret the
regulation as applying to the distribution, Arthur Andersen is not able to
provide a "should" opinion on whether the options are incentive stock options in
the first item above.
As indicated above, a tax opinion merely represents the opinion giver's
best judgment with respect to the probable outcome and is not binding on the IRS
or the courts. Positions contrary to the tax opinion may be taken by the IRS and
a court considering the issues may hold contrary to the opinion.
* * *
The summary of federal income tax consequences and the Arthur Andersen LLP
opinion set forth above do not purport to cover all federal income tax
consequences that may apply to all categories of option holders. All option
holders should consult their own tax advisors regarding the particular federal,
foreign, state and local tax consequences of the distribution and exercise of
options to such option holders.
27
<PAGE> 31
TAX SEPARATION AGREEMENT
ITC Holding and KNOLOGY entered into a tax separation agreement to reflect
KNOLOGY ceasing to be included in ITC Holding's consolidated tax return and to
allocate the risk of potential adverse tax consequences stemming from the
distribution.
In the tax separation agreement ITC Holding and KNOLOGY made
representations to each other regarding the distribution and covenants regarding
future actions. Under the tax separation agreement KNOLOGY represented as of the
date of the distribution that:
(1) KNOLOGY has no plan or intention to purchase any of its outstanding
stock after the distribution,
(2) KNOLOGY has no plan or intention to liquidate KNOLOGY, merge KNOLOGY
with any other corporation, or sell or otherwise dispose of the assets
of KNOLOGY other than in the ordinary course of business,
(3) immediately after the distribution, at least 90% of the fair market
value of the gross assets of KNOLOGY will consist of the stock and
securities of members of the KNOLOGY group of companies that are
engaged in the active conduct of a trade or business,
(4) payments made in connection with all continuing transactions between
either ITC Holding or KNOLOGY and entities in their respective groups
will be at fair market value based on the terms and conditions arrived
at by the parties bargaining at arm's length,
(5) the distribution is not part of a plan or series of related
transactions in which one or more persons acquire directly or
indirectly KNOLOGY stock representing a 50% or greater interest within
the meaning of Section 355(e) of the Internal Revenue Code,
(6) there is no plan or intention by KNOLOGY to enter into any
negotiations, agreements, or arrangements with respect to transactions
or events, including stock issuances, pursuant to the exercise of
options or otherwise, option grants, capital contributions, or
acquisitions, but not including the distribution, that may cause the
spin-off to be treated as part of a plan in which one or more persons
acquire directly or indirectly KNOLOGY stock representing a 50% or
greater interest within the meaning of Section 355(e) of the Internal
Revenue Code, and
(7) KNOLOGY is not aware of any present plan or intention by the current
stockholders of ITC Holding to sell, exchange, transfer by gift or
otherwise dispose of any of their stock in, or securities of, ITC
Holding or KNOLOGY subsequent to the distribution.
KNOLOGY covenanted in the tax separation agreement that it would not take
any action or fail to take any action that would cause any of the
representations listed as (1) through (6) above to be untrue.
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<PAGE> 32
KNOLOGY also covenanted in the tax separation agreement that:
- during the two-year period following the spin-off, KNOLOGY would not
cease to be engaged in the active trade or business relied upon for
purposes of satisfying the requirements of the spin-off ruling request,
and
- during the applicable period provided in the Internal Revenue Code with
respect to the distribution, KNOLOGY would not enter into any transaction
or make any change in equity structure, including stock issuances
pursuant to the exercise of options, option grants or otherwise, capital
contributions, or acquisitions, but not including the distribution, that
may cause the distribution to be treated as part of a plan in which one
or more persons acquire directly or indirectly KNOLOGY's stock
representing a 50% or greater interest within the meaning of Section
355(e) of the Internal Revenue Code.
The tax separation agreement permits KNOLOGY to take actions inconsistent
with its representations and covenants if it either obtains a ruling from the
IRS or an opinion of expert tax counsel that the actions should not result in
the distribution being taxable, or if the proposed actions are approved by
holders of at least two-thirds of KNOLOGY's voting stock. If KNOLOGY breaches
its representations and covenants by taking actions not permitted in the tax
separation agreement and the breach causes the distribution not to be treated as
tax-free, KNOLOGY could be subject to significant damages. KNOLOGY's maximum
liability for breach of its representations and covenants in the tax separation
agreement is limited by agreement to $50 million.
ITC Holding made similar representations and covenants under the tax
separation agreement. Stockholders of ITC Holding who hold 20,000 shares or more
of ITC Holding's capital stock have entered into agreements with ITC Holding
generally agreeing not to transfer any of their KNOLOGY stock for two years
following the distribution.
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<PAGE> 33
NO MARKET FOR OUR STOCK
Our stock is not traded on any stock exchange or listed on the Nasdaq Stock
Market or any other established trading market. No market makers currently make
a market in our stock and we do not plan to engage a market maker. Therefore,
there is no established public trading market and no high and low bid
information or quotations available. We do not expect that an active trading
market will develop after the distribution.
In addition, all shares of our stock are subject to transfer restrictions,
including the shares received in the distribution and shares issuable upon
exercise of options. If you decide to sell your shares of stock of our company,
you will first have to offer those shares to us to purchase, before you can sell
to a third party. This, along with the lack of a public market, limits your
ability to sell your shares.
As of February 29, 2000, we had 6,476 shares of common stock outstanding
held of record by approximately 4 stockholders, 48,462,499 shares of Series A
preferred stock outstanding held of record by approximately 331 stockholders and
21,180,131 shares of Series B preferred stock outstanding held of record by
approximately 27 stockholders.
DIVIDEND POLICY
As we are a holding company, our ability to pay cash dividends depends on
us receiving cash dividends, advances and other payments from our subsidiaries.
The ability of our subsidiary KNOLOGY Holdings to pay dividends is restricted
under the terms of its credit facility, as discussed in more detail under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources." While two of our
subsidiaries, Interstate Telephone and Valley Telephone, have declared dividends
to their former parent company, ITC Holding, in the past, we plan to retain
earnings to finance the expansion of our operations. Future declaration and
payment of dividends, if any, will be determined based on the then-current
conditions, including our earnings, operations, capital requirements, financial
condition, and other factors the board of directors deems relevant. In addition,
our ability to pay dividends is limited by the terms of the indenture governing
our outstanding notes and by the terms of our credit facility.
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<PAGE> 34
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The selected financial data as of and for the years ended December 31, 1997,
1998 and 1999 have been derived from our audited financial statements. The
selected financial data set forth below should be read in conjunction with our
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations", our financial statements and related notes, and
other financial data included elsewhere in this prospectus. See note 1 to our
financial statements regarding the reorganization.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1995 1996 1997 1998(A) 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues.................... $18,929,279 $ 17,527,208 $17,633,313 $ 45,132,522 $ 66,720,929
Operating expenses:
Cost of services.................... 5,593,083 2,991,412 3,121,108 16,796,593 26,964,519
Selling, operations and
administrative.................... 8,740,090 8,331,795 9,498,461 33,266,292 45,960,263
Depreciation and amortization....... 3,185,901 3,022,056 2,781,800 17,326,895 40,970,149
----------- ------------ ----------- ------------ ------------
Total operating expenses.............. 17,519,074 14,345,263 15,401,369 67,389,780 113,894,931
----------- ------------ ----------- ------------ ------------
Operating income (loss)............... 1,410,205 3,181,945 2,231,944 (22,257,258) (47,174,002)
----------- ------------ ----------- ------------ ------------
Other expense, net.................... (362,331) (379,889) (2,048,506) (18,645,199) (32,837,223)
----------- ------------ ----------- ------------ ------------
Income (loss) before minority
interest, income tax (provision)
benefit and cumulative effect of a
change in accounting principle...... 1,047,874 2,802,056 183,438 (40,902,457) (80,011,225)
Minority interest..................... 667,038 -- -- 13,294,079 3,267,653
Income tax (provision) benefit........ (573,327) (1,371,865) (1,010,779) 5,631,618 19,697,270
Cumulative effect of a change in
accounting principle................ -- -- -- (582,541) --
----------- ------------ ----------- ------------ ------------
Net income (loss)..................... 1,141,585 1,430,191 (827,341) (22,559,301) (57,046,302)
Subsidiary preferred stock
dividends........................... -- -- (4,193,276) (1,424,222) (1,744,703)
----------- ------------ ----------- ------------ ------------
Net income (loss) attributable to
common stockholders................. $ 1,141,585 $ 1,430,191 $(5,020,617) $(23,983,523) $(58,791,005)
=========== ============ =========== ============ ============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common
stockholders........................ $ 11,415.85 $ 14,301.91 $(50,206.17) $(239,835.23) $ (11.45)
Basic and diluted weighted average
number of common shares
outstanding......................... 100 100 100 100 5,132,653
OTHER FINANCIAL DATA:
Capital expenditures.................. $ 3,079,108 $ 995,320 $ 1,727,079 $120,227,057 $ 87,386,231
Cash provided by (used in) operating
activities.......................... 94,418 4,770,730 3,680,116 23,035,488 2,235,335
Cash (used in) provided by investing
activities.......................... (3,544,192) (197,362) (22,223,940) (34,586,803) (29,316,194)
Cash (used in) provided by financing
activities.......................... 1,535,595 (4,457,176) 18,726,407 16,083,187 29,740,547
EBITDA(b)............................. 5,565,993 5,640,550 2,509,854 8,564,129 (2,829,134)
Ratio of earnings to fixed
charges(c).......................... 2.89 3.57 1.03 -- --
Insufficient earnings to cover fixed
charges............................. -- -- -- $ 27,608,378 $ 76,743,572
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 832,057 $ 2,977,835 $(1,240,180) $ 49,965,918 $ 15,664,483
Property and equipment, net............ 20,406,060 11,374,950 11,260,846 211,885,668 273,896,831
Total assets........................... 38,544,328 22,883,276 30,196,492 374,680,811 400,333,810
Long-term debt, including accrued
interest............................. 11,075,698 -- -- 276,178,820 331,012,181
Total liabilities...................... 22,034,469 7,235,555 6,656,317 314,414,049 357,684,385
Minority interest...................... 2,981,968 -- -- 3,267,653 --
Retained earnings (accumulated
deficit)............................. 8,168,034 9,598,225 3,181,179 (20,802,344) (79,593,349)
Total stockholders' equity............. 13,527,891 15,647,721 23,540,175 54,512,149 37,923,360
</TABLE>
31
<PAGE> 35
- ---------------
(a) See note 9 to the financial statements, Cable Alabama acquisition, for
further information regarding presentation.
(b) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. While EBITDA should not be construed as a
substitute for operating income (loss) as a measure of performance or as a
better measure of liquidity than cash flows from operating activities, which
are determined in accordance with generally accepted accounting principles,
it is a measure commonly used in our industry and is included herein because
we believe EBITDA provides relevant and useful information to our investors.
Since the elements of EBITDA are determined using the accrual basis of
accounting and EBITDA excludes the effects of capital and financing related
costs, investors should not use it to analyze and compare companies on the
basis of operating performance. We utilize and have disclosed EBITDA to
provide additional information with respect to our ability to meet future
debt service, capital expenditures and working capital requirements; to
incur additional indebtedness; and to fund continuing growth. EBITDA may not
necessarily be calculated comparably with similarly titled measures for
other companies. Additionally, we do not currently believe that there are
any legal or functional requirements that limit management's discretionary
use of funds depicted by EBITDA.
(c) Earnings consist of income before preferred stock dividends, income taxes,
plus fixed charges. Fixed charges consist of interest charges and the
portion of rent expense under operating leases representing interest, which
is estimated to be 1/3 of such expense.
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<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our consolidated financial condition and
results of operations for the three years ended December 31, 1999 and certain
factors that are expected to affect our prospective financial condition. You
should read the following discussion together with our "Selected Consolidated
Financial Data" beginning on page 30 and our financial statements and related
notes beginning on page F-1.
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. 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 "Risk Factors" on page 6 and elsewhere in this prospectus.
Our historical financial statements include the assets, liabilities and
results of operations of our subsidiaries which have been majority-owned by ITC
Holding during each year. Accordingly, our financial statements include the
assets, liabilities and results of operations of all of our subsidiaries for the
years 1997, 1998 and 1999.
OVERVIEW
Knology, Inc. was formed in September 1998 to enable ITC Holding to
complete a reorganization of some of its subsidiaries. In November 1999, in
order to effectuate the reorganization:
- ITC Holding contributed to Knology, Inc.:
- its 85% interest in Knology Holdings, Inc.;
- all of the outstanding capital stock of Interstate Telephone Company,
Inc., Valley Telephone Company, Inc., Globe Telecom, Inc. and ITC
Globe, Inc., referred to as our "telephone operations group;"
- a note in the principal amount of $9.6 million;
- its 6% interest in ClearSource, Inc., subscription rights to purchase
ClearSource shares and $5.6 million in cash to purchase the
additional ClearSource shares; and
- the holders of the remaining 15% interest in Knology Holdings, Inc.
exchanged that interest for shares of Knology, Inc. and the holders of
outstanding warrants to purchase Knology Holdings preferred stock
exchanged those warrants for warrants to purchase preferred stock of
Knology, Inc.
As a result of the reorganization, ITC Holding held a 90% interest in us,
which it distributed to its stockholders on February 7, 2000.
The reorganization was accounted for in a manner similar to a pooling of
interest for the telephone operations group. Knology Holdings and its
subsidiaries have been treated as an equity investment in our consolidated
financial statements for 1997, since ITC Holding owned 29% of Knology Holdings
at that time. Knology Holdings and its
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<PAGE> 37
subsidiaries have been consolidated in our financial statements since July 1998
when ITC Holding increased its ownership to 85%. The 1998 financials include the
accounts of Knology Holdings for the entire year and the minority interest in
losses includes the 58% share of Knology Holdings' losses for the period from
January 1998 to July 1998. For a more detailed description of the reorganization
and its accounting treatment, see Note 1 to our consolidated financial
statements.
In December 1999, InterCall, Inc., a subsidiary of ITC Holding, loaned us
approximately $29.7 million to fund capital expenditures and working capital.
The loan, which had a maturity date of March 31, 2000, provided that InterCall
could elect to convert it into options to purchase our Series A preferred stock.
In February 2000, InterCall converted the loan into options to purchase
6,258,036 shares of our Series A preferred stock, and we issued to ITC Holding a
note under which we will pay ITC Holding any proceeds from option exercises
received by us, including an amount equal to the exercise price for cashless
exercises. The options were distributed to ITC Holdings' stockholders on
February 4, 2000.
In June 1998, Knology Holdings acquired TTE Inc., a non-facilities based
reseller of local, long-distance and operator services in South Carolina. The
acquisition was accounted for as a purchase and the results of TTE have been
included in our financial statements since the date of its acquisition.
In October 1998, Knology Holdings acquired the Cable Alabama cable
television system serving the Huntsville, Alabama area. The acquisition was
accounted for as a purchase and the operations of the system have been included
in our financial statements since the date of its acquisition.
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<PAGE> 38
Our current organizational structure is as follows:
(CHART)
REVENUES AND EXPENSES
We can group our revenues into four categories: video revenues, telephone
revenues, Internet revenues and other revenues.
- Video revenues. Our video revenues consist of fixed monthly fees for
basic, premium and digital cable television services, as well as fees
from pay-per-view movies and events such as boxing matches and concerts,
that involve a charge for each viewing. Video revenues accounted for
approximately 50% and 53% of our consolidated revenues for the years
ended December 31, 1998 and December 31, 1999, respectively.
- Telephone revenues. Our telephone revenues consist primarily of fixed
monthly fees for local service, enhanced services such as call waiting
and voice mail, and usage fees for long distance service. Telephone
revenues accounted for approximately 49% and 43% of our consolidated
revenues for the years ended December 31, 1998 and December 31, 1999,
respectively.
- Internet revenues and other revenues. Our Internet revenues consist
primarily of fixed monthly fees for Internet access service and rental of
cable modems. Other revenues resulted principally from broadband carrier
services and video production services. These combined revenues accounted
for approximately 1% and 4% of our
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<PAGE> 39
consolidated revenues for the years ended December 31, 1998 and December
31, 1999, respectively.
Our operating expenses include cost of services expenses, selling,
operations and administrative expenses, and depreciation and amortization
expenses.
Cost of services expenses include:
- Video cost of services. Video cost of services consist primarily of
monthly fees to the National Cable Television Cooperative and other
programming providers, and are generally based on the average number of
subscribers to each program. Programming costs accounted for
approximately 12.5% and 13.4% of our operating expenses for the years
ended December 31, 1998 and December 31, 1999, respectively. Programming
costs is our largest single cost and we expect this to continue. Since
this cost is based on numbers of subscribers, it will increase as we add
more subscribers.
- Telephone and Internet access services. Cost of services related to our
telephone and Internet access services include costs of Internet
transport and telephone switching, and interconnection and transport
charges payable to local and long distance carriers.
Selling, operations and administrative expenses include:
- Sales and marketing costs. Sales and marketing costs include the cost
of sales and marketing personnel and advertising and promotional
expenses.
- Network operations and maintenance expenses. Network operations and
maintenance expenses include payroll and departmental costs incurred for
network design and maintenance monitoring.
- Customer service expenses. Customer service expenses include payroll
and departmental costs incurred for customer service representatives and
management.
- General and Administrative Expenses. General and administrative
expenses consist of corporate and subsidiary general management and
administrative costs.
Depreciation and amortization expenses include depreciation of our
interactive broadband networks and equipment, and amortization of cost in excess
of net assets and other intangible assets related to acquisitions.
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<PAGE> 40
RESULTS OF OPERATIONS
The following table sets forth financial data as a percentage of operating
revenues for the years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Operating revenues...................................... 100% 100% 100%
--- --- ----
Operating expenses:
Cost of services..................................... 18 28 40
Selling, operating and administrative................ 54 83 69
Depreciation and amortization........................ 16 38 61
--- --- ----
Total....................................... 88 149 170
--- --- ----
Operating income (loss)................................. 12 (49) (70)
Other income and expenses............................... (12) (41) (49)
--- --- ----
Income (loss) before minority interest, income tax
(provision) benefit and cumulative effect of a change
in accounting principle.............................. 0 (90) (120)
Minority interest....................................... 0 29 5
Income tax (provision) benefit.......................... (6) 12 30
Cumulative effect of change in accounting principle..... 0 (1) 0
--- --- ----
Net income (loss)....................................... (6) (50) (85)
Subsidiary preferred stock dividends.................... (24) (3) 0
--- --- ----
Net income (loss) attributable to stockholders.......... (30)% (53)% (88)%
=== === ====
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Operating revenues increased 47.8% from $45.1 million for the
year ended December 31, 1998 to $66.7 million for the year ended December 31,
1999. Our increased revenues are primarily due to a higher number of connections
during the year ended December 31, 1999 compared to the same period in 1998. The
additional connections resulted primarily from:
- the extension of our broadband networks in the Montgomery, Columbus and
Panama City markets;
- the continued growth of broadband services in the Augusta and Charleston
markets; and
- the acquisition of the TTE and Cable Alabama systems in June 1998 and
October 1998, respectively.
Particularly in the cable industry, there is a trend towards consolidation,
exclusivity arrangements and other forms of competition. If the level of
competition continues to increase, due to consolidation, exclusivity
arrangements or otherwise, our ability to attract and retain customers and to
increase revenues could suffer.
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<PAGE> 41
Expenses. Our operating expenses, excluding depreciation and
amortization, increased 45.7%, from $50.0 million for the year ended December
31, 1998 to $72.9 million for the year ended December 31, 1999. The cost of
services component of operating expenses increased 60.5%, from $16.8 million for
1998 to $27.0 for 1999. Our selling, operations, and administration expenses
increased 38.3%, from $33.3 million for 1998 to $46.0 million for 1999. The
increase in our cost of services and other operating expenses is consistent with
the growth in revenues and is a result of the expansion of our operations and
the increase in the number of subscribers and the number of employees associated
with such expansion and growth into new markets. We expect our cost of services
to continue to increase as we add more revenue generating units. Our selling,
operations and administration expenses will increase as we expand into
additional markets. Programming costs, which are our largest single expense
item, have been increasing over the last several years, and we expect this trend
to continue. We may not be able to pass these higher costs on to customers,
which would adversely affect our cash flow and operating margins.
Our depreciation and amortization expenses increased 137.0% from $17.3
million for the year ended December 31, 1998 to $41.0 million for the year ended
December 31, 1999. Approximately $12.0 million of the increase in depreciation
and amortization is due to the amortization of the excess of the purchase price
of Cable Alabama over the fair value of net assets acquired. Approximately $10.6
million of the increase is due to depreciation expense related to network
capital expenditures, with the remaining $1.1 million of the increase primarily
due to depreciation expense related to the purchase of buildings, computers and
office equipment at the corporate and subsidiary locations. We expect our
depreciation and amortization expense to continue to increase as we make capital
expenditures to extend our existing networks and build additional networks.
Other Income and Expense. Our interest income was $9.6 million for the
year ended December 31, 1998, compared to $1.5 million for the year ended
December 31, 1999. The interest income reflects the interest earned from the
investment of certain proceeds received from the issuance of the senior discount
notes in October 1997. The decrease in interest income is due to the draw down
of marketable securities to fund planned expansion and acquisitions.
Our interest expense increased from $29.1 million for the year ended
December 31, 1998 to $34.4 million for the year ended December 31, 1999. The
increase in interest expense reflects the accrual of the interest attributable
to the senior discount notes issued in October 1997.
Income Tax (Provision) Benefit. We recorded an income tax benefit of $5.6
million for the year ended December 31, 1998 compared to an income tax benefit
of $19.7 million for the year ended December 31, 1999. The income tax benefit in
1999 resulted from our utilizing net tax losses under a tax sharing agreement
with ITC Holding. The tax sharing agreement was effective August 1998 upon the
acquisition by ITC Holding of its majority-owned interest of KNOLOGY Holdings,
Inc. With the completion of the spin-off of KNOLOGY, Inc. by ITC Holding, we
will no longer participate in the tax sharing agreement. Therefore, we will not
receive any payments
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<PAGE> 42
from ITC Holding related to income tax benefits for periods subsequent to the
distribution. As a stand alone entity after the spin-off, we will record a full
valuation allowance against any income tax benefit until taxable income is
generated, at which time a tax benefit will be realized.
Net Loss Attributable to Common Stockholders. We incurred a net loss of
$24.0 million for the year ended December 31, 1998 compared to a net loss of
$58.8 million for the year ended December 31, 1999. The increase in net loss is
a result of the expansion of our operations and the increase in the number of
employees associated with such expansion and growth into new markets. We expect
net losses to continue to increase as we proceed with the expansion of our
business.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
As explained above, our results for the year ended December 31, 1998
include the results of all of our current subsidiaries. However, our 1997
results do not include the results of KNOLOGY Holdings, which was not
majority-owned by ITC Holding during 1997 and therefore, was accounted for as an
equity method investment in 1997.
Revenues. Our operating revenues increased $27.5 million, or 156.3%, from
$17.6 million for the year ended December 31, 1997 to $45.1 million for the year
ended December 31, 1998. Excluding operating revenues of $25.8 million of
KNOLOGY Holdings in 1998, our operating revenues increased $1.7 million, or
9.7%, due primarily to the addition of a competitive local telephone and
broadband services operations in the Georgia/Alabama border area.
Expenses. Our operating expenses, excluding depreciation and
amortization, increased $37.5 million, or 297.6%, from $12.6 million for the
year ended December 31, 1997 to $50.1 million for the year ended December 31,
1998. Excluding operating expenses of $37.3 million of KNOLOGY Holdings in 1998,
our operating expenses increased $195,000, or 1.5%.
Our depreciation and amortization expenses increased from $2.8 million for
the year ended December 31, 1997 to $17.3 million for the year ended December
31, 1998, an increase which primarily reflects the inclusion of $12.4 million of
KNOLOGY Holdings' depreciation and amortization for the 1998 period which was
consolidated in our 1998 results.
Our interest income and interest expense increased $9.6 million and $29.0
million, respectively, from 1997 to 1998, primarily due to the inclusion of
KNOLOGY Holdings' results in the 1998 period. The interest expense and interest
income reported in the 1998 period reflects the accrual of the interest
attributable to the senior discount notes issued in October 1997 and the
interest income from the investment of the proceeds of the notes into marketable
securities.
Equity in losses of subsidiary decreased $2.4 million from the year ended
December 31, 1997 compared to the same period in 1998. The decrease represents
the acquisition of the majority of KNOLOGY Holdings stock in 1998 which
acquisition required us to consolidate the operations of KNOLOGY Holdings in
1998.
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<PAGE> 43
Other Income and Expense. Other income (expense) changed from $(59,000)
for the year ended December 31, 1997 to $783,000 for the year ended December 31,
1998 and is primarily due to the 1997 period reflecting a gain on the sale of an
investment.
Minority Interests. Minority interests in losses of subsidiary increased
from $0 in 1997 to $13.3 million in 1998. Minority interests in 1998 reflects
the minority stockholders' share of the losses and the pre-acquisition losses in
connection with the acquisition of KNOLOGY Holdings in 1998. In accordance with
Accounting Principles Board Opinion No. 16, the reorganization of KNOLOGY
Holdings was recorded at ITC Holding's historical cost for the 85% controlling
interest obtained. The remainder was treated as an acquisition of minority
interest at fair value.
Income Tax (Provision) Benefit. We recorded an income tax benefit of $5.6
million for the year ended December 31, 1998 compared to a provision of $1.0
million for the year ended December 31, 1997. The income tax benefit in 1998
resulted from our utilizing net tax losses under a tax sharing agreement with
ITC Holding. The provision in 1997 reflects the tax expense of all of our
subsidiaries. The change in the amount of $6.6 million resulted from the
consolidation of KNOLOGY Holdings due to the acquisition of majority interest by
ITC Holding in 1998, in which period KNOLOGY Holdings' taxable losses result in
a tax benefit. As a stand alone entity after spin-off by ITC Holding, we will
record a full valuation allowance against any income tax benefit until taxable
income is generated, at which time a tax benefit will be realized.
Preferred Dividends. Preferred dividends in the amount of $4.2 million in
1997 and $1.4 million in 1998 represent profits of Interstate Telephone and
Valley Telephone distributed to ITC Holding Company. The decrease in 1998 as
compared to 1997 relates to the increased capital deployed to launch operations
of Globe Telecommunications and ITC Globe in 1998.
Net Loss Attributable to Common Stockholders. We incurred a net loss of
$827,000 for the year ended December 31, 1997 compared to a net loss of $22.6
million for the year ended December 31, 1998. The increase in net loss is a
result of the expansion of our operations and the increase in the number of
employees associated with such expansion and growth into new markets. We expect
net losses to continue to increase as we proceed with the expansion of our
business.
The following table sets forth certain operating data as of December 31,
1997, 1998 and 1999. The information provided in the table reflects
revenue-generating connections. Because we deliver multiple services to our
customers, we report the total number of our
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<PAGE> 44
various revenue generating service connections for video, voice and data
services, rather than the total number of customers.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Connections(1)
Video....................................... 37,716 80,600 89,937
Voice
On-net(2)................................ 19,518 24,343 35,879
Off-net(3)............................... 0 5,982 7,908
Data........................................ 0 908 4,989
------- ------- -------
Total connections.............................. 57,234 111,833 138,713
======= ======= =======
Marketable homes passed(4)..................... 124,773 256,271 305,773
======= ======= =======
</TABLE>
- ---------------
(1) Connections represent revenue-generating connections. For video and data,
connections represent the number of customers subscribing to the service.
For voice, connections represent the number of lines connected. For example,
a voice customer that has two lines would be counted as two connections.
(2) On-net refers to lines provided over our broadband networks. It includes
19,518, 21,369 and 23,538 lines as of December 31, 1997, 1998 and 1999,
respectively, provided using traditional copper telephone lines.
(3) Off-net consists of all voice connections provided within our broadband
network area over telephone lines leased from third parties.
(4) Marketable homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by our cable
television distribution network.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had net working capital of $15.7 million,
compared to $50.0 million at December 31, 1998.
Net cash provided by operations totaled $3.7 million, $23.0 million and
$2.2 million for the years ended December 31, 1997, 1998 and 1999, 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;
- loss on disposition of assets;
- cumulative effect of an accounting change;
- deferred income taxes;
- deferred investment tax credit;
- equity in net loss of subsidiary; and
- minority interest in subsidiaries' net loss.
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<PAGE> 45
Net cash used for investing activities was $22.2 million, $34.6 million and
$29.3 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Our investing activities in 1997 consisted primarily of $1.7
million of capital expenditures, $14.3 million for the purchase of the Panama
City cable system, $4.2 million of dividends paid by Interstate Telephone and
Valley Telephone to ITC Holding and a $2.1 million increase in
construction-related payables. In 1998, our investing activities consisted
primarily of $120.2 million of capital expenditures, $67.7 million for the
acquisition of the Huntsville, Alabama cable system, $6.2 million for the
purchase of equity interests in KNOLOGY Holdings, net of cash acquired of $6.1
million, $1.4 million of dividends paid by Interstate Telephone to ITC Holding
and $0.8 million for an investment in ClearSource, Inc. These investing
activities are offset by $162.3 million in proceeds from the sale of short-term
investments. Our investing activities for the year ended December 31, 1999
consisted of $87.4 million of capital expenditures principally funded by $60.2
million in proceeds from the sale of short-term investments.
Net cash flow from financing activities was cash provided of $18.7 million,
cash provided of $16.1 million and cash provided of $29.7 million for the years
ended December 31, 1997, 1998 and 1999, respectively. Cash flow from financing
activity in 1997 consisted of $14.3 million of additional infusion of equity and
$4.4 million of reimbursement of advances previously made to an affiliate.
Financing activities in 1998 primarily consisted of $15.6 million of additional
infusion of equity and $2.0 million repayment from an affiliate, offset by $1.5
million in expenditures related to the issuance of debt. These numbers do not
include $242.4 million raised by KNOLOGY Holdings in 1997, as KNOLOGY Holdings
was not majority-owned by ITC Holding during 1997. Financing activities in 1999
primarily consisted of $28.6 million of short-term borrowings through the credit
facility and affiliates, $8.1 million from the issuance of warrants,
contribution of ClearSource and the exercise of options, partially offset by
$6.1 million in repayments to affiliates.
FUNDING TO DATE
We have required equity infusions and debt proceeds to finance a
significant portion of our operating, investing and financing activities in the
development of our business. On October 22, 1997, KNOLOGY Holdings received net
proceeds of approximately $242.4 million from the offering of units consisting
of senior discount notes due 2007 and warrants to purchase preferred stock. The
notes were sold at a substantial discount from their principal amount at
maturity and there will not be any payment of interest on the notes prior to
April 15, 2003. The notes will fully accrete to face value of $444.1 million on
October 15, 2002. From and after October 15, 2002, the notes will bear interest,
which will be payable in cash, at a rate of 11 7/8% per annum on April 15 and
October 15 of each year, commencing April 15, 2003. The indenture contains
covenants that affect, and in certain cases significantly limit or prohibit, the
ability of KNOLOGY Holdings to:
- incur indebtedness;
- pay dividends;
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<PAGE> 46
- prepay subordinated indebtedness;
- redeem capital stock;
- make investments;
- engage in transactions with stockholders and affiliates;
- create liens;
- sell assets; and
- engage in mergers and consolidations.
If KNOLOGY Holdings fails to comply with these covenants, KNOLOGY Holdings'
obligation to repay the notes may be accelerated. However, these limitations are
subject to a number of important qualifications and exceptions. In particular,
while the indenture restricts KNOLOGY Holdings' ability to incur additional
indebtedness by requiring compliance with specified leverage ratios, it permits
KNOLOGY Holdings and its subsidiaries to incur an unlimited amount of
indebtedness to finance the acquisition of equipment, inventory and network
assets and to secure such indebtedness, and to incur up to $50 million of
additional secured indebtedness. Upon a change of control of KNOLOGY Holdings,
as defined in the indenture, KNOLOGY Holdings would be required to make an offer
to purchase the notes at a purchase price equal to 101% of their accreted value,
plus accrued interest. The spin-off did not constitute a change of control under
the Indenture.
Each unit in the 1997 units offering also included a warrant to purchase
0.003734 shares of preferred stock of KNOLOGY Holdings at an exercise price of
$0.01 per share. In November 1999, we completed an exchange in which we received
the KNOLOGY Holdings warrants, issued in connection with the senior discount
notes in 1997, in exchange for warrants to purchase shares of our Series A
preferred stock, which new warrants contain substantially identical terms as the
KNOLOGY Holdings' warrants.
In connection with the 1997 units offering, KNOLOGY Holdings completed an
equity private placement in which KNOLOGY Holdings issued approximately $32.2
million of preferred stock. A portion of the proceeds from this private
placement were used to repay approximately $11.0 million in borrowings from
SCANA Communications, Inc. and an additional $11.0 million of debt incurred by
KNOLOGY Holdings to finance the purchase of its cable television systems in
Montgomery, Alabama and Columbus, Georgia in 1995. During 1998, ITC Holding
repurchased all shares of KNOLOGY Holdings' preferred stock owned by KNOLOGY
Holdings' stockholders other than the AT&T venture funds.
On December 22, 1998, KNOLOGY Holdings entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp. The credit facility allows KNOLOGY Holdings to borrow up
to five times a certain individual subsidiary's annualized consolidated adjusted
cash flow, as defined in the credit facility agreement. The credit facility may
be used for working
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<PAGE> 47
capital and other purposes, including capital expenditures and permitted
acquisitions. At KNOLOGY Holdings' option, interest will accrue based on either
the prime or federal funds rate plus applicable margin or the LIBOR rate plus
applicable margin. The applicable margin may vary from .50% to 2.50% based on
the leverage ratio of KNOLOGY Holdings. The credit facility contains a number of
covenants including, among others, covenants limiting the ability of KNOLOGY
Holdings and its subsidiaries to:
- incur debt;
- create liens;
- pay dividends;
- make distributions or stock repurchases;
- make certain investments;
- engage in transactions with affiliates;
- sell assets; and
- engage in mergers and acquisitions.
The credit facility also includes covenants requiring compliance with
certain operating and financial ratios on a consolidated basis, including the
number of revenue generating units and average revenue per subscriber. KNOLOGY
Holdings is currently in compliance with these covenants, however, there are no
assurances that KNOLOGY Holdings will remain in compliance. Should KNOLOGY
Holdings not be in compliance with the covenants, KNOLOGY Holdings would be in
default and would require a waiver from the lender. In the event the lender
would not provide a waiver, amounts outstanding against the facility could be
payable to the lender on demand. A change of control of KNOLOGY Holdings, as
defined in the credit facility agreement, would constitute a default under the
covenants. The distribution does not constitute a change of control of KNOLOGY
Holdings under the credit facility agreement.
The maximum amount currently available under the credit facility at
December 31, 1999 was approximately $23 million, assuming compliance with all of
the operating and financial covenants. As of December 31, 1999, $19 million of
the $23 million currently available had been drawn against the credit facility.
We obtained an aggregate of approximately $39.4 million from ITC Holding
and its subsidiary InterCall during November 1999 and January 2000.
Approximately $9.6 million of these advances was advanced to us in November
1999. This loan was converted into 2,029,724 shares of Series A preferred stock
in November 1999. Another $29.7 million loan was made in January 2000. The loan
bore interest at an annual rate of 11.875% and had a maturity date of March 31,
2000. In February 2000, the loan was converted into options to purchase up to
6,258,036 shares of our Series A preferred stock.
In February 2000, we issued to qualified investors in an equity private
placement 21,180,131 shares of our Series B preferred stock at a purchase price
of $4.75 per share,
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<PAGE> 48
for aggregate proceeds of approximately $100.6 million. The investors included
current stockholders, new institutional investors and certain officers of our
Company in the amounts of $10,499,997, $89,500,000 and $605,625, respectively.
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 $9 million to fund
operating losses and approximately $131 million for capital expenditures during
2000. The $131 million includes approximately $70 million related to the
construction of networks in our existing markets. The remainder primarily
relates to the purchase of equipment for customer premises, such as cable boxes,
information systems and the commencement of the construction of networks in
additional markets. Failure to have access to additional funds during 2000 could
require us to delay some of our construction plans, delay preliminary efforts in
new markets and possibly require us to restrict or reduce the level of
operations in some markets.
We presently estimate the cost to complete construction of the networks in
our existing markets to be approximately $170 million, of which approximately
$70 million would be expended during 2000. We currently expect that if
sufficient funds are raised, the construction of our networks in our existing
markets would be substantially completed during 2002.
We presently expect that present cash reserves, cash flow from operations,
funding obtained through the existing KNOLOGY Holdings credit facility 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
franchise agreements, which could adversely affect us, or may just limit our
growth within these markets.
We plan to expand to additional cities in the southeastern United States.
We estimate the cost of constructing networks and funding initial subscriber
equipment in additional new cities at approximately $75 to $100 million per
100,000 homes. The actual costs of each new market may vary significantly from
this range and will depend on the number of miles of network to be constructed,
the geographic and demographic characteristics of the city, costs associated
with the cable franchise in each city, the number of subscribers in each city,
the mix of services purchased, the cost of subscriber equipment we pay for or
finance and other factors. We will need additional financing to expand into
additional cities, for new business activities or in the event we decide to make
additional acquisitions. We expect to raise this capital through private and
public debt offerings and private and public equity offerings, although there is
no assurance that this financing will be available on terms favorable to us. If
we are not successful in
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<PAGE> 49
raising additional capital, we will not be able to expand to additional cities
as planned. The schedule for our planned expansion will depend upon the
availability of sufficient capital. Definitive decisions on which cities will be
chosen for expansion are not expected to be made until this capital has been
raised.
In connection with our spin-off by ITC Holding, which was completed on
February 7, 2000, we entered into a tax separation agreement with ITC Holding.
In the agreement, we made representations and covenants that impose limitations
on our future actions. Because we could have substantial liability, up to $50
million, under the tax separation agreement if we breach our representations and
covenants, we could be discouraged from entering into transactions that might
result in a breach. We might not pursue any transaction that would be presumed
to be part of a plan or series of related transactions which results in any
cumulative 50% change of ownership within the four-year period beginning two
years before the date of our spin-off by ITC Holding. Transactions that could
involve a possible breach include an actual or constructive change of control,
exceeding limits on the raising of equity capital or the use of our stock to
acquire other companies. We may have to forego some growth opportunities that
may occur during the two years subsequent to the spin-off, until February 7,
2002, because of our representations and covenants.
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. Our only borrowings subject to market conditions are our borrowings
under our credit facility which are based on either a prime or federal funds
rate plus applicable margin or LIBOR plus applicable margin. Any changes in
these rates would affect the rate at which we could borrow funds under our bank
credit facility. A hypothetical 10% increase in interest rates on our variable
rate bank debt for a duration of one year would increase interest expense by an
immaterial amount.
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OUR BUSINESS
We are a rapidly-growing facilities-based provider of bundled broadband
communications services to residential and small business customers in the
southeastern United States. Our current service offerings include cable
television, local and long-distance telephone and high-speed Internet access. We
deliver our services through advanced hybrid fiber/coaxial networks and believe
that our capability to deliver multiple services to any given customer provides
us with a competitive advantage. Our strategy is to become the leading
single-source provider of video, voice and data services to residential and
small business customers in each of our markets by offering individual or
bundled service options through our integrated network, which includes "last
mile" connectivity. We believe that we are one of the first facilities-based
providers of bundled video, voice and data services to focus on the residential
and small business markets in the United States, and that we are the first
competitive provider of these services in our target markets.
Our initial hybrid fiber/coaxial networks are in select mid-sized markets
in the southeastern United States, including: Huntsville and Montgomery,
Alabama; Panama City, Florida; Augusta and Columbus, Georgia; and Charleston,
South Carolina. We entered these markets based on specific criteria, including
favorable demographic profiles, population densities and our ability to be the
first provider of bundled broadband services. In each of these markets, we
provide a full suite of analog and digital cable television, local and
long-distance telephone and high-speed Internet access services. We also
currently provide local telephone services and broadband services throughout the
Georgia/Alabama border area known as the valley, which includes Lanett and
Valley, Alabama and West Point, Georgia.
We plan to continue to expand our network into additional mid- to
large-sized markets in the southeastern United States. We have been awarded a
franchise in Knoxville, Tennessee, and have applied for franchises in Nashville,
Tennessee and in Lexington and Louisville, Kentucky. If we are awarded these
franchises, our total market territory will increase from approximately 645,000
homes to more than 1.25 million homes. We plan to selectively expand into new
markets thereafter. Our strategy is to capitalize on competitive opportunities
in selected markets where factors such as market demographics and the aging
infrastructure of the incumbent service providers' network facilities combine to
create a particularly attractive opportunity to develop, own and operate
advanced hybrid fiber/coaxial networks.
Our advanced hybrid fiber/coaxial networks are designed with sufficient
capacity to meet the growing demand for high-speed and high-bandwidth video,
voice and data services. Our networks also have a significant amount of excess
capacity that will be available for the introduction of new products. To
optimize the utilization of our network and our return on invested capital, we
also provide access to our networks and various network-related services to
other telecommunications carriers. We refer to these services as broadband
carrier services. Other Internet service providers lease our broadband carrier
services to provide high-speed Internet access, and other telephone companies
also lease our broadband carrier services.
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Because we deliver a variety of services to our customers, we report the
total number of connections for video, voice and data services. For example, a
single customer who purchases cable television, local telephone and Internet
access services would count as three connections. From December 31, 1997 to
December 31, 1999, the number of connections for video, voice and data services
increased more than 142% from 57,234 to 138,713. As of December 31, 1999, our
network passed 305,773 homes and we had a total of 138,713 connections for
video, voice and data services, including 36,879 on-net connections. For the
year ended December 31, 1999, video, voice and data services accounted for 53%,
43% and 4% of our consolidated revenue, respectively.
We have extensive operating experience in the video, voice and data service
industries and in the design, development and construction of telecommunications
facilities, including more than five years of experience operating advanced
broadband networks and more than 100 years of experience operating and upgrading
telephone networks. Our management team is led by Rodger Johnson, our Chief
Executive Officer, and Campbell Lanier, our Chairman and the Chairman of ITC
Holding Company, Inc. Our equity sponsors include funds associated with J. H.
Whitney & Co., SCANA Communications Holdings, The Blackstone Group, South
Atlantic and AT&T Ventures.
OUR STRATEGY
Our goal is to become the leading provider of broadband communication
services to residential and small business customers in our target markets. To
achieve this objective, we are pursuing the following strategies:
- Exploit the "Last Mile" Bottleneck. Existing local networks are
typically low-capacity, single-service facilities without the bandwidth
for multiple and/or new bandwidth intensive services. Investment in the
local network, or "last mile" has not generally kept pace with other
industry and technological advances thereby creating an opportunity to
provide high-speed local connectivity to residential and small business
customers. We seek to be the first provider of bundled broadband services
to residential and small business customers in each of our target
markets.
- Continue Constructing Advanced Interactive Broadband Networks. By
designing, constructing and operating our own high-capacity, interactive
broadband networks, we can provide our residential and small business
customers a wide range of high-quality broadband communications services.
Our advanced hybrid fiber/coaxial networks are designed to provide
sufficient capacity to meet the growing demand for high-speed,
high-capacity video, voice and data services. Our networks also have a
significant amount of excess capacity to accommodate new products and
technologies which will be available for the introduction of new
products. We believe that this gives us a competitive advantage over
cable, telephone and wireless systems that do not have such capacities.
In addition, we believe our networks generally provide superior signal
quality and network reliability relative to the typical networks of the
incumbent service providers.
- Offer Bundled Services. We believe that by offering high-quality video,
voice and high-speed, always-on data communications services to our
customers in product
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bundles, 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 are attractive, particularly since most of our
prospective customers presently buy services from multiple sources. In
addition, by bundling services, we can reduce our customer acquisition
and installation costs, increase our pricing flexibility and increase
customer retention.
- Be First To Market Broadband Communications Services. We believe that
we are the first provider of a bundled video, voice and data services
package in our existing markets, and we intend to be the first to offer a
similar services package in each new market that we enter. By penetrating
cities with broadband services before our competitors, we may be able to
realize benefits in network construction, rights-of-way and brand
recognition, which may be limited or more expensive for later entrants.
- Target Attractive Mid-Sized Markets. We intend to expand our operations
to southeastern markets that have the size, demographics and geographical
location suitable for our business strategy. We plan to target cities
that have the following characteristics, among others:
- an average of at least 70 homes per mile;
- at least 100,000 households; and
- cities where we believe we have the opportunity to capture a
substantial number of customers and be the leading provider of
bundled communications services.
We have been recently granted a franchise in Knoxville, Tennessee and
currently have franchise applications pending in Nashville, Tennessee and
Lexington and Louisville, Kentucky.
- Provide Broadband Carrier Services. We lease unused capacity on our
networks to local and long-distance telephone companies, Internet service
providers and other integrated services providers on a wholesale basis.
Our entry into a local market with a newly constructed high-capacity
network offers other service providers a reliable and cost competitive
alternative to data transmission services provided by the incumbent
provider. These leases generate incremental revenues in addition to those
derived from the sale of data transmission services to residential and
small business customers. We believe that we have a competitive advantage
due to the high-quality of our networks and the fact that they pass
substantially every home and business in our service areas.
OUR INTERACTIVE BROADBAND NETWORKS
Our interactive broadband networks are:
- high-speed and high-capacity;
- two-way interactive, which means that the customers have the ability to
send and receive signals at the same time; and
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- hybrid fiber/coaxial networks, which means that the network is made up of
a combination of high-capacity fiber-optic cables and traditional coaxial
cables.
Our hybrid fiber/coaxial network is designed using redundant fiber-optic
cables. Redundant cables increase reliability by providing an alternate route
for signals to travel if network problems arise. By comparison, most traditional
cable television systems do not have significant redundant cables. In addition,
we provide power to our system from locations along the network called hub
sites, each of which is equipped with a generator and battery back-up power
source to allow service to continue in a power outage.
Our interactive broadband networks can support numerous channels of basic
and premium cable television services, telephone services, Internet access and
other broadband communications services. Our networks have extra capacity, so we
can add new services as content and technology become available.
We offer local telephone service over these networks in much the same way
local phone companies provide service. We provide dial tone service and install
a network interface box outside a customer's home. We may add wiring inside the
premises as well. We can offer multiple lines of telephone service. Our networks
interconnect with those of other local phone companies through a nine-state
interconnection agreement with BellSouth Telecommunications, Inc. We provide
long distance service using leased facilities from other telecommunications
service providers. We have entered into an agreement with Business Telecom, Inc.
under which:
- we lease a portion of Business Telecom's long distance telephone
facilities; and
- Business Telecom provides us with call switching services and operator
and directory assistance.
This agreement with Business Telecom expires in September 2000. We have a
minimum annual purchase commitment of $50,000 under this agreement which we have
always met or surpassed. We have entered into an agreement with ITC DeltaCom
under which:
- we lease a portion of ITC DeltaCom's long distance telephone and Internet
facilities; and
- ITC DeltaCom provides us with call switching services and operator and
directory assistance.
This agreement with ITC DeltaCom expires in May 2000. We do not have a
minimum purchase commitment under this agreement.
We provide high-speed Internet access services using high-speed cable
modems in much the same way customers currently receive Internet services over
modems linked to the local telephone network. The cable modems we presently use
are typically 50 times faster than regular phone dial-up modems. Our customer's
cable line with cable modem connects directly into the Internet. The Internet
connection is always active and there is no need to dial up for access to the
Internet or wait to connect through a port leased by an Internet service
provider.
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ITC DeltaCom provides us with the technical Internet services that allow us
to offer Internet access to our customers. ITC DeltaCom is an affiliate of our
company. We believe that the terms of our agreements with ITC DeltaCom are
comparable to what we could obtain for similar services from an unaffiliated
company.
Since the cable equipment industry is a consolidated industry, there are
relatively few manufacturers of cable equipment. We purchase digital cable
equipment from one supplier. This supplier has informed us that it may decide
not to sell equipment to us in some new markets. We are currently in discussions
with this supplier and are optimistic that this supplier will sell equipment for
all of our new markets. If we are unable to resolve this issue with this
supplier favorably or are unable to identify an alternate source of digital
cable equipment, our ability to expand into some new markets may be impaired.
OUR BROADBAND COMMUNICATIONS SERVICES
Cable Television. We offer our customers three types of cable television
services: expanded basic, premium, and digital. Customers generally pay fixed
monthly fees for cable programming and premium television services, which
constitute our principal sources of revenue.
Most customers choose to subscribe to expanded basic cable service. We call
this service expanded basic because it includes many more channels than
traditional basic cable service. Our expanded basic cable service consists of
approximately 65-75 channels of programming, including:
- television signals from local broadcast stations;
- television signals from so-called super stations such as WGN (Chicago);
- numerous satellite-delivered non-broadcast channels such as CNN, MTV,
ESPN, The Discovery Channel and Nickelodeon;
- displays of information featuring news, weather, stock and financial
market reports; and
- public, government and educational access channels.
We offer a variety of premium services for an extra monthly charge. Premium
services include channels with feature motion pictures such as HBO, Showtime and
Cinemax or other special channels. We also provide our customers:
- access to additional channels offering pay-per-view feature movies, live
and taped sports events, concerts and other special features which
involve a charge for each viewing;
- access to home shopping networks; and
- specialty services such as digital audio service.
Programming for our cable television systems comes from over 70 national
and local television networks. Since January 1, 1996, our arrangements with many
of these
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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 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
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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 EarthLink, Inc., a large Internet service provider of which
ITC Holding is a large stockholder, which allows EarthLink to offer high-speed
Internet access to its customers in Montgomery, Alabama using our network. We
entered into a similar agreement with A World of Difference, Inc., in August
1999 for the Charleston area.
Future Broadband Communications Services. We believe that our interactive
broadband networks may enable us to provide additional broadband services in the
future, including:
- Interactive energy management services in partnership with power
companies, which allow customers to monitor energy usage and cost online;
- Security services, including closed-circuit television security
monitoring and alarm systems;
- Voice transmission using the Internet, which integrates traditional
telephone functions with Internet-based technology; and
- High-speed, high-capacity transmission of data using advanced transfer
protocols, such as the asynchronous transfer mode method of transmission.
MARKETS AND SUBSCRIBERS
Current Markets
Our interactive broadband networks currently serve:
- Montgomery, Alabama;
- Huntsville, Alabama;
- Columbus, Georgia;
- Augusta, Georgia;
- Charleston, South Carolina;
- Panama City, Florida; and
- a rural area on the Georgia/Alabama border known as the valley.
We provide video, telephone and Internet services over a broadband network
in Montgomery, Huntsville, Columbus, Augusta, Charleston and Panama City. In the
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valley area, we provide telephone service over a traditional copper wire
telephone network and video and Internet services over a broadband network.
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 cities in the southeastern United States.
We plan to target cities that have the following characteristics, among others:
- an average of 70 homes per mile;
- at least 100,000 households; and
- cities where we believe we have the opportunity to capture a substantial
number of customers and be the leading provider of bundled communications
services.
NETWORK CONSTRUCTION AND OPERATIONS
Network Construction
With the exception of the Georgia/Alabama border area where we maintain our
own construction crews, we use contractors for the construction of our networks,
including both the laying of underground cable and attaching aerial cable to
utility poles. We serve as the manager of the construction process, directing
and supervising the various construction crews. We have 59 employees dedicated
to monitoring and facilitating the construction of our networks. 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 four 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.
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Franchises
Cable television systems and local telephone systems generally are
constructed and operated under the authority of nonexclusive franchises, granted
by local and/or state governmental authorities. Franchises typically contain
many conditions, such as:
- time limitations on commencement and completion of system construction;
- customer service standards;
- minimum number of channels; and
- the provision of free service to schools and certain other public
institutions.
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 15 year terms, and we expect
our franchises to be renewed by the relevant franchising authority before or
upon expiration.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the relevant franchising authorities. 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>
TENNESSEE
Knoxville................................................ 10 4/18/2010
Knox County.............................................. 10 3/27/2010
SOUTH CAROLINA
Charleston............................................... 15 4/28/2013
North Charleston......................................... 15 6/12/2013
Charleston County........................................ 15 12/15/2013
Mount Pleasant........................................... 15 12/15/2013
Hanahan.................................................. 15 12/8/2013
Summerville.............................................. 15 2/10/2014
Lincolnville............................................. 15 12/2/2013
Goose Creek.............................................. 15 11/11/2013
Berkeley County.......................................... 15 7/20/2013
GEORGIA
Augusta/Richmond County.................................. 15 1/20/2013
Columbia County.......................................... 11 11/1/2009
Columbus Renewal......................................... 10 3/16/2009
West Point............................................... 15 1/19/2013
</TABLE>
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<TABLE>
<CAPTION>
LOCATION TERM EXPIRATION DATE
- -------- ---- ---------------
<S> <C> <C>
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............................................... 6 3/7/2006
Madison.................................................. 8 (1) 10/22/2006
Madison County........................................... 11(1) 11/20/2009
Redstone Arsenal......................................... * *
Limestone County......................................... 6 5/7/2005
Chambers County.......................................... 15 12/15/2012
Lanett................................................... 15 1/20/2013
Valley................................................... 15 1/12/2013
</TABLE>
- ---------------
(1) This number represents the number of years left under the franchise when we
acquired the franchise in the 1998 Cable Alabama acquisition.
* We are operating in this market under a letter agreement while our franchise
application is pending.
The Cable Communications Policy Act of 1984 also prohibits franchising
authorities from granting exclusive franchises or unreasonably refusing to award
additional franchises covering an existing cable system's service area. This
simplifies the application process for our obtaining a new franchise. This
process usually takes about six to nine months. While this makes it easier for
us to enter new markets, it also makes it easier for competitors to enter the
markets in which we currently have franchises.
SWITCHING
Switches are devices located along the network that direct voice and data
traffic. Our switching equipment allows us to provide enhanced custom calling
services including call waiting, call forwarding and three-way-calling.
Residences and businesses are connected to the switches primarily with copper
lines. We believe our network equipment and infrastructure is in good condition.
Much of our network equipment and infrastructure has been replaced within the
past three years.
Interconnection
We rely on local telephone companies and other companies to connect calls
to users who are not our customers. We have access to BellSouth's telephone
network under a nine-state interconnection agreement. The Telecommunications Act
of 1996 established certain requirements and standards for interconnection
arrangements, and our intercon-
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nection 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."
The key terms of our interconnection agreement with BellSouth are:
- the right to connect to each others facilities;
- the rates we pay each other for handling and delivery of one another's
telephone traffic; and
- the right to attach network facilities to each other's telephone poles
and rights of way.
Under the Telecommunications Act of 1996, BellSouth is required to allow us
to interconnect to their network. Pursuant to the Telecommunications Act and the
terms of our existing agreement, we can either:
- automatically renew our existing interconnection agreement by notifying
BellSouth of our intention to renew within the applicable timeframe:
- negotiate the terms of a new agreement with BellSouth;
- choose another interconnection agreement that BellSouth has with another
telephone company and enter into an interconnection agreement on those
same terms and conditions; or
- accept the default pricing and terms and conditions offered by BellSouth.
We do not plan to renew our current interconnection agreement. Because of
recent FCC regulations we expect to be able to enter into a new interconnection
agreement with better rates. We plan to negotiate our own terms with BellSouth.
BellSouth may not agree to favorable terms since BellSouth is our competitor.
However, if we are not able to negotiate favorable terms, we will select another
interconnection agreement that BellSouth has entered into with another telephone
company and enter into an interconnection agreement with BellSouth using those
terms and conditions.
The terms of our interconnection agreement have also been approved by the
Georgia, Alabama, Florida and South Carolina state public utility commissions.
Our new agreement will be subject to approval by the Georgia, Alabama, Florida
and South Carolina state public utility commissions. Approvals of other state
public utility commissions will be required in connection with the provision of
telephone service in other states.
It is generally expected that the Telecommunications Act of 1996 will
continue to undergo considerable interpretation and implementation over the next
several years, which could have a negative impact on our interconnection
agreement with BellSouth. Our ability to compete successfully in the provision
of services will depend on the timing of such implementing regulations and
whether they are favorable to us.
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SALES AND MARKETING
We believe that we are the first provider of a bundled video, voice and
data broadband communications services package in our current markets, and we
intend to be first to market a similar services package in new cities. We
believe that cost savings on a bundle of services and the advantages of one-stop
shopping will be attractive to new customers, particularly since most of our
prospective customers now buy services from multiple sources. We intend to
emphasize our position as a new communications company that brings competition
and choice to cities where we provide service. We also work to attract new cable
television subscribers in areas in which our network has expanded. Our focus
includes multiple dwelling units, many of which are subject to exclusivity
arrangements with other cable providers that have not yet expired or which
involve more complex arrangements with the property owner.
Cable Television. To attract cable television subscribers in new areas,
we mount extensive marketing campaigns prior to initiation of service with
door-to-door solicitations and flyers followed by direct mail and telemarketing.
We also use these solicitation efforts in our existing markets to encourage
people who previously have not chosen any cable service to use our cable service
or to encourage people who use another cable service to switch to our service.
We have a sales staff in each of our markets, including residential and business
sales managers, sales representatives and customer service representatives. We
use our own installation and repair crews and those of outside contractors to
install new service quickly.
Telephone and Internet. For our telephone and Internet marketing, we have
focused on subscribers of our cable television services through direct mail,
door-to-door solicitations, flyers and telemarketing. We offer our cable
television customers discounted rates for telephone service and high-speed
Internet service. We emphasize the cost savings of a bundle of services. We also
provide high-speed Internet access to certain Internet service providers who in
turn resell the service to their customers. We have sales managers for our
telephone and Internet services, and sales representatives focusing on bundled
services.
Customer Service. Customer service is an essential element of our
operations and marketing, and we believe our quality and responsiveness
differentiates us from our competitors. A significant number of our employees
are dedicated to customer service activities, including
- order taking;
- customer activations;
- billing inquiries and collections;
- service upgrades;
- provision of customer premises equipment; and
- administration of our customer satisfaction program.
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In addition, we provide 24-hour customer service, operate customer phone
centers in each of our service areas, and operate a back-up customer phone
center in West Point, Georgia. We monitor our networks 24 hours a day, seven
days a week and strive to resolve problems prior to a customer being aware of
any service interruptions.
COMPETITION
Other Cable Systems
Other cable television operations exist in each of our current markets. Our
competitors include AT&T Cable Services, Comcast Cable Communications, Time
Warner Cable, Mediacom and Charter Communications. We compete with these
competitors on terms of pricing and programming content, including the number of
channels and the availability of local programming. We obtain our programming by
entering into contracts or arrangements with cable programming vendors. A cable
programming vendor may enter into an exclusive arrangement with one of our cable
television competitors. This would create a competitive advantage for the cable
television competitor by restricting our access to programming. Each of AT&T
Cable Services, Comcast Cable Communications and Time Warner Cable have entered
into exclusivity arrangements with the WeB channel, which is the distribution
channel for WB programming, in different markets. We provide programming in each
of these markets as well, and these exclusivity arrangements restrict our access
to programming.
We expect that we will have competition with other cable television
providers in each of our future markets. In addition, Federal law prohibits
cities from granting exclusive cable franchises and from unreasonably refusing
to grant additional, competitive franchises. This makes it easier for
competitors to enter our markets. In addition, an increasing number of cities
are considering the feasibility of owning their own cable systems in a manner
similar to city-provided utility services.
A continuing trend toward business combinations and alliances in the cable
television area and the telecommunications industry as a whole may create
significant new competitors for us. This trend toward business combinations may
be shrinking the number of attractive acquisition targets.
Other Television Providers
Cable television distributors may, in certain markets, compete for
customers with other video programming distributors and other providers of
entertainment, news and information. The competitors in these markets include:
- broadcast television; and
- satellite and wireless cable systems.
We compete with these competitors on terms of pricing and programming content,
including the number of channels and the availability of local programming. We
often are not the first provider of video programming in our market, and we have
to compete with other companies that have long-standing customer relationships
with the residents in these areas. The Telecommunications Act of 1996 may create
more competition for
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current cable television distributors, as it allows local telephone companies to
provide video services in their local service areas.
Alternative methods of distributing the same or similar video programming
offered by cable television systems exist. Congress and the FCC have encouraged
these alternative methods and technologies in order to offer services in direct
competition with existing cable systems. In addition to broadcast television
stations, we compete with other multichannel program service providers.
We encounter competition from direct broadcast satellites systems that
transmit signals to small dish antennas owned by the end-user. DirecTV and
Echostar offer multichannel programming through high power communications
satellites to a dish antenna with a diameter of only approximately 18 inches.
Although satellite television providers presently serve a relatively small
percentage of pay television subscribers, their share has been growing steadily.
Competition from direct broadcast satellites could become substantial as
developments in technology increase satellite transmitter power and decrease the
cost and size of equipment. The Intellectual Property and Communications Omnibus
Reform Act of 1999 permits satellite carriers to carry local television
broadcast stations, is expected to enhance satellite carriers' ability to
compete with us for subscribers. As a result, competition from these companies
may increase.
Wireless cable represents another type of video distribution service. These
systems deliver programming services over microwave channels to subscribers who
have a special antenna. Wireless cable systems are less capital intensive, are
not required to obtain local franchises or pay franchise fees, and are subject
to fewer regulatory requirements than cable television systems. Although there
are relatively few systems in the United States right now, many markets have
been licensed or tentatively licensed. The FCC has granted the use of certain
frequencies to these services and expanded the channels reserved for educational
purposes. The FCC's actions enable a single entity to develop a wireless cable
system with up to 35 channels and thus could compete more effectively with cable
television.
We also compete with systems that provide multichannel program services
directly to hotel, motel, apartment, condominium and other multiunit complexes
through a satellite master antenna, which is a single satellite dish for an
entire building or complex. These systems are generally free of any regulation
by state and local governmental authorities. Pursuant to the Telecommunications
Act of 1996, these systems called satellite master antenna television systems,
are not commonly owned or managed and do not cross public rights-of-way do not
need a franchise to operate.
The Telecommunications Act of 1996 eliminated many restrictions on local
telephone companies offering video programming, and we may face increased
competition from them. Several major local telephone companies, including
BellSouth, have announced plans to provide video services to homes.
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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.
We continue to expect to face intense competition in providing our
telephone and related telecommunications services. The Telecommunications Act of
1996 allows service providers to enter markets that were previously closed to
them. Incumbent local telephone carriers are no longer protected from
significant competition in local service markets. In addition, under certain
circumstances regional Bell operating companies may enter the long distance
market. These provisions blur the distinctions that previously existed between
local and long distance services.
One major impact of the Telecommunications Act of 1996 may be a trend
toward the use and acceptance of bundled service packages. As a result, we will
be competing with:
- incumbent local telephone companies such as BellSouth as well as other
competitive local telephone companies;
- traditional providers of long distance services such as AT&T, MCI
WorldCom and Sprint; and
- other providers of cable television service such as AT&T Cable Services,
Comcast Cable Communications, Time Warner Cable, Mediacom and Charter
Communications, Inc.
Our ability to compete successfully will depend on the attributes of the overall
bundle of services we are able to offer, including our price, features, and
customer service.
We compete with Business Telecom and ITC DeltaCom in providing telephone
services to business customers. We purchase services from Business Telecom and
ITC DeltaCom. Our agreements with Business Telecom and ITC DeltaCom are
described above under the heading "-- Our Interactive Broadband Networks."
Wireless telephone service such as cellular and PCS currently is viewed by
consumers as a supplement to, not a replacement for, traditional telephone
service. Wireless service generally is more expensive than traditional local
telephone service and is priced on a usage-sensitive basis. In addition, the
transmission quality of wireless service is not comparable to wireline service.
However, in the future the rate and quality differential between wireless and
traditional telephone service may decrease and lead to more competition between
providers of these two types of services.
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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.
EarthLink, a large Internet service provider that purchases Internet
related services from us, is also a competitor.
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
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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.
From time to time, federal and state legislators propose legislation that
could affect our business, either beneficially or adversely, such as by
increasing competition or affecting the cost of its operations. Additionally,
the FCC and state regulatory bodies, may adopt rules, regulations or policies
that may affect our business. We cannot predict the impact of such legislative
actions on its operations. The following description of certain regulatory
factors does not purport to be a complete summary of all present and proposed
legislation and regulations pertaining to our operations.
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 Act.
Among other things, the Cable Communications Policy Act of 1984 affirmed the
right of franchising authorities to award one or more franchises within their
jurisdictions. It also prohibited non-grandfathered cable television systems
from operating without a franchise in such jurisdictions. The Cable
Communications Policy Act of 1984 provides that in granting or renewing
franchises, franchising authorities may establish requirements for cable-related
facilities and equipment, but may not establish or enforce requirements for
video programming or information services other than in broad categories.
Cable Television Consumer Protection and Competition Act of 1992
The Cable Television Consumer Protection and Competition Act of 1992
permitted a greater degree of regulation of the cable industry with respect to,
among other things:
- rates for cable programming services;
- program access and exclusivity arrangements;
- access to cable channels by unaffiliated programming services;
- terms and conditions for the lease of channel space for commercial use by
parties unaffiliated with the cable operator;
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- ownership of cable systems;
- customer service requirements;
- requiring cable companies to carry certain television broadcast stations
or to permit television stations to withhold consent for cable systems to
carry their stations;
- technical standards; and
- cable equipment compatibility.
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
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. This Act
permitted regional Bell operating companies to apply to the FCC for authority to
provide long distance services. It also included significant changes in the
regulation of cable operators. For example, the FCC's authority to regulate the
cable programming service tier rates of all cable operators expired on March 31,
1999. The legislation also:
- repeals the anti-trafficking provisions of the Cable Television Consumer
Protection and Competition Act of 1992, which required cable systems to
be owned by the same person or company for at least three years before
they could be sold to a third party;
- limits the rights of franchising authorities to require certain
technology or to prohibit or condition the provision of
telecommunications services by the cable operator;
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- 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
imposition of fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses. A brief summary of certain federal regulations follows.
Rate Regulation. The Cable Television Consumer Protection and Competition
Act of 1992 authorized rate regulation for certain cable communications services
and equipment in communities where the cable operator is not subject to
effective competition. The Cable Television Consumer Protection and Competition
Act of 1992 requires the FCC to resolve complaints about rates for cable
programming service tier services and to reduce any such rates found to be
unreasonable. It also limits the ability of many cable systems to raise rates
for basic services. Cable services offered on a per channel or on a per program
basis are not subject to rate regulation by either franchising authorities or
the FCC. Notwithstanding the above, the Telecommunications Act of 1996
deregulated cable programming service rates as of March 31, 1999. After March
31, 1999, only the basic tier of service, which does not include the expanded
basic tier of service, and equipment used to receive the basic tier of service
remains subject to rate regulation.
The Cable Television Consumer Protection and Competition Act of 1992
requires communities to certify with the FCC before regulating basic cable
rates. The FCC's rate regulations do not apply where a cable operator
demonstrates that it is subject to effective competition. We meet the FCC
definition of effective competition in the areas that we currently serve. To the
extent that any municipality attempts to regulate our basic rates or equipment,
we believe we could demonstrate to the FCC that our systems all face effective
competition and, therefore, are not subject to rate regulation.
Carriage of Broadcast Television Signals. The Cable Television Consumer
Protection and Competition Act of 1992 established signal carriage requirements.
These requirements allow commercial television broadcast stations that are local
to a cable system to elect every three years whether to require the cable system
to carry the station
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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
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
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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 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
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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
stopped 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
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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 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
program distributor notice that it intends to permit another program distributor
to provide service there. The 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
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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"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable television systems to their subscribers.
Internet Service Providers. A number of Internet service providers have
requested that the FCC and state and local officials adopt rules requiring cable
operators to provide unaffiliated Internet service providers with direct access
to the operators' broadband facilities on the same terms as the operator makes
those facilities available to affiliated Internet service providers. To date the
FCC has rejected these unbundling proposals, but a number of local franchising
authorities have imposed this type of requirement on cable operators. Litigation
regarding these unbundling requirements is pending. AT&T recently announced that
it would open its systems to competing Internet service providers, including
EarthLink, with which it already has entered into an agreement. At this time it
is uncertain whether these requirements lawfully may be imposed on cable
operators, or how pervasive they ultimately may be if upheld in court.
Regulatory Fees and Other Matters. The FCC requires payment of annual
regulatory fees by the various industries it regulates, including the cable
television industry. In 1997, cable television systems were required to pay
regulatory fees of $0.54 per subscriber. In 1998, the fee was $0.44 per
subscriber. In 1999, the fee was $0.48 per subscriber. Per-subscriber regulatory
fees may be passed on to subscribers as external cost adjustments to rates for
basic cable service. Fees are also assessed for other FCC licenses, including
licenses for business radio, cable television relay systems and earth stations.
These fees, however, may not be collected directly from subscribers as long as
the FCC's rate regulations remain applicable to the cable system.
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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. KNOLOGY Holdings is classified by the FCC as a
non-dominant carrier with respect to both its domestic interstate and
international long distance carrier services and its competitive local exchange
carrier services. As a non-dominant carrier, its 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.
KNOLOGY Holdings has filed tariffs with the FCC for our domestic interstate and
international long distance services, interstate access services and interstate
operator services.
Valley Telephone and Interstate Telephone are regulated by the FCC as
dominant, rather than non-dominant carriers. As dominant carriers, Valley
Telephone and Interstate Telephone must file tariffs with the FCC and must
provide the FCC with notice prior to changing their rates, terms or conditions
of interstate services. Valley Telephone concurs in tariffs filed by the
National Exchange Carrier Association, while Interstate Telephone has its own
tariffs on file with the FCC.
Interconnection. The Telecommunications Act of 1996 establishes local
telephone competition as a national policy. This Act preempts laws that prohibit
competition for
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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.
The Telecommunications Act of 1996 includes an exemption from
interconnection requirements for rural telephone companies. Under this
exemption, a competitor is not entitled to interconnect with a rural telephone
company absent a finding by the appropriate state commission that the request is
not unduly economically burdensome. Both Valley Telephone and Interstate
Telephone are considered rural telephone companies under the Telecommunications
Act of 1996, and the Alabama Public Service Commission has determined that these
companies should be exempt from the interconnection requirements of the
Telecommunications Act of 1996 at least through June 2001.
Number Portability. Another new federal statute requires that all local
telephone service carriers provide customers with the ability to retain, at the
same location, existing telephone numbers without impairment of quality,
reliability or convenience. This number portability will remove one barrier to
entry faced by new competitors, which
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would otherwise have to persuade customers to switch local service providers
despite having to change telephone numbers. The FCC ordered permanent number
portability to be made available in the 100 largest metropolitan areas by
December 31, 1998. Number portability is available in all of our required
markets. While number portability benefits our competitive local exchange
carrier operations, it represents a burden to Valley Telephone and Interstate
Telephone. At this time, we are unable to predict the impact, if any, of
possible number portability delays or complications in our service territories.
Universal Service and Access Charge Reform. The FCC has adopted rules
implementing the universal service requirements of the Telecommunications Act of
1996. Pursuant to those rules, all telecommunications providers must contribute
a small percentage of their telecommunications revenues to a newly established
Universal Service Fund. There is an exemption for providers whose contribution
would be less than $10,000 in a particular year. Interstate Telephone and Valley
Telephone presently contribute to the fund, and we expect that KNOLOGY Holdings
will be required to start contributing in 2000. We can not be certain whether we
will be able to either recover the costs of fund contributions from our
customers or to receive offsetting fund disbursements.
The FCC presently is in the process of reducing access charges imposed by
telephone companies for origination and termination of long distance traffic. In
those areas where we use our own or our affiliated cable facilities for our
comprehensive local telephone operations, we are largely unaffected by local
telephone carriers' access charge fluctuations. However, overall decreases in
local telephone carriers' access charges as contemplated by the FCC's access
reform policies would likely put downward pricing pressure on our charges to
domestic interstate and international long distance carriers for comparable
access. Over time, statutory universal service funding obligations, coupled with
the FCC's new access charge regime, could adversely affect us by limiting our
ability to offset our fund contributions through higher charges to domestic
interstate and international long distance carriers for originating and
terminating interstate traffic over our cable facilities.
Regional Bell Operating Company Entry into Long Distance. The
Telecommunications Act of 1996 also establishes standards for regional Bell
operating companies and their affiliates to provide long distance
telecommunications services between a local access and transport area, or LATA,
and points outside that area. Local access and transport areas are geographical
regions in the United States within which a local telephone company may offer
local telephone service. In 1997, BellSouth filed applications with the FCC for
authority to offer in-region, or interLATA services in South Carolina and
Louisiana; in 1998, BellSouth filed a second application with the FCC for
authority to offer such services in Louisiana. In December 1997, the FCC
rejected the South Carolina application. The Louisiana applications were
rejected in February 1998 and October 1998, respectively. Notwithstanding these
decisions, BellSouth likely will file additional applications to offer interLATA
services for other states in its territory, including states in which we provide
these services. Because of its existing base of local telephone service
customers and its extensive telecommunications
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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
- 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 a telephone company alongside
another telephone company's equipment along a network.
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The FCC has taken steps to facilitate competitors' access to lines
connecting customer premises to the operator for purposes of digital subscriber
line deployment. Specifically, the FCC required incumbent local exchange
carriers like Bell South, to permit unaffiliated providers of digital subscriber
line services to use a portion of the lines connecting customer premises to the
operator used for basic telephone service rather that purchasing new lines. In
related proceedings, the FCC adopted rules requiring incumbent carriers to offer
competing carriers access to a number of listed network elements, including
local loops, sub loops, and local circuit switching. Some of the rules
established in these proceedings will not be effective until May 2000. Also in
related proceedings, the FCC adopted rules requiring incumbent carriers to allow
competing carriers to access space in the incumbent's central office, which will
enable competitors to collocate all equipment necessary for interconnection or
access to unbundled network elements. Portions of these proceedings are
currently on remand from a U.S. Court of Appeals, and petitions for
reconsideration are pending before the FCC concerning the collocation and line
sharing proceedings. Hence, the FCC is reviewing these rules, and these rules
are subject to change. Having better collocation arrangements at incumbent local
exchange carriers' main facilities housing telephone network equipment benefits
our competitive local exchange operations. However, the FCC's advanced services
proceeding, inasmuch as it primarily benefits digital subscriber line providers
who compete 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
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- to comply with, and to submit to, state regulatory jurisdiction over
consumer protection policies, complaints, transfers of control and
certain financing transactions.
Generally, state regulatory authorities can condition, modify, cancel, terminate
or revoke certificates of authority to operate in a state for failure to comply
with state laws or the rules, regulations and policies of the state regulatory
authority. Fines and other penalties may also be imposed for such violations.
Valley Telephone and Interstate Telephone are subject to additional
requirements under state law, including rate regulation and quality of service
requirements. In Alabama, both Valley Telephone and Interstate Telephone are
subject to a price cap form of rate regulation. Under price caps, the companies
have limited ability to raise rates for intrastate telephone services, but the
Alabama Public Service Commission does not regulate the rate of return earned by
the companies.
Local Regulation
Occasionally we are required to obtain street use and construction permits
and franchises to install and expand our interactive broadband network using
state, city, county or municipal rights-of-way. Some municipalities where we
have installed or anticipate constructing networks require the payment of
license or franchise fees which are based upon a percentage of gross revenues or
on a per linear foot basis. The Telecommunications Act of 1996 requires
municipalities to manage public rights-of-way in a competitively neutral and
non-discriminatory manner.
EMPLOYEES
At February 29, 2000 we had 759 full-time employees. We consider our
relations with our employees to be good, and we structure our compensation and
benefit plans in order to attract and retain high caliber personnel. We will
need to recruit additional employees in order to implement our expansion plan,
including general managers for each new city and additional personnel for
installation, sales, customer service and network construction. We recruit from
several major industries for employees with skills in voice, video and data
technologies. We do not believe we will have problems retaining personnel with
the necessary qualifications.
PROPERTIES
We own or lease property in the following locations:
<TABLE>
<CAPTION>
LOCATION ADDRESS LEASE/OWN PRIMARY USE
- -------- ------- --------- -----------
<S> <C> <C> <C>
West Point, GA........ 1241 O.G. Skinner Drive Own Corporate Admin. Offices
West Point, GA........ 206 West 9th Street Lease Network Operations Center
Montgomery, AL........ 1450 Ann Street Lease Headend & Technical Offices
Columbus, GA.......... 1701 Boxwood Place Lease Admin. Offices & Headend
Panama City, FL....... 13200 P.C.B. Pkwy Lease Admin. Offices & Headend
Augusta, GA........... 3714 Wheeler Road Own Admin. Offices & Headend
Charleston, SC........ 4506 Dorchester Road Own Admin. Offices and Headend
Huntsville, AL........ 2401 10th Street Own Admin. Offices and Headend
</TABLE>
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In addition to these properties, we also hold operating leases for hub
sites along our network in each market. Our principal physical assets consist of
fiber optic and coaxial broadband network and equipment, located either at the
equipment site or along the network. Our distribution equipment along the
network is generally attached to utility poles we own or use under standard pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. Under our pole
attachment agreements, local public utilities and other pole owners rent us
space on utility poles to attach our network cables and equipment. The rate a
pole owner charges us for space varies, but the rate is generally based upon the
amount of space we rent. See "Business-Legislation and Regulation" for a
discussion of the FCC's regulation of pole attachment rates. Our franchises give
us rights of way for our network. The physical components of the networks
require maintenance and periodic upgrading to keep pace with technological
advances. We believe that our properties, taken as a whole, are in good
operating condition and are suitable for our business operations.
LEGAL PROCEEDINGS
In the normal course of business, we are subject to litigation. However, in
our opinion, there is no legal proceeding pending against us which would have a
material adverse effect on our financial position, results of operations, or
liquidity. We are also party to regulatory proceedings affecting the relevant
segments of the communications industry generally.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and
executive officers. Our board currently consists of ten members and is generally
divided into three classes, with members serving for three-year terms expiring
in the years indicated. Two of our directors have been elected by the holders of
our Series B preferred stock and serve for one-year terms until their successors
have been elected and qualified.
<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRES
- ---- --- -------- -------
<S> <C> <C> <C>
Rodger L. Johnson.............. 52 President, Chief Executive Officer 2002
and Director
Robert K. Mills................ 36 Chief Financial Officer, Vice
President and Treasurer
Felix L. Boccucci, Jr.......... 42 Vice President of Business
Development
Anthony J. Palermo, Jr......... 45 Vice President of Operations
Chad S. Wachter................ 33 Vice President, General Counsel
and Secretary
Thomas P. Barrett.............. 53 Vice President of Information
Technology
Marcus R. Luke, Ph.D........... 44 Chief Technology Officer
James T. Markle................ 40 Vice President of Network
Operations
Bret T. McCants................ 40 Vice President of Network
Construction and Maintenance
Peggy B. Warner................ 48 Vice President of Marketing and
Carrier Sales
Campbell B. Lanier, III(1)..... 49 Chairman of the Board 2002
Richard S. Bodman.............. 61 Director 2000
Alan A. Burgess(1)............. 64 Director 2001
Donald W. Burton(2)............ 55 Director 2001
L. Charles Hilton, Jr.(1)...... 68 Director 2000
William H. Scott, III(2)....... 52 Director 2001
Donald W. Weber(2)............. 63 Director 2002
James R. Matthews.............. 33 Director 2001
Bret Pearlman.................. 33 Director 2001
</TABLE>
- ---------------
(1) Member of the audit committee.
(2) Member of the compensation and stock option committee.
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Rodger L. Johnson was named as our President and Chief Executive Officer
and as a director in October 1999. He has served as the President of KNOLOGY
Holdings and as a director since April 1999 and as its Chief Executive Officer
since June 1999. Prior to joining KNOLOGY Holdings, Mr. Johnson had served as
President and Chief Executive Officer, as well as a Director, of Communications
Central Inc., a provider of 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. Before founding
JKC Holdings, Inc., Mr. Johnson served for approximately eight years as the
President and Chief Operating Officer and as the President and Chief Executive
Officer of Brock Control Systems, Inc., a publicly-held sales and marketing
software provider.
Robert K. Mills has served as our Chief Financial Officer, Vice President
and Treasurer since November 1, 1999. He has worked for ITC Holding since
September 1999 as Vice President of Corporate Development. From 1994 to
September 1999, Mr. Mills served as Vice President -- Treasurer and Strategic
Planning of Powertel, Inc., which provides wireless communications services.
From 1987 to 1994, Mr. Mills practiced accounting at Arthur Andersen LLP. Mr.
Mills received an MBA from Tulane University in 1987 and is a certified public
accountant.
Felix L. Boccucci, Jr. has served as our Vice President of Business
Development since October 1999. He has served as Vice President of Business
Development of KNOLOGY Holdings since August 1997. He served as our Chief
Financial Officer, Treasurer and Secretary from November 1995 through August
1997. In addition, he currently serves as the Chief Financial Officer for
Interstate and Valley Telephone Companies. From October 1994 until December
1995, Mr. Boccucci served as Vice President Finance Broadband of ITC Holding.
Prior to such time, Mr. Boccucci worked for GTE Corporation, a
telecommunications company, which merged with Contel Corporation in March 1991.
From May 1993 to October 1994, he served as a Senior Financial Analyst for GTE.
From 1991 to 1993, Mr. Boccucci served as Financial Director for GTE's Central
Area Telephone Operations. From 1987 to 1991, he was the Assistant Vice
President controller in charge of Contel's Eastern Region Telephone Operations
comprising 13 companies in twelve states.
Anthony J. Palermo, Jr. has served as our Vice President of Operations
since July 1999. Prior to joining KNOLOGY, Mr. Palermo served as a consultant to
Nokia and Optima Technologies from November 1998 through July 1999. From
November 1995 to November 1998, Mr. Palermo was employed at Communications
Central, Inc., where he served as Vice President of Sales, Marketing, and
Operations. Prior to Communications Central, Inc. he spent six years at Brock
Control Systems as Vice President of Operations and Chief Operating Officer. Mr.
Palermo has also spent eleven years in the communications industry with AT&T
Long Lines and RCA-Cylix.
Chad S. Wachter has served as our Vice President, General Counsel and
Secretary since October 1999. He joined KNOLOGY Holdings as its General Counsel
and
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Secretary in August 1998. From April 1997 to August 1998, Mr. Wachter served as
Assistant General Counsel of Powertel, Inc., an affiliate of ITC that operates
cellular and PCS businesses. From May 1990 until April 1997, Mr. Wachter was an
associate and then a partner with Capell, Howard, Knabe & Cobbs, P.A. in
Montgomery, Alabama.
Thomas P. Barrett has served as our Vice President of Information
Technology since October 1999. Prior to joining us, from July 1998 to September
1999, Mr. Barrett served as the President of Quintiles Americas. Quintiles
Americas is a division of Quintiles Inc., a pharmaceutical research company.
From January 1993 to June 1998, Mr. Barrett was employed by Perot Systems as an
account manager. He also served as the human resources director for a period of
time while at Perot Systems. From October 1992 to January 1993, Mr. Barrett
worked for General Research Corporation as an account manager for a software
development project. From August 1963 to September 1999, Mr. Barrett served in
the U.S. Army in a number of command and staff positions and achieved the rank
of Brigadier General.
Marcus R. Luke, Ph.D. has served as our Chief Technology Officer since
October 1999. He has served as the Chief Technology Officer of KNOLOGY Holdings
since August 1997. Prior to this he served as the Vice President of Network
Construction of KNOLOGY Holdings from November 1995 until August 1997, and
Director of Engineering of Cybernet Holding, L.L.C., from May 1995 until
November 1995. Prior to joining KNOLOGY Holdings, Dr. Luke served as Southeast
Division Construction Manager for TCI from July 1993 to May 1995. From July 1987
to June 1993, he served as Area Technical Manager for TCI's southeast area,
which included Montgomery. Dr. Luke worked for Storer Communications Inc. from
1985 to 1987 as Vice President of Engineering. Prior to 1985, he spent 12 years
in various engineering and management positions with Storer Communications Inc.
James T. Markle joined us in October 1999 as our Vice President of Network
Operations. He has served as Vice President of Network Operations for KNOLOGY
Holdings since March 1999. Prior to joining KNOLOGY Holdings, Mr. Markle was
employed by MindSpring Enterprises, Inc. where he served as the Executive Vice
President of Network Operations from March 1998 and as Vice President of Network
Operations from April 1995. Prior to joining MindSpring, from April 1994 until
April 1995, Mr. Markle served as the Director of Technical Support for Concert
Communications Co., a telecommunications company. From August 1990 to April
1994, Mr. Markle served as Senior Manager of Network Operations for MCI
Communications, a telecommunications company. Mr. Markle served in various
operation positions at SouthernNet/Telecom*USA, including Director of Operations
for a multistate region, from July 1985 until July 1990.
Bret T. McCants has served as our Vice President of Network Services since
October 1999. He has served as the Vice President of Network Services of KNOLOGY
Holdings since April 1997. Prior to joining KNOLOGY Holdings, Mr. McCants was a
co-founder of CSW Communications. From January 1996 to April 1997 he served as
CSW Communications, Director of Operations, and from 1994 to 1996, he
participated in the development and managed the deployment of voice, data and
interactive energy
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management equipment to homes in Laredo, Texas. Prior to joining CSW
Communications, Mr. McCants 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 held several positions in the Sales, Marketing and
Engineering departments at Central Power and Light Company.
Peggy B. Warner joined us as our Vice President of Marketing and Carrier
Sales in October 1999. She has been the Vice President of Marketing and Carrier
Sales of KNOLOGY Holdings since January 1998. Prior to joining KNOLOGY Holdings,
from February 1995 to December 1997, Ms. Warner held various positions at SCANA
Communications, Inc., including Manager Sales, Marketing and Customer Service
and General Manager. While at SCANA Communications, Inc., Ms. Warner was
responsible for the company's fiber optic carriers' carrier and 800 MHz trunked
radio lines of business. Prior to that time, from December 1993 to January 1994,
she was an Executive National Accounts Manager with MCI Telecommunications
Corporation where she developed and managed a nationwide Government Systems
regional sales organization. Ms. Warner also held various other sales and
marketing management positions with MCI between May 1986 and January 1995. She
was an Account Manager with AT&T Information Systems between January 1983 and
April 1986, and she held various sales positions with BellSouth prior to 1983.
Campbell B. Lanier, III has been one of our directors and our Chairman of
the Board since our inception. He has served as a director of KNOLOGY Holdings
since November 1995. Mr. Lanier serves as Chairman of the Board and Chief
Executive Officer of ITC Holding and has served as a director of ITC Holding
since the company's inception in 1989. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. Mr. Lanier also is Chairman of the
Board and a director of ITC DeltaCom, Inc., which provides wholesale and retail
telecommunications services; Powertel, Inc., which provides wireless
communications services; EarthLink, Inc., an Internet services provider; and
Vista Eyecare, Inc., a full service optical retailer. Mr. Lanier has served as a
Managing Director of South Atlantic Private Equity Fund, IV, Limited Partnership
since July 1997. He has also served as a director of Helen Keller Eye Research
Foundation since June 1997 and as Chairman since January 2000.
Richard S. Bodman has been one of our directors since December 1999. He has
been a director of KNOLOGY Holdings since June 1996. Mr. Bodman was elected to
KNOLOGY Holdings' board of directors pursuant to a stockholders' agreement under
which AT&T Venture Fund I, L.P. had the right to elect one director to KNOLOGY
Holdings' board. This stockholders' agreement has terminated. Mr. Bodman is
currently the Managing General Partner of AT&T Venture Fund I L.P. From August
1990 to May 1996, Mr. Bodman served as Senior Vice President of Corporate
Strategy and Development for AT&T. Mr. Bodman also is currently a director of
the following public companies: Internet Security Systems, Inc., Tyco
International Inc. and Young and Rubicam Inc.
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Alan A. Burgess has been one of our directors since December 1999. He has
served as a director of KNOLOGY Holdings since January 1999. From 1967 until his
retirement in 1997, Mr. Burgess was a partner with Andersen Consulting. Over his
thirty-year career he held a number of positions as Managing Partner, including
Managing Partner of Regulated Industries from 1974 to 1989. In 1989 he assumed
the role of Managing Partner of the Communications Industry Group. In addition,
he served on Andersen Consulting's Global Management council and was a member of
the Partner Income Committee. Mr. Burgess is also the Chief Financial Officer of
Seventh Wave Technologies, Inc.
Donald W. Burton has been one of our directors since December 1999. He has
been a director of KNOLOGY Holdings since January 1996. Since January 1981, he
has served as Managing General Partner of South Atlantic Venture Fund I, II and
III, Limited Partnerships and Chairman of South Atlantic Private Equity Fund IV,
Limited Partnership. Mr. Burton has been the general partner of The Burton
Partnership, Limited Partnership since October 1979. Since January 1981, he has
served as President of South Atlantic Capital Corporation. Mr. Burton also
serves on the board of directors of several ITC companies, including ITC
Holding, ITC DeltaCom, Inc. and Powertel, Inc. He is a director of the Heritage
Group of Mutual Funds and several private companies. Mr. Burton also serves as a
director of the National Venture Capital Association.
L. Charles Hilton, Jr. has been one of our directors since December 1999.
He has served as a director of KNOLOGY Holdings since KNOLOGY Holdings acquired
the beach cable system in Panama City, Florida in December 1997. Mr. Hilton was
the founder and sole stockholder of Beach Cable, Inc., and served as its Chief
Executive Officer from 1991 to December 1997. Since 1958, Mr. Hilton has served
as Chairman and Chief Executive Officer of Gulf Asphalt Corporation, a general
construction firm. Mr. Hilton has been a partner in the law firm of Hilton,
Hilton, Kolk & Roesch since 1984, and currently serves as Chief Executive
Officer of Hilton, Inc., a family corporation which owns and operates various
commercial buildings in Bay County, Florida. He also is a member of the board of
directors of several private companies.
William H. Scott, III has been one of our directors since our inception,
and he has served as a director of KNOLOGY Holdings since November 1995. He has
served as President of ITC Holding since December 1991 and has been a director
of ITC since May 1989. He also is an officer and director of several other ITC
Holding subsidiaries. In addition, Mr. Scott is a director of Powertel Inc., ITC
DeltaCom, Inc., EarthLink, Inc., Innotrac Corporation, which provides customized
technology-based marketing support services, HeadHunter.NET, Inc., a company
providing online recruiting services to employers, recruiters, and job-seekers,
and NFront, Inc., a provider of full-service Internet banking solutions for
community banks.
Donald W. Weber has been one of our directors since December 1999. He has
served as a director of KNOLOGY Holdings since August 1998. Since 1997, Mr.
Weber has been a consultant and private investor. Since 1995, Mr. Weber served
as President and Chief Executive Officer of ViewStar Entertainment Services,
Inc., a digital satellite
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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.
James R. Matthews has been one of our directors since March 31, 2000. Mr.
Matthews is a General Partner of J. H. Whitney & Co., which he joined in 1994
and where he focuses on making private equity and subordinated debt investments
in the communications industry. Previously, he was with Gleacher & Co. Inc. and
Salomon Brothers Inc. Mr. Matthews is a director of SpectraSite Communications,
Inc., an owner and operator of towers and sites for the wireless communications
industry; ClearSource, Inc., a broadband communications services provider;
Grande Communications, Inc., a broadband communications services provider; and
NewPath Holdings, Inc., a provider of DSL-based communications services. Mr.
Matthews was elected to our board pursuant to a stockholders agreement that
provides J. H. Whitney IV, L.P. will have the right to appoint a director to our
board of directors so long as J. H. Whitney IV, L.P. and its affiliates own at
least 45% of the stock first issued to J. H. Whitney or the stock that such
stock is convertible into.
Bret Pearlman has been one of our directors since March 31, 2000. Mr.
Pearlman became a Senior Managing Director of The Blackstone Group L.P. in
January 2000, and is a member of Blackstone Management Associates III L.L.C., a
general partner of each of Blackstone CCC Capital Partners L.P., Blackstone CCC
Offshore Capital Partners L.P. and Blackstone Family Investment Partnership III
L.P., each of which has invested in us. Mr. Pearlman has been involved in The
Blackstone Group's principal activities since 1989. Mr. Pearlman serves as a
director of American Axle & Manufacturing Holdings, Inc. Mr. Pearlman was
elected to our board pursuant to a stockholders agreement that provides that
Blackstone CCC Capital Partners L.P., Blackstone CCC Offshore Capital Partners
L.P. and Blackstone Family Investment Partnership III L.P. and their respective
affiliates will collectively have the right to appoint a director to our board
of directors so long as they own at least 45% of the stock first issued to such
funds or the stock that such stock is convertible into.
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;
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- 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.
COMPENSATION OF DIRECTORS
Our directors do not receive directors' fees. Directors are reimbursed for
their reasonable out-of-pocket travel expenditures. Our directors are also
eligible to receive grants of stock options under our stock option plan.
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EXECUTIVE COMPENSATION
Our executive officers were appointed in October and November 1999.
However, as most of our executive officers were executive officers of KNOLOGY
Holdings, Inc. immediately prior to our formation, we have set forth below the
compensation received by our executive officers from KNOLOGY Holdings for the
fiscal years ended December 31, 1999, 1998 and 1997.
The following table provides compensation information for our chief
executive officer and former chief executive officer and the most highly
compensated other executive officers whose total annual salary and bonus exceed
$100,000. We will use the term "named executive officers" to refer to these
people later in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
YEAR(1) SALARY BONUS OPTIONS(2) COMPENSATION(3)
------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Rodger L. Johnson........... 1999 $139,617 $ -- 2,000,000 $3,181
President & Chief 1998 -- -- -- --
Executive Officer(4) 1997 -- -- -- --
William E. Morrow........... 1999 160,577 36,877 600,000 5,186
Former President & 1998 134,539 76,800 420,000 --
Chief Executive Officer 1997 102,462 22,602 180,000 --
Felix L. Boccucci, Jr. ..... 1999 111,252 23,949 34,120 5,061
Vice President of 1998 98,250 33,385 30,000 --
Business Development(5) 1997 92,430 9,473 -- --
Bret T. McCants............. 1999 115,962 25,198 94,824 4,308
Vice President of 1998 101,494 29,926 120,000 --
Network Construction 1997 58,847 21,177 42,000 --
And Maintenance
Marcus R. Luke.............. 1999 107,309 23,925 28,120 2,202
Chief Technology Officer 1998 97,307 31,275 90,000 --
1997 90,292 6,102 -- --
Peggy B. Warner............. 1999 110,963 23,502 34,120 5,734
Vice President of 1998 106,396 8,775 150,000 --
Marketing and Sales 1997 -- -- -- --
</TABLE>
- ---------------
(1) As noted above, all of the named executive officers were initially employed
by KNOLOGY Holdings, Inc. The compensation table reflects the compensation
earned from KNOLOGY Holdings.
(2) All options are exercisable for shares of our common stock and reflect the
4:1 exchange ratio of the exchange of KNOLOGY Holdings capital stock for our
capital stock in November 1999.
(3) For fiscal year 1999, includes premiums on term life insurance ($643, $186,
$239, $263, $236, and $375 for Messrs. Johnson, Morrow, Boccucci, McCants,
Luke and Ms. Warner, respectively) and employer matching contributions to
our 401(k) plan ($2,538, $5,000, $4,822, $4,045, $1,966, and $4,999 for
Messrs. Johnson, Morrow, Boccucci, McCants, Luke and Ms. Warner,
respectively).
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(4) Mr. Johnson has served as the president of KNOLOGY Holdings since May 1999
and as its chief executive officer since June 1999.
(5) Mr. Boccucci served as chief financial officer, treasurer and secretary of
KNOLOGY Holdings from November 1995 through August 1997.
1995 STOCK OPTION PLAN
We assumed KNOLOGY Holding, Inc.'s stock option plan in November 1999. Each
outstanding option to purchase stock of KNOLOGY Holdings was converted into an
option to purchase four shares of our common stock at the time we assumed the
stock option plan.
Our stock option plan allows us to grant options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended, as well as non-qualifying options to our key employees
and non-employee directors and those of our subsidiaries. The stock option plan
authorizes the issuance of up to 8,000,000 shares of common stock pursuant to
options granted under the plan. The maximum number of shares subject to options
that may be awarded under the plan to any person is 1,800,000 shares. The
compensation and stock option committee of the board of directors administers
the plan and grants options to purchase common stock.
The exercise price for incentive stock options granted under the stock
option plan must be at least 100% of the fair market value of the common stock
on the date of grant and must be at least 110% to an optionee beneficially
owning more than 10% of the outstanding common stock. The exercise price for
non-incentive stock options granted under the plan must be at least the par
value of the common stock. The maximum option term is ten years, or five years
to an optionee beneficially owning more than 10% of the outstanding common
stock. Options may be exercised at any time after grant except as otherwise
provided in the particular option agreement. There is also a $100,000 limit on
the value of common stock covered by incentive stock options that become
exercisable by an optionee in any year. The board of directors may amend,
suspend or terminate the stock option plan for shares of common stock for which
options have not been granted.
Upon assumption of the KNOLOGY Holdings plan in November 1999, we had
options to purchase 6,674,176 shares of common stock outstanding pursuant to the
stock option plan. As of February 29, 2000 there were options to purchase
6,645,116 shares of common stock outstanding.
1999 LONG-TERM INCENTIVE PLAN
Our board and stockholders approved the KNOLOGY, Inc. 1999 long-term
incentive plan in November 1999. The purpose of the plan is to promote our
success by linking the personal interests of employees, officers and directors
to those of our stockholders. Under our plan, we may grant to our employees,
officers and directors, and those of our subsidiaries, incentive or
non-qualified stock options, stock appreciation rights, performance units,
restricted stock, dividend equivalents, other stock-based awards, or any other
right or interest relating to our stock or cash. The plan authorizes
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the issuance of up to 8,000,000 shares of common stock pursuant to awards. The
maximum number of shares of common stock with respect to one or more options
and/or stock appreciation rights that may be granted during any one calendar
year to any one person is 1,800,000. The maximum fair market value of any other
types of awards that may be received by one person during any one calendar year
under our plan is $2,000,000.
The plan is administered by the compensation and stock option committee of
the board of directors, which has the power to designate participants; determine
the type, number, terms and conditions of awards to be granted; establish rules
and regulations to administer the plan; and make all other decisions necessary
to administer the plan. Awards may have any terms specified by the committee
consistent with the plan, except that the terms of any incentive stock option
must meet the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended.
The committee may condition any award under the plan upon the achievement
of performance goals, based on:
- specified target return, or target growth in return, on equity or assets;
- stock price;
- total stockholder return (stock price appreciation plus reinvested
dividends) relative to a defined comparison group or target over a
specific performance period;
- a specified target relative to, or target growth in, revenue, revenue
generating units, homes passed, cost of service, operating cost, capital
expenses, net income or earnings per share; or
- any combination of the above goals.
If an award is made on a performance basis, the committee must establish goals
at the beginning of the period for which such performance goal relates, and the
committee has the right for any reason to reduce (but not increase) the award,
notwithstanding the achievement of a specified goal.
The board of directors or the committee may at any time terminate or amend
our plan without stockholder approval; but it may condition any amendment on the
approval of stockholders if deemed advisable for tax, securities law or other
reasons. No termination or amendment of our plan may adversely affect any
outstanding award without the written consent of the participant.
As of February 29, 2000, there were options to purchase 324,412 shares of
common stock outstanding pursuant to this stock option plan.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information about option awards made to the
named executive officers during 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE ----------------------
NAME GRANTED FISCAL 1999 PRICE EXPIRATION DATE 5% 10%
- ---- ---------- ------------ -------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rodger L. Johnson.......... 1,020,000 23.04% $2.8325 February 3, 2009 $4,709,314 $7,482,899
President & Chief
Executive Officer 980,000 22.15% $2.8325 August 4, 2009 4,524,636 7,189,452
William E. Morrow.......... 600,000 13.56% $2.8325 February 3, 2009 2,770,185 4,401,705
Former President and
Chief Executive
Officer
Felix L. Boccucci, Jr. .... 14,120 0.32% $2.8325 February 3, 2009 65,192 103,586
Vice President of
Business Development 20,000 0.45% $2.8325 August 4, 2009 92,340 146,724
Bret T. McCants............ 14,824 0.33% $2.8325 February 3, 2009 68,442 108,751
Vice President of Network
Construction and
Maintenance 80,000 1.80% $2.8325 August 4, 2009 369,358 586,894
Marcus R. Luke............. 14,120 0.32% $2.8325 February 3, 2009 65,192 103,586
Chief Technology Officer 14,000 0.32% $2.8325 August 4, 2009 64,638 102,706
Peggy B. Warner............ 14,120 0.32% $2.8325 February 3, 2009 65,192 103,586
Vice President of Sales
and Marketing 20,000 0.45% $2.8325 August 4, 2009 92,340 146,724
</TABLE>
- ---------------
(1) All options are exercisable for shares of common stock and are granted under
the stock option plan. All option share numbers reflect the 4:1 exchange
ratio of the exchange of KNOLOGY Holdings capital stock for our capital
stock in November 1999. Such options generally vest over five years unless
such person's employment is terminated, in which case options that have not
vested at that time will terminate.
(2) Values shown are the result of calculation at assumed 5% and 10%
appreciation rates called for by the Securities and Exchange Commission and
are not intended to forecast possible future appreciation in the market
price of our common stock.
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OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the number of shares covered by both
exercisable and unexercisable options as of December 31, 1999 and the year-end
value of exercisable options as of December 31, 1999 for the named executive
officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodger Johnson.................. -- -- 0 2,000,000 $ 0 $3,840,000
William E. Morrow............... -- -- 90,000 1,110,000 $247,500 $2,344,500
Felix L. Boccucci............... -- -- 52,854 77,334 $145,348 $ 171,349
Brett McCants................... -- -- 21,000 235,824 $ 57,750 $ 509,812
Marcus R. Luke.................. 4,000 $19,000 16,496 123,244 $ 45,364 $ 268,019
Peggy B. Warner................. -- -- 0 184,120 $ 0 $ 403,010
</TABLE>
- ---------------
(1) The value of the unexercised in-the-money options at December 31, 1999 was
calculated using a market price of $4.75 per share.
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 several transactions with
ITC Holding or its affiliates, as discussed below.
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CERTAIN TRANSACTIONS AND RELATIONSHIPS
We were formed in 1998 by ITC Holding Company, Inc. We own 100% of KNOLOGY
Holdings, and 100% of certain other companies, including Interstate Telephone
Company, Valley Telephone Company Globe Telecommunications and ITC Globe. Before
we owned them, each of these companies was owned separately by ITC Holding. ITC
Holding determined that KNOLOGY Holdings and these other companies have parallel
growth in the same markets and that combining their businesses would enhance
their ability to take advantage of the opportunities in these markets. To
accomplish this, ITC Holding formed us and, in November 1999, contributed these
companies to us along with certain other related assets.
KNOLOGY Holdings is our principal subsidiary. ITC Holding formed KNOLOGY
Holdings in 1995. ITC Holdings' percentage ownership in KNOLOGY Holdings fell
below 50% in 1996, but it subsequently reacquired stock in the company, and by
November 1999, it owned 85% of KNOLOGY Holdings which it contributed to us. At
approximately the same time, we offered to exchange our stock for the remaining
stock of KNOLOGY Holdings, as a result of which we now own 100% of KNOLOGY
Holdings. These transactions are described in greater detail below.
ITC Holding is a diversified telecommunications company that owns interests
in many companies that have businesses similar to ours. Because of our
relationship with ITC Holding, we are affiliated with certain of these
companies. Some of them, such as ITC DeltaCom, Inc. and EarthLink, Inc., provide
us with and/or receive from us services and products. We have described the
nature and amount of the business that we do with affiliated companies in
greater detail below.
We have adopted a policy requiring that any material transactions between
us and others affiliated with our officers, directors or principal stockholders
be on terms no less favorable to us than reasonably could have been obtained in
arm's-length transactions with independent third parties.
TRANSACTIONS WITH ITC COMPANIES
Certain of our directors and officers hold or held the following positions
with companies that are affiliated with us:
- Campbell B. Lanier, III, who serves as the Chairman of our board of
directors, also serves as Chairman of the Board and Chief Executive
Officer of ITC Holding Company and all of its subsidiaries including
InterCall, and is also a director of companies that were formerly
subsidiaries of ITC Holding, such as ITC DeltaCom, EarthLink and
Powertel.
- William H. Scott, III, one of our directors, serves as President,
Chief Operating Officer and a director of ITC Holding and all of its
subsidiaries including InterCall, and is also a director of companies
that were formerly subsidiaries of ITC Holding, such as ITC DeltaCom,
EarthLink and Powertel.
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- Donald W. Burton, one of our directors, is a director of ITC Holding,
ITC DeltaCom and Powertel.
- Donald W. Weber, one of our directors, is a director of Powertel.
- Richard S. Bodman, one of our directors, is the managing general
partner of AT&T Ventures, which controls the AT&T venture funds that
own approximately 8.9% and 2.0% of our Series A preferred shares and
Series B preferred shares, respectively.
- Felix Boccucci, our Vice President of Business Development, served as
an executive officer of ITC Holding prior to October 1997.
We are affiliated with all of these companies by reason of our common
stockholder bases and common directorships, and we have a business relationship
with some of them, as described in detail below.
As of February 7, 2000, Campbell B. Lanier, III beneficially owned
approximately 23% of the common stock of ITC Holding, and William Scott and
Donald Burton beneficially owned approximately 1% and 8%, respectively, of the
common stock of ITC Holding. Most of our other officers, directors and
stockholders also owned stock in ITC Holding and, as such, they all received the
same amount of stock on a pro rata basis in the distribution as the rest of the
ITC Holding stockholders.
Certain affiliated companies provide us with various services and/or
receive services provided by us. We feel that our transactions with these
affiliated companies are representative of arms' length transactions.
ITC DeltaCom provides us with wholesale long-distance and related services
and leases capacity to us on certain of its fiber routes. In 1997, 1998 and
1999, these services were worth $589,011, $1,213,533 and $1,769,174,
respectively. During those years, our company provided ITC DeltaCom with local
and long distance telephone, programming and other services worth $386,842,
$639,568 and $698,332, respectively. We received these services from ITC
DeltaCom pursuant to an agreement which expires in May 2000. As of February 29,
2000, Mr. Lanier owned approximately 16% of ITC DeltaCom. Messrs. Lanier and
Scott serve as executive officers and directors of ITC DeltaCom and Mr. Burton
serves as a director of ITC DeltaCom.
We received cellular services from Powertel in 1997, 1998 and 1999 worth
$118,064, $342,696 and $525,664, respectively, and we leased fiber cables to
Powertel during this time worth $519,956, $593,221 and $704,912, respectively.
We lease these fiber cables to Powertel pursuant to a fiber lease agreement
which expires in April 2000. As of February 29, 2000, ITC Holding owned
approximately 25% of Powertel. Messrs. Lanier, Scott and Burton are directors of
Powertel.
We provided services to InterCall, our parent company prior to the
distribution and a wholly owned subsidiary of ITC Holding, in 1997, 1998 and
1999 worth $477,405, $737,204 and $983,310, respectively. We provide these
services to InterCall pursuant to an agreement which expires in July 2004.
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In 1997, 1998 and 1999, we provided local Internet transport services to
EarthLink, a national Internet access provider, worth $132,524,$216,049 and
$325,535, respectively. We provide these services to EarthLink pursuant to an
Internet transport agreement which expires in July 2001. As of February 29,
2000, ITC Holding, through InterCall, owned approximately 8% of EarthLink.
Messrs. Lanier and Scott are directors of EarthLink.
We lease pole space from South Carolina Electric & Gas Co., an affiliate of
SCANA Communications which is one of our stockholders and was a principal
investor in KNOLOGY Holdings in the past, as discussed below. We lease this pole
space pursuant to an annual pole attachment agreement. In 1999, we paid $30,952
under this agreement. In 1998, we purchased fiber optic cables from SCANA
Communications for a total purchase price of $306,530. We lease fiber optic
cables from SCANA Communication pursuant to two operating leases agreement
entered into in the fourth quarter of 1998. The terms of the leases are 15 and
20 years. In 1999, we paid $87,600 under these agreements.
In November 1999, we entered into a services agreement and a related
support agreement with a wholly-owned subsidiary of ITC Holding named ITC
Service Company under which we agreed to provide human resources, information
technology and other services to ITC Service Company and under which ITC Service
Company agreed to lease storage space as needed and provide certain
administrative services to us. We expect to be paid approximately $60,000 per
year for services provided by us, and we expect to pay a substantially smaller
amount for services that ITC Service Company provides to us, under these
agreements. The agreements have no expiration date, but may be terminated on 30
days' notice by either party.
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, 1999, KNOLOGY Holdings recorded $2,574,000 in
selling, operations, administrative and rent expenses related to these services.
We feel that the methodology used to calculate the amounts charged was
reasonable.
Our insurance provider is J. Smith Lanier & Co. Mr. Lanier's brother and
uncle are principal owners of this insurance placement company, both of whom, as
stockholders in ITC Holding, received the same pro rata amount of our Series A
preferred stock in the distribution as the other ITC Holding stockholders. In
1997, 1998 and 1999 this company charged us approximately $221,000, $628,000 and
$977,419, respectively, for insurance services.
We leased office space in 1998 and part of 1999 to ITC DeltaCom, for which
we received $122,000 and $40,000, respectively, in lease payments. We no longer
lease space to ITC DeltaCom.
We lease space to Powertel pursuant to a 10-year lease which expires in
2005. In 1998 and 1999, we received $112,200 in lease income under this
agreement.
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In 1997, our subsidiaries Interstate Telephone and Valley Telephone paid
$4.2 million in dividends to ITC Holding. In 1998 and 1999, Interstate Telephone
paid $1.4 million and $1.7 million, respectively, in dividends to ITC Holding.
Effective August 1998, upon the acquisition by ITC Holding if its majority
interest in KNOLOGY Holdings, we participated in a tax sharing agreement with
ITC Holding. The tax sharing agreement allowed ITC Holding to include our
results in a consolidated federal income tax return. Based upon our taxable
losses being included in the consolidated tax return, we recorded income tax
benefits for $5.6 million and $19.7 million for the years ended December 31,
1998 and 1999, respectively. Upon completion of the spin-off on February 7,
2000, this tax-sharing agreement was terminated.
The tax separation agreement that we entered into with ITC Holding will
continue after the spin-off. The purpose of the tax separation agreement is to
allocate the risk of potential adverse tax consequences stemming from the
spin-off. We do not anticipate any adverse tax consequences, but any adverse tax
consequences that do occur could be material.
In October 1999, a subsidiary of ITC Holding agreed to lend up to $13
million to KNOLOGY Holdings under a line of credit which matured on the earlier
of November 16, 2002 or one day after the commitment under KNOLOGY Holdings'
existing credit facility is reduced to zero. Interest accrued on the loan at a
rate of 11 3/4% per year. This loan was subordinate to the senior secured credit
facility KNOLOGY Holdings has with First Union National Bank and First Union
Capital Markets. In November 1999, we borrowed $9.6 million under this line of
credit. In accordance with the terms of the loan, the ITC Holding subsidiary
immediately converted this loan into shares of our Series A preferred stock at a
price per share of $4.75, at which time the line of credit terminated.
In November 1999, we acquired KNOLOGY Holdings, Interstate Telephone,
Valley Telephone, Globe Telecommunications and ITC Globe from ITC Holding. ITC
Holding contributed to us stock representing approximately 85% of the
outstanding equity of KNOLOGY Holdings, stock representing 100% of each of
Interstate Telephone, Valley Telephone, Globe Telecommunications and ITC Globe,
272,832 shares of preferred stock of ClearSource, Inc., subscription rights to
purchase an additional 810,501 shares of preferred stock of ClearSource,
approximately $5.6 million in cash to be used for the subscription payments to
ClearSource and a note of KNOLOGY Holdings in the principal amount of up to $13
million. Concurrently with this November 1999 acquisition, we completed an
exchange with other KNOLOGY Holdings stockholders in which we received KNOLOGY
Holdings common stock and preferred stock in exchange for our common stock and
Series A preferred stock. We now hold 100% of the outstanding capital stock of
KNOLOGY Holdings.
In December 1999, after the contribution and exchange discussed above, a
subsidiary of ITC Holding agreed to lend us up to $30.4 million under a line of
credit. The proceeds of this loan are to be used for construction of the network
by KNOLOGY Holdings and for working capital. This loan accrued interest at a
rate of 11 3/4% per year and had a maturity date of March 31, 2000. Under the
terms of this loan, the ITC
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Holding subsidiary converted all of the principal and interest of the loan into
options to purchase shares of our Series A preferred stock at a price per option
of $4.75. InterCall paid $4.75 for each share subject to a KNOLOGY option, which
is the value placed on the shares underlying the options for purposes of the
distribution, as discussed above. The parties agreed as part of the conversion
transaction that KNOLOGY would pay the option exercise prices to ITC Holding
when they were received by KNOLOGY. A residual note evidences this agreement.
Under the residual note no amount is due to ITC Holding from KNOLOGY in the
event of an option expiring or terminating.
On February 4, 2000, ITC Holding distributed to its optionholders options
to purchase 6,258,036 shares of our Series A preferred stock. On February 7,
2000, ITC Holding distributed to its stockholders all 43,211,531 shares of our
Series A preferred stock.
SALES OF CAPITAL STOCK
In December 1995 and January 1996, in connection with its initial
capitalization, KNOLOGY Holdings issued to certain investors, including ITC
Holding, SCANA Communications, Inc. and South Atlantic Venture Fund III, 7,780
shares of its preferred stock at a purchase price of $1,000 per share, for an
aggregate amount of $7,780,000. ITC Holding contributed $4,000,000 plus all of
its direct and indirect interests in Cybernet Holding, L.L.C. and in KNOLOGY of
Columbus, Inc. in exchange for shares of KNOLOGY Holdings preferred stock. SCANA
Communications is a communications subsidiary of SCANA Corporation, a
diversified utility company. South Atlantic represents a series of venture
capital funds. Mr. Burton is managing general partner of South Atlantic Venture
Fund I, II and III and is Chairman of South Atlantic Venture Fund, IV, and Mr.
Lanier is the managing general partner of South Atlantic Private Equity Fund,
IV.
KNOLOGY Holdings was a party to a stockholders' agreement dated December 8,
1995, as amended, with all of its stockholders. No party to the stockholders'
agreement could transfer any of KNOLOGY Holdings' capital stock, rights or
options held by such party to third parties without having offered rights of
first refusal to purchase such securities to KNOLOGY Holdings. This agreement
has been terminated.
In May 1996, in connection with a private placement of its preferred stock,
KNOLOGY Holdings issued 10 shares of its preferred stock to ITC Holding and
9,302 shares of its preferred stock to new investors at a purchase price of
$1,200 per share, for an aggregate amount of $11,174,440. The new investors
included Century Telephone Enterprises, Inc., a regional communications company
that provides local exchange and cellular telephone services, and certain of the
AT&T venture funds, a series of venture capital funds. In connection with this
private placement, ITC Holding, the AT&T venture funds, KNOLOGY Holdings and
others entered into a stockholders' agreement, which was amended and restated as
of July 28, 1997. Pursuant to the agreement, all parties agreed to take all
action within their respective power as may be required, for as long as Century
Telephone Enterprises, Inc. or AT&T Venture Fund I, L.P. owned more than 5% of
KNOLOGY Holdings' equity securities, to elect one director designated by
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each such 5% stockholder. Richard Bodman was elected to KNOLOGY Holdings' board
of directors pursuant to this arrangement. Mr. Bodman's term will expire in
2000. Century Telephone does not presently have a representative on KNOLOGY
Holdings' board of directors. This stockholders' agreement terminated prior to
the distribution.
In February 1997, KNOLOGY Holdings issued 8,960 shares of preferred stock
to certain of its current stockholders for a purchase price of $1,200 per share,
for an aggregate amount of $10,752,000. As part of this private placement, ITC
Holding, Century Telephone, South Atlantic and the AT&T venture funds
contributed $4,302,000, $2,096,400, $1,000,800 and $1,416,000, respectively, in
exchange for such preferred stock.
In May 1997, KNOLOGY Holdings signed a letter of intent with SCANA
Communications, whereby SCANA agreed to provide KNOLOGY Holdings with a
revolving credit facility of up to $40.0 million for network construction and
working capital. The companies, however, never established this credit facility.
Beginning in June 1997, KNOLOGY Holdings borrowed an aggregate of $11.0 million
of principal plus accrued interest (approximately $305,300) from SCANA pursuant
to a promissory note. The note accrued interest at the rate of 12% per annum and
was payable upon demand after January 1, 1998. KNOLOGY Holdings repaid the
promissory note in October 1997 with a portion of the proceeds from the offering
and the private placement described below. In October 1999, KNOLOGY Holdings
issued to SCANA warrants to purchase 753 shares of KNOLOGY Holdings preferred
stock in connection with these loans. SCANA exercised these warrants in November
1999. The weighted average exercise price of the SCANA warrant is $1,500 per
share of preferred stock.
In October 1997, KNOLOGY Holdings issued approximately 21,400 shares of its
preferred stock to qualified investors in an equity private placement for a
purchase price of $1,500 per share, for an aggregate amount of approximately
$32.2 million. ITC Holding, Century Telephone, South Atlantic, AT&T venture
funds and SCANA Communications, Inc. purchased approximately $10.0 million, $2.5
million, $5.5 million, $5.0 million and $5.0 million of preferred stock,
respectively, in the equity private placement.
In October 1997, KNOLOGY Holdings also completed a private offering of
444,100 units, each of which consisted of one 11 7/8% senior discount note and
one warrant to purchase .003734 shares of its preferred stock, at an exercise
price of $.01 per share, for $444.1 million aggregate principal amount at
maturity yielding net proceeds of approximately $242.4 million. SCANA
Communications purchased 71,050 of these units for $39,998,308. The senior
discount notes issued in the offering were subsequently exchanged for
substantially identical exchange notes that had been registered under the
Securities Act of 1933, as amended, in an exchange offer that expired on March
24, 1998.
In December 1997, KNOLOGY Holdings acquired Beach Cable, Inc., a cable
television system in Panama City, Florida. L. Charles Hilton, Jr., who became a
director of our company in December 1999, was the founder and sole stockholder
of Beach Cable. Mr. Hilton received 2,485 shares of KNOLOGY Holdings preferred
stock in the
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acquisition valued at $1,500 per share. During 1998, 134 of these shares were
returned to KNOLOGY Holdings as part of a purchase price adjustment.
In January 1998, ITC Holding purchased from Century Telephone its preferred
stock of KNOLOGY Holdings. In July 1998, ITC Holding acquired shares of
preferred stock of KNOLOGY Holdings in exchange for $100 in cash and ITC Holding
common stock valued at $1,600 per share for each share of preferred stock of
KNOLOGY Holdings exchanged. ITC Holding purchased 21,551 shares of preferred
stock of KNOLOGY Holdings from several stockholders, including all of the
preferred stock owned by South Atlantic and SCANA Communications in the
exchange.
In November 1999, we completed an exchange with other KNOLOGY Holdings
stockholders, including AT&T venture funds and SCANA Communications, in which we
exchanged our common stock and preferred stock for KNOLOGY Holdings common stock
and preferred stock. Through this exchange offering, we acquired 7,113 shares of
preferred stock of KNOLOGY Holdings from AT&T venture funds for 4,267,800 shares
of our Series A preferred stock and 753 shares of preferred stock of KNOLOGY
Holdings from SCANA Communications for 451,800 shares of our Series A preferred
stock.
On February 4, 2000, ITC Holding Company distributed to its option holders
options to purchase 6,258,036 shares of our Series A preferred stock. On
February 7, 2000, ITC Holding distributed to its shareholders all of its
43,211,531 shares of our Series A preferred stock. On February 7, 2000 we
completed a private placement of 21,180,131 shares of our Series B preferred
stock to a small group of institutional investors and certain of our executive
officers for approximately $100.6 million.
We entered into a stockholders agreement with the holders of our Series B
preferred stock upon the closing of the private placement. Some large holders of
our Series A preferred stock also are parties to that agreement, including
Campbell B. Lanier III, the chairman of our board of directors, and SCANA
Communications Holdings, Inc. The stockholders agreement provides among other
things, that after we file a registration statement under Section 12 of the
Securities and Exchange Act of 1934, the parties to this stockholders agreement
will have the right, subject to specified limitations,
- to demand registration of their unregistered shares; and
- to demand inclusion of their unregistered shares in any registration of
securities by us.
It also provides that certain holders of our Series B preferred stock will
have the right to appoint directors to our board so long as they each hold at
least 45% of their original investment in our capital stock.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 29, 2000
regarding beneficial ownership of our voting capital stock by:
- each person known by us to beneficially own more than 5% of our
outstanding voting capital stock,
- each of our executive officers,
- each of our directors, and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each of the named stockholders is c/o
1241 O.G. Skinner Drive, West Point, GA 31833.
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B PREFERRED COMMON AS CONVERTED(3)
NAME AND ADDRESS OF BENEFICIAL ------------------- ------------------- ----------------- -------------------
OWNER(1)(2) NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- ------------------------------ --------- ------- --------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
SCANA Communications Holdings,
Inc(3)........................ 7,234,271 14.0% -- -- -- -- 7,234,271 9.9%
AT&T Venture Funds(4)........... 4,267,800 8.2 421,052 2.0% -- -- 4,688,852 6.4
American Water Works Company,
Inc.(5)....................... 3,820,943 7.4 -- -- -- -- 3,820,943 5.2
South Atlantic Private Equity
Funds(6)...................... 3,356,443 6.5 1,578,947 7.5 -- -- 4,935,390 6.7
J. Smith Lanier(7).............. 2,781,761 5.4 -- -- -- -- 2,781,761 3.8
J.H. Whitney IV, L.P(8)......... -- -- 8,421,053 39.8 -- -- 8,421,053 11.5
Blackstone Management Associates
III L.L.C.(9)................. -- -- 6,315,789 29.8 -- -- 6,315,789 8.6
First Union Investors,
Inc(10)....................... -- -- 2,105,263 9.9 -- -- 2,105,263 2.9
EXECUTIVE OFFICERS
Felix L. Boccucci, Jr(11)....... 22,921 * 4,200 * 81,068 9.3% 108,189 *
Marcus R. Luke(12).............. 18,878 * 1,600 * 70,620 8.1 91,098 *
Bret McCants(13)................ 5,454 * 9,000 * 81,000 9.3 95,454 *
William E. Morrow(14)........... 13,527 * 345,000 39.4 358,527 *
Peggy B. Warner(15)............. -- -- 64,000 * 45,000 5.1 109,000 *
Rodger L. Johnson............... -- -- 10,000 * -- -- 10,000 *
DIRECTORS
Campbell B. Lanier(16).......... 9,231,310 17.8 -- -- -- -- 9,231,310 12.6
Richard Bodman(4)............... 4,267,800 8.2 -- -- -- -- 4,267,800 5.8
Donald W. Weber(17)............. 46,811 -- -- -- -- -- 46,811 *
Donald W. Burton(6)............. 3,523,563 6.8 1,789,473 8.4 -- -- 5,313,036 7.2
L. Charles Hilton, Jr........... 377,197 * -- -- -- -- 377,197 *
William H. Scott, III(18)....... 1,203,138 2.3 -- -- -- -- 1,203,138 1.6
Alan A. Burgess................. -- -- -- -- -- -- -- --
Rodger L. Johnson............... -- -- -- -- -- -- -- --
James R. Matthews(8)............ -- -- 8,421,053 39.8 -- -- 8,421,053 11.5
Bret Pearlman(9)................ -- -- 6,315,789 29.8 -- -- 6,315,789 8.6
All Named Executive Officers and
Directors as a Group (15
persons)...................... 18,710,599 35.2 16,615,115 78.0 622,688 71.2 35,948,402 47.3
</TABLE>
- ---------------
* Less than 1%
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from February 29, 2000. More
than one person may be deemed to be a beneficial
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owner of the same securities. All persons shown in the table above have
sole voting and investment power, except as otherwise indicated.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not deemed
outstanding in determining the percentage owned by any other person.
(3) The address of SCANA Communications Holdings, Inc. is 1426 Main Street, MC
134, Columbia, South Carolina, 29218.
(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 346,432
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; 3,117,284 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 186,277 shares owned by Special Partners
Fund, L.P., of which Venture Management III, L.L.C. is the general partner,
of which Mr. Bodman is a manager; and includes 1,038,859 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) The address of American Water Works Company, Inc. is 1025 Laurel Oak Road,
P. O. Box 1770, Voorhees, NJ 08043,
(6) The address of Mr. Burton and of each entity comprising South Atlantic is
614 West Bay Street, Suite 200, Tampa, Florida 33606. Includes 446,094
shares held of record by The Burton Partnership, Limited Partnership, of
which Mr. Burton is the sole general partner; 1,685,251 shares held by
South Atlantic Venture Fund III, Limited Partnership, of which South
Atlantic Venture Partners III, Limited Partnership is the sole general
partner, of which Mr. Burton is the managing partner; 188,039 shares held
by South Atlantic Private Equity Fund IV (QP), Limited Partnership, of
which Mr. Burton is a general partner; 1,255,426 shares held by South
Atlantic Private Equity Fund IV, Limited Partnership, of which Mr. Burton
is a general partner; and 206,674 shares held by South Atlantic Venture
Fund II, Limited Partnership, of which Mr. Burton is the managing partner.
Each of the respective South Atlantic funds has sole voting and investment
power with respect to the shares beneficially owned by such fund. Also
includes 49,336 shares held of record by four Burton Family trusts of which
Mr. Burton is trustee.
(7) The address of Mr. Lanier is 3300 20th Avenue, Valley, Alabama 36854.
(8) The address of J. H. Whitney IV, L.P. is 177 Board Street, Stamford, CT
06901. The general partner of J. H. Whitney IV, L.P. is J. H. Whitney
Equity Partners IV, LLC of which James R. Matthews is the managing member.
(9) The address of Blackstone Management Associates III L.L.C. is 345 Park
Avenue, 31st Floor, New York, New York 10154. Includes 5,029,244 shares
held by Blackstone CCC Capital Partners L.P., 907,598 shares held by
Blackstone CCC Offshore Capital Partners L.P. and 378,947 shares held by
Blackstone Family Investment Partnership III L.P., for each of which
Blackstone Management Associates III L.L.C. is the general partner of which
Bret Pearlman is a member.
(10) The address of First Union Investors, Inc. is One First Omon Center,
Charlotte, NC 28288-0732.
(11) Includes 102,680 shares issuable under options.
(12) Includes 77,098 shares issuable under options.
(13) Includes 81,000 shares issuable under options.
(14) Includes 345,000 shares issuable under options.
(15) Includes 45,000 shares issuable under options.
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(16) Includes 121,758 shares held of record by the Jane Lowery Zachry Hyatt
Lanier Trust, of which Mr. C. Lanier, III is trustee; 136,419 shares held
of record by The Campbell B. Lanier, Jr. Irrevocable Life Insurance Trust,
of which Mr. C. Lanier, III is trustee; 56,759 shares held of record by the
Lanier Family Foundation, of which Mr. C. Lanier, III is co-trustee; and
392 shares held of record by Mr. C. Lanier, III's wife. Also includes
619,774 shares issuable under options.
(17) Includes 5,457 shares issuable under options.
(18) Includes 44,857 shares held of record by The Martha J. Scott, Trustee FBO
Mary Martha Scott U/ A 6/26/91 Trust, of which Mr. Scott's wife is trustee;
3,055 shares held of record by two members of Mr. Scott's immediate family;
87,322 shares held of record by The Melissa H. Lanier 1997 GST Trust, of
which Mr. Scott is trustee; and 161,149 shares held of record by The
Campbell B. Lanier, III Charitable Remainder Trust. Also includes 699,859
shares issuable under options.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is subject to the
provisions of our certificate of incorporation and our bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
We currently have 200,000,000 shares of common stock authorized and 6,476
shares of common stock outstanding. We currently have 175,000,000 shares of
preferred stock authorized of which 75,000,000 shares are designated as Series A
preferred stock and 50,000,000 shares are designated as Series B preferred
stock. As of February 29, 2000 we had 48,462,499 shares of Series A preferred
stock outstanding and 21,180,131 shares of Series B preferred stock outstanding.
COMMON STOCK
Voting Rights. Each holder of common stock is entitled to attend all
special and annual meetings of the stockholders of our company and, together
with the holders of all other classes of stock entitled to attend and vote at
such meetings, to vote upon any matter or thing properly considered and acted
upon by the stockholders. Holders of common stock are entitled to one vote per
share and vote as a single class.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, subject to the
provisions of our preferred stock, holders of common stock are entitled to
participate ratably on a per-share basis in all distributions to the holders of
our common stock in any dissolution, liquidation or winding up.
Dividends. Dividends and distributions may be paid on the common stock in
cash, property or securities, and the holders of our common stock will be
entitled to participate in such dividends and distributions ratably on a per
share basis. The rights of holders of our common stock to receive dividends and
distributions are subject to any provisions of any of our preferred stock
outstanding.
Transfer Restrictions. Any holder of shares of common stock that decides
to sell its shares of common stock must first offer those shares to us before it
can offer the shares to a third party. Our board of directors at its discretion
may waive or terminate the transfer restrictions. All transfer restrictions will
terminate upon a qualified underwritten public offering of our common stock,
which is an underwritten public offering
- with a per-share purchase price of at least $6.00;
- resulting in proceeds to us of at least $50 million prior to expenses and
underwriting commissions; and
- in which our common stock is listed for quotation on the Nasdaq National
Market or a national securities exchange.
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Redemption. All outstanding shares of our common stock are subject to
redemption if our board of directors determines such action should be taken to
prevent the loss or secure the reinstatement of a license or franchise held by
us or any of our subsidiaries and used to conduct business.
AUTHORIZED PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors to
issue, from time to time and without further stockholder action, except as
required by applicable law, one or more series of preferred stock, and to fix
the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights, conversion
privileges and other rights. The issuance of additional preferred stock may have
the effect of delaying, deferring or preventing a change in control of our
company without further action by the stockholders. Preferred stock issued with
voting, conversion or redemption rights may adversely affect the voting power of
the holders of common stock and existing series of preferred stock, and could
discourage attempts to obtain control of our company.
SERIES A PREFERRED STOCK
Voting Rights. Except as otherwise required by law, the holders of shares
of Series A preferred stock are entitled to attend all special and annual
meetings of the stockholders of our company and, together with the holders of
all other classes of stock entitled to attend and vote at such meetings, to vote
upon any matter or thing properly considered and acted upon by the stockholders.
Holders of Series A preferred stock will vote with holders of common stock on an
as-converted basis. In addition, holders of Series A preferred stock and Series
B preferred stock are entitled to a separate class vote on:
- the issuance of any additional Series A preferred stock;
- the creation of any class or series of capital stock with preference to
or on parity with the Series A preferred stock;
- the voluntary dissolution of our company; and
- any amendment to our certificate of incorporation or bylaws that would
materially adversely affect the preferences of the Series A preferred
stock.
Holders of Series A preferred stock and holders of Series B preferred stock are
entitled to vote together as a single class or as separate classes on any
merger, consolidation, recapitalization, liquidation, dissolution, winding-up or
sale of all or substantially all of our assets that constitutes a change of
control.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, following any
required prior distributions or payments for any other series of preferred
stock, the holders of shares of our Series A
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preferred stock are entitled to receive, out of our assets legally available for
distribution to stockholders, a liquidation value equal to the greater of:
- the initial per-share purchase price of $4.75, or
- the amount such holder would have received had his Series A preferred
stock been converted into common stock immediately before the liquidation
event.
This distribution must be paid after any distribution with respect to the Series
B preferred stock but prior to any distribution with respect to the common
stock. If the remaining distributable assets are insufficient to pay cash in an
amount equal to the full Series A preferred stock liquidation distribution, then
such assets or the proceeds of such assets will be distributed among the holders
of the Series A preferred stock ratably on a per share basis.
Dividends. The holders of our Series A preferred stock and Series B
preferred stock, prior to and in preference to the holders of our common stock,
will participate on an as-converted basis in all dividends and distributions
payable to the holders of our common stock. As we do not pay guaranteed
dividends to our preferred stockholders, we do not have a restriction on any
repurchase or redemption of shares of our Series A preferred stock while there
is any arrearage in the payment of dividends.
Conversion Into Common Stock. The Series A preferred stock is convertible
at any time at the option of the holder into the number of shares of common
stock determined by multiplying the conversion rate then in effect by the number
of shares of Series A preferred stock held. The conversion rate is the quotient
obtained by dividing the Series A preferred stock issue price by the conversion
price. The Series A preferred stock issue price equals $4.75, subject to
adjustments for any future stock dividends, stock splits or similar transactions
affecting the Series A preferred stock. The conversion price equals the initial
per-share purchase price of $4.75, subject to adjustments for any future stock
dividends, stock splits and similar transactions affecting the common stock, as
well as issuances of common stock and common stock equivalents other than
options and stock issued pursuant to employee benefit plans at less than the
conversion price then in effect. The shares of Series A preferred stock shall
automatically be converted into shares of common stock at the conversion price,
as adjusted for any stock split or reclassification, upon our completion of a
qualified underwritten public offering of common stock. Each share of Series A
preferred stock will be convertible into one share of our common stock
immediately after the distribution.
Transfer Restrictions. Any holder of shares of Series A preferred stock
that decides to sell its shares of Series A preferred stock must first offer
those shares to us before it can offer the shares to a third party. Our board of
directors at its discretion may waive or terminate the transfer restrictions.
All transfer restrictions will terminate upon a qualified underwritten public
offering of our common stock. Additionally, holders of Series A preferred stock
who own more than 5% of our capital stock on an as-converted basis and who are
parties to the stockholders agreement also must offer any shares not purchased
by us to the other greater than 5% stockholders party to the stockholders'
agreement. If any shares remain to be sold to a third party, the other
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greater than 5% stockholders have the right to sell their shares along with the
original selling stockholder on a pro rata basis.
SERIES B PREFERRED STOCK
The Series B preferred stock has substantially the same rights,
restrictions, preferences and designations as our Series A preferred stock,
other than the differences set forth below.
Additional Voting Rights. Similar to the rights of the holders of Series
A preferred stock, the holders of Series B preferred stock are entitled to a
separate class vote on:
- the issuance of additional Series B preferred stock; and
- the creation of any class or series of capital stock with preference to
or on parity with the Series B preferred stock.
In addition to the other voting rights granted to holders of shares of
Series A preferred stock, holders of Series B preferred stock are entitled to a
separate class vote on any redemption or redemptions of common stock or
preferred stock except for
- any redemption or redemptions approved by a director elected by the
holders of the Series B preferred stock; and
- any redemption or redemptions from employees or former employees
representing, in the aggregate, during any twelve-month period in which
such redemption or redemptions occur, not more than 1% of our outstanding
common stock on a fully-diluted basis.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, before any
distribution or payment is made to the holders of any other class or series of
our capital stock, the holders of shares of Series B preferred stock are
entitled to receive, out of assets legally available for distribution to
stockholders, a liquidation value equal to the greater of:
- the initial per-share purchase price of $4.75, or
- the amount such holder would have received had his Series B preferred
stock been converted into common stock immediately before the liquidation
event.
If the distributable assets would be insufficient to pay cash in an amount
equal to the full Series B preferred stock liquidation distribution, then such
assets or the proceeds of such assets will be distributed among the holders of
Series B preferred stock ratably on a per share basis.
Board Seats. The holders of Series B preferred stock, voting together as
a separate class, have the right to elect two directors to our board of
directors. Under the stockholders' agreement entered into in connection with the
private placement of the Series B preferred stock, certain holders of our Series
B preferred stock have the right to appoint these two directors as long as each
such holder maintains at least 45% of its original investment in our capital
stock. Additionally, under the stockholders agreement,
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certain holders of our Series B preferred stock have the right to appoint board
observers as long as each such holder maintains at least 25% of its original
investment.
Preemptive Rights. Under the stockholders' agreement that we entered into
with the holders of Series B preferred stock and some of the holders of shares
of Series A preferred stock who did not receive their shares in the
distribution, each party that is a holder of shares of Series B preferred stock
or Series A preferred stock that represent, on an as-converted basis, at least
5% of our outstanding capital stock will have the right to purchase its pro-rata
share of 75% of any future offerings of our equity securities. This right will
not apply to issuances pursuant to employee benefit plans or issuances for
non-cash consideration.
Registration Rights. Under the stockholders' agreement mentioned above,
shares of common stock issued or issuable upon the conversion of Series A
preferred stock obtained other than as a result of the distribution and which
were not registered in connection with the distribution or Series B preferred
stock will have the benefit of various registration rights. Holders of such
preferred stock have the right to require us to effect up to two registrations
on Form S-1 and unlimited registrations on Form S-3, each with respect to at
least 25% of our registrable stock, subject to our reasonable deferral rights.
Holders of such preferred stock also have unlimited rights to include shares in
future registrations of stock by us or our own account or the account of other
selling stockholders. These rights to include shares in future registrations are
subject to customary rights of KNOLOGY to exclude the shares to the extent the
managing underwriter determines that it would hurt the distribution to which the
registration relates. We will pay all expenses in connection with these
registrations other than underwriter discounts and commissions. Approximately 21
million shares of Series B preferred stock and approximately 48 million shares
of Series A preferred stock have the benefit of these registration rights. A
holder's registration rights will terminate when all registrable securities
beneficially owned by such holder immediately may be sold under Rule 144(k) of
the Securities Act of 1933, as amended, or our common stock is listed on a
national securities exchange or traded on the Nasdaq market system except in
certain limited circumstances.
OPTIONS
As of February 29, 1999, we had outstanding options to purchase 6,645,116
shares of our common stock granted under our 1995 stock option plan. The
weighted average exercise price of these options is $2.70. The options will vest
at different times between the current date and November 2004, and each option
terminates 10 years from the date of its issuance. The options terminate upon
the option holder's termination of employment. Further, the options are
immediately exerciseable upon the sale of KNOLOGY, unless our board decides such
acceleration is not in the best interests of KNOLOGY. An additional 324,412
shares of common stock are subject to options granted pursuant to our long term
incentive plan. The weighted average exercise price of these options is $4.75.
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WARRANTS
As of February 29, 1999, we had outstanding 444,100 warrants, each of which
warrant entitles the warrant holder to purchase 2.2404 shares of our Series A
preferred stock at an exercise price of $.01 per share. The exercise price is
subject to adjustment for any division, consolidation or reclassification of the
Series A preferred stock or similar actions by KNOLOGY. The warrants are
exercisable at any time until their expiration in October 2007. Any warrants
that are not exercised by that date will expire. Under certain circumstances, as
set forth in the warrant agreement, if we consolidate or merge with, or sell
substantially all of our assets to, another person at a time when our preferred
stock or common stock is not publicly traded, we would be required to make an
offer to repurchase the warrants at their fair market value.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Certain provisions of the Delaware General Corporation Law, our certificate
of incorporation, our bylaws and our stock option plans may have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt. This may be true even in circumstances where
a takeover attempt might result in payment of a premium over market price for
shares held by stockholders.
We are subject to Section 203 of the Delaware General Corporation Law.
Section 203 prohibits, subject to certain exceptions, a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. A business combination includes mergers, asset sales and
other transactions that may result in a financial benefit to stockholders. A
person will be deemed an interested stockholder triggering this protection if
the person together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of our outstanding voting
stock. There are three exceptions to these provisions. First, if our board of
directors gives prior approval to either the business combination or the
transaction which resulted in the stockholder becoming an interested stockholder
then the restrictions do not apply. Second, the restrictions will not apply if,
upon the consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of our outstanding voting stock. Finally, the restrictions will not apply if, at
the time of or following the consummation of the transaction in which the
stockholder became an interested stockholder, our board of directors approves
the business combination and stockholders holding at least 66 2/3% of our
outstanding voting stock not owned by the interested stockholder authorize the
business combination.
We may issue 50,000,000 shares of undesignated preferred stock. Under
certain circumstances, the issuance of preferred stock could be utilized as a
method of discouraging, delaying or preventing a change in control of our stock.
The provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or preventing a non-negotiated merger or other
business combination involving us. These provisions are intended to encourage
any person interested in acquiring us to negotiate with and obtain the approval
of our board of directors in
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connection with the transaction. Certain of these provisions may, however,
discourage our future acquisition in a transaction not approved by our board of
directors in which stockholders might receive an attractive value for their
shares or that a substantial number or even a majority of our stockholders might
believe to be in their best interest. As a result, stockholders who desire to
participate in such a transaction may not have the opportunity to do so. Such
provisions could also discourage bids for our common stock at a premium, as well
as create a depressive effect on the market price of our common stock.
LEGAL MATTERS
Hogan & Hartson L.L.P., of Washington, D.C., has issued an opinion about
certain legal matters with respect to our Series A preferred stock, options and
common stock. Arthur Andersen LLP has issued an opinion about certain tax
matters with respect to Federal income tax consequences of the distribution to
ITC Holding option holders.
EXPERTS
The consolidated financial statements and schedules of KNOLOGY, Inc. and
subsidiaries as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999, included in this prospectus and in the
registration statement have been audited by Arthur Andersen LLP, independent
accountants, as indicated in their reports with respect thereto, and are
included in reliance upon the authority of said firm as experts in giving said
reports.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It
includes exhibits and schedules. This prospectus is part of the registration
statement. It does not contain all of the information that is in the
registration statement. The registration statement contains more information
about our company and our capital stock. Statements contained in this prospectus
concerning the provisions of documents filed as exhibits to the registration
statement are necessarily summaries of such documents. Each of these statements
is qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. You may read and copy all or any portion of the registration
statement at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room's
operations. The registration statement is also available to you on the SEC's
Internet site (www.sec.gov).
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KNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets -- December 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999......................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the Years Ended December 31, 1997,
1998 and 1999............................................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KNOLOGY, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1999
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KNOLOGY,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. As discussed in Note 1 to the financial statements, effective
August 1998, the Company acquired a majority ownership interest in KNOLOGY
Holdings, Inc. in a business combination accounted for as a purchase. As a
result of this acquisition, the financial information for 1998 includes the
accounts of KNOLOGY Holdings, Inc. and, therefore, is not comparable to periods
prior to the acquisition.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 25, 2000
F-2
<PAGE> 113
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,158,774 $ 7,818,462
Marketable securities..................................... 66,231,397 6,069,461
Accounts receivable, net of allowance for doubtful
accounts of $418,499 and $695,067 as of December 31,
1998 and 1999, respectively............................. 8,774,536 9,037,451
Accounts receivable -- affiliates......................... 6,785,691 18,244,232
Prepaid expenses.......................................... 500,022 796,708
------------ ------------
Total current assets................................ 87,450,420 41,966,314
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
System and installation equipment......................... 188,753,702 274,010,824
Test and office equipment................................. 8,539,784 15,273,068
Automobiles and trucks.................................... 3,777,458 5,286,638
Production equipment...................................... 857,028 869,264
Land...................................................... 2,750,244 2,750,244
Buildings................................................. 10,902,460 12,775,054
Inventory................................................. 32,417,006 21,769,689
Leasehold improvements.................................... 1,145,184 1,689,656
------------ ------------
249,142,866 334,424,437
Less accumulated depreciation and amortization............ (37,257,198) (60,527,606)
------------ ------------
Property, plant, and equipment, net................. 211,885,668 273,896,831
------------ ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net.......................... 65,192,185 73,185,779
Deferred issuance costs, net.............................. 8,733,803 7,878,034
Investments............................................... 825,072 3,249,056
Other..................................................... 593,663 157,796
------------ ------------
Total assets........................................ $374,680,811 $400,333,810
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable.......................... $ 12,174 $ 12,174
Accounts payable.......................................... 19,651,228 15,138,408
Accounts payable -- affiliates............................ 248,306 337,964
Accrued liabilities....................................... 12,303,038 7,033,444
Advances from affiliates.................................. 2,025,604 0
Unearned revenue.......................................... 3,231,232 3,779,841
------------ ------------
Total current liabilities........................... 37,471,582 26,301,831
NONCURRENT LIABILITIES:
Notes payable............................................. 122,070 19,110,520
Accrued interest payable.................................. 21,036,541 41,082,791
Unamortized investment tax credits........................ 441,989 370,373
Deferred income taxes..................................... 321,658 0
Bonds payable, net of discount............................ 255,020,209 270,818,870
------------ ------------
Total liabilities................................... 314,414,049 357,684,385
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
MINORITY INTEREST........................................... 3,267,653 0
------------ ------------
WARRANTS (NOTE 3)........................................... 2,486,960 4,726,065
------------ ------------
STOCKHOLDERS' EQUITY:
Series A preferred stock, $.01 par value per share;
75,000,000 shares authorized, 0 and 48,035,531 shares
issued and outstanding at December 31, 1998 and 1999,
respectively............................................ 0 480,355
Series B preferred stock, $.01 par value per share;
50,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 1998 and 1999 (Note 11)..... 0 0
Common stock, $.01 par value per share; 200,000,000 shares
authorized, 100 and 6,476 shares issued and outstanding
at December 31, 1998 and 1999, respectively............. 1 65
Additional paid-in capital................................ 75,312,104 117,066,988
Accumulated deficit....................................... (20,802,344) (79,593,349)
Unrealized gains (losses)................................. 2,388 (30,699)
------------ ------------
Total stockholders' equity.......................... 54,512,149 37,923,360
------------ ------------
Total liabilities and stockholders' equity.......... $374,680,811 $400,333,810
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 114
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES:
Telephone................................................. $17,633,313 $ 22,318,344 $ 28,774,150
Video..................................................... 0 22,527,403 35,165,411
Internet services and other............................... 0 286,775 2,781,368
----------- ------------ ------------
Total operating revenues............................ 17,633,313 45,132,522 66,720,929
----------- ------------ ------------
OPERATING EXPENSES:
Cost of services.......................................... 3,121,108 16,796,593 26,964,519
Selling, operations, and administrative................... 9,498,461 33,266,292 45,960,263
Depreciation and amortization............................. 2,781,800 17,326,895 40,970,149
----------- ------------ ------------
Total operating expenses............................ 15,401,369 67,389,780 113,894,931
----------- ------------ ------------
OPERATING INCOME (LOSS)..................................... 2,231,944 (22,257,258) (47,174,002)
----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income........................................... 0 9,639,050 1,478,998
Interest expense.......................................... (12,431) (29,033,088) (34,308,742)
Affiliate interest income (expense), net.................. 467,815 (34,115) (114,545)
Equity losses in subsidiary............................... (2,444,706) 0 0
Other (expense) income, net............................... (59,184) 782,954 107,066
----------- ------------ ------------
Total other expense................................. (2,048,506) (18,645,199) (32,837,223)
----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTERESTS, AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... 183,438 (40,902,457) (80,011,225)
MINORITY INTERESTS.......................................... 0 13,294,079 3,267,653
----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............................ 183,438 (27,608,378) (76,743,572)
INCOME TAX (PROVISION) BENEFIT.............................. (1,010,779) 5,631,618 19,697,270
----------- ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... (827,341) (21,976,760) (57,046,302)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NOTE
2)........................................................ 0 (582,541) 0
----------- ------------ ------------
NET LOSS.................................................... (827,341) (22,559,301) (57,046,302)
SUBSIDIARY PREFERRED STOCK DIVIDENDS........................ (4,193,276) (1,424,222) (1,744,703)
----------- ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................ $(5,020,617) $(23,983,523) $(58,791,005)
=========== ============ ============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS.............................................. $(50,206.17) $(239,835.23) $ (11.45)
=========== ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING............................................... 100 100 5,132,653
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 115
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS UNREALIZED TOTAL
--------------------- --------------- PAID-IN (ACCUMULATED GAINS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) EQUITY
---------- -------- ------ ------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996....................... 0 $ 0 100 $ 1 $ 6,049,495 $ 9,598,225 $ 0 $ 15,647,721
Comprehensive Loss:
Net loss attributable to
common stockholders...... 0 0 0 0 0 (5,020,617) 0 (5,020,617)
---------- -------- ----- --- ------------ ------------ -------- ------------
Comprehensive Loss... 0 0 0 0 0 0 (5,020,617)
---------- -------- ----- --- ------------ ------------ -------- ------------
Acquisition of subsidiary
stock.................... 0 0 0 0 14,310,000 0 14,310,000
Merger of subsidiary out of
consolidated group....... 0 0 0 0 (500) (1,396,429) 0 (1,396,929)
---------- -------- ----- --- ------------ ------------ -------- ------------
BALANCE, December 31,
1997....................... 0 0 100 1 20,358,995 3,181,179 0 23,540,175
Comprehensive Loss:
Net loss attributable to
common stockholders.... 0 0 0 0 0 (23,983,523) (23,983,523)
Unrealized gain on
marketable
securities............. 0 0 0 0 0 0 2,388 2,388
---------- -------- ----- --- ------------ ------------ -------- ------------
Comprehensive Loss... 0 0 0 0 0 0 (23,981,135)
---------- -------- ----- --- ------------ ------------ -------- ------------
Issuance of subsidiary
common stock............. 0 0 0 0 3,152 0 0 3,152
Acquisition of minority
interests................ 0 0 0 0 51,916,884 51,916,884
Additional infusion of
equity................... 0 0 0 0 3,033,073 3,033,073
---------- -------- ----- --- ------------ ------------ -------- ------------
BALANCE, December 31,
1998....................... 0 0 100 1 75,312,104 (20,802,344) 2,388 54,512,149
Comprehensive Loss:
Net loss attributable to
common stockholders...... 0 0 0 0 0 (58,791,005) 0 (58,791,005)
Unrealized loss on
marketable securities.... 0 0 0 0 0 0 (33,087) (33,087)
Comprehensive Loss... 0 0 0 0 0 0 (58,824,092)
Exercise of stock options.... 0 0 6,476 65 1,317,659 0 0 1,317,724
Reorganization (Note 1)...... 48,035,531 480,355 (100) (1) (480,354) 0 0 0
Acquisition of minority
interest................... 0 0 0 0 36,967,307 0 0 36,967,307
Additional infusion of
equity..................... 0 0 0 0 2,025,604 0 0 2,025,604
Exercise of SCANA warrants... 0 0 0 0 1,924,668 0 0 1,924,668
---------- -------- ----- --- ------------ ------------ -------- ------------
BALANCE, December 31,
1999....................... 48,035,531 480,355 6,476 $65 $117,066,988 $(79,593,349) $(30,699) $ 37,923,360
========== ======== ===== === ============ ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 116
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (827,341) $(22,559,301) $(57,046,302)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 2,781,800 17,326,895 40,970,149
Amortization of bond discount........................... 0 13,651,778 15,798,661
Gain (loss) on disposition of assets.................... 0 71,378 (7,086)
Loss on sale of investments............................. (13,315) (515,903) 0
Cumulative effect of change in accounting principle..... 0 582,541 0
Deferred income taxes................................... (764,802) (238,815) (321,658)
Interest related to exercise of warrants................ 0 0 795,168
Cash surrender value of life insurance.................. 92,604 11,764 386,663
Amortization of deferred investment tax credit.......... (71,616) (71,616) (71,616)
Equity in net loss of subsidiary........................ 2,444,706 0 0
Minority interest in net loss of subsidiary............. 0 (13,294,079) (3,267,653)
Changes in operating assets and liabilities:
Accounts receivable................................... (811,787) (10,292,009) (5,622,525)
Prepaid expenses...................................... 5,580 (408,164) (296,686)
Accounts payable...................................... 2,111,164 10,693,014 (4,423,162)
Accrued liabilities and interest...................... (1,283,101) 26,664,142 14,776,656
Unearned revenue...................................... 59,934 1,514,093 548,609
Other................................................. (43,710) (100,230) 16,117
------------ ------------ ------------
Total adjustments................................... 4,507,457 45,594,789 59,281,637
------------ ------------ ------------
Net cash provided by operating activities........... 3,680,116 23,035,488 2,235,335
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,727,079) (120,227,057) (87,386,231)
Purchase of investments and acquisitions, net of cash
acquired................................................ (14,310,000) (73,920,617) 0
Organizational cost expenditures.......................... 0 (251,815) 0
Proceeds from sale of investments......................... 118,711 162,264,322 60,161,936
Dividends from affiliate/return of capital................ (4,193,276) (1,424,222) (1,744,703)
Accounts payable-capital related.......................... (2,112,296) 0 0
Investment in ClearSource................................. 0 (825,072) (586,992)
Proceeds from sale of property............................ 0 32,075 75,357
Other..................................................... 0 (234,417) 164,439
------------ ------------ ------------
Net cash used in investing activities............... (22,223,940) (34,586,803) (29,316,194)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short-term borrowings...... 0 (11,654) (11,550)
Expenditures related to issuance of debt and credit
facility................................................ 0 (1,498,817) (51,616)
Proceeds from credit facility............................. 0 0 19,000,000
Proceeds from affiliate loan.............................. 0 0 9,641,189
Proceeds from the issuance of subsidiary common stock..... 0 3,152 9,760
Proceeds from the issuance of warrants.................... 0 0 1,129,500
Proceeds from the contribution of ClearSource............. 0 0 5,663,006
Stock options exercised................................... 0 0 1,307,964
Expenditures related to reorganization.................... 0 0 (848,775)
Additional infusion of equity............................. 14,310,000 15,564,902 0
Repayments from (advances to) affiliate................... 4,416,407 2,025,604 (6,098,931)
------------ ------------ ------------
Net cash provided by financing activities........... 18,726,407 16,083,187 29,740,547
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 182,583 4,531,872 2,659,688
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 444,319 626,902 5,158,774
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 626,902 $ 5,158,774 $ 7,818,462
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 12,431 $ 46,162 $ 669,968
============ ============ ============
Cash paid (received) during the period for income taxes... $ 1,145,805 $ 1,742,947 $ (9,273,563)
============ ============ ============
Merger of subsidiary out of consolidated group............ $ 108,108 $ 0 $ 0
============ ============ ============
Subsidiary preferred stock dividends...................... $ 4,193,276 $ 1,424,222 $ 1,744,703
============ ============ ============
Detail of investments and acquisitions:
Cash acquired........................................... $ 0 $ (6,144,581) $ 0
Property, plant, and equipment.......................... 0 30,133,876 0
Intangible assets....................................... 0 55,009,395 0
Minority interest....................................... 0 20,912,251 0
Common and/or preferred stock received (issued)......... 14,310,000 (34,532,324) 0
Bond discount........................................... 0 8,542,000 0
------------ ------------ ------------
Net cash paid for acquisitions.......................... $ 14,310,000 $ 73,920,617 $ 0
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 117
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
KNOLOGY, Inc. (the "Company"), a wholly owned subsidiary of ITC Holding
Company, Inc. ("ITC Holding"), was incorporated under the laws of the state of
Delaware in September 1998. The purpose of incorporating the Company was to
enable ITC Holding to complete a reorganization of certain of its wholly owned
and majority-owned subsidiaries on November 23, 1999 (the "Reorganization"), as
follows:
a. ITC Holding contributed all of the outstanding capital stock of
Interstate Telephone, Inc; Valley Telephone, Inc.; Globe Telecom, Inc.; and
ITC Globe, Inc. to the Company (collectively, the "Telephone Operations
Group").
b. ITC Holding contributed its 85% interest in KNOLOGY Holdings, Inc.
("KNOLOGY Holdings") to the Company.
c. ITC Holding contributed its 6% interest in ClearSource, Inc.
("ClearSource"), $5.7 million in cash to purchase additional ClearSource
shares, and subscription rights to purchase ClearSource shares to the
Company.
d. Other minority shareholders exchanged the remaining 15% of KNOLOGY
Holdings for shares of stock of the Company.
As a result of the Reorganization, the Telephone Operations Group and
KNOLOGY Holdings and subsidiaries are now wholly owned subsidiaries of the
Company. Following the Reorganization, ITC Holding held a 90% interest in the
Company. ITC Holding currently does not own any capital stock of the Company
following the distribution of the Company's shares to ITC Holding's shareholders
(Note 11) which was completed February 7, 2000.
The Reorganization has been accounted for in a manner similar to a pooling
of interest for the Telephone Operations Group. KNOLOGY Holdings and
subsidiaries have been treated as an equity investment in subsidiary in 1997 in
relation to the Company's 29% ownership interest. KNOLOGY Holdings and
subsidiaries have been consolidated with the Company in 1998 and 1999 in
relation to the 85% controlling interest obtained in July 1998 (Note 9) which
was recorded at ITC Holding's historical cost. For the period from August 1998
to December 1999, the 15% of KNOLOGY Holdings that the Company did not own has
been reflected as minority interest and the pro-rata losses attributed to the
minority holders to the extent that their investment was greater than zero in
accordance with Financial Accounting Standards Board Current Text on
Consolidation and Statement of Financial Accounting Standards No. 94. Because a
controlling interest in KNOLOGY Holdings was acquired in August 1998, the
financial statements for the year ended December 31, 1998 include the accounts
of KNOLOGY Holdings for the entire year and the minority interest in losses
includes the
F-7
<PAGE> 118
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
58% share of KNOLOGY Holdings' losses for the period from January 1998 to July
1998.
The exchange of the remaining 15% of KNOLOGY Holdings for shares of stock
of the Company was accounted for as an acquisition of a minority interest of a
subsidiary. The stock issued in the exchange was valued at $22.4 million and was
recorded as goodwill since the book value of net assets acquired (which
approximated fair value) was less than zero. The Company had recorded 100% of
KNOLOGY Holdings' losses since KNOLOGY Holdings' equity was less than zero.
NATURE OF BUSINESS
The Telephone Operations Group is wholly owned and provides a full line of
local telephone and related services and broadband services. Certain of the
Telephone Operations Group subsidiaries are subject to regulation by state
public service commissions of applicable states for intrastate
telecommunications services. For applicable interstate matters related to
telephone service, certain Telephone Operations Group subsidiaries are subject
to regulation by the Federal Communications Commission.
KNOLOGY Holdings and its subsidiaries own and operate advanced hybrid
fiber-coaxial networks and provide residential and business customers broadband
communications services, including analog and digital cable television, local
and long-distance telephone, high-speed Internet access, and broadband carrier
services to various markets in the southeastern United States.
The Company has experienced operating losses as a result of the expansion
of the advanced broadband communications networks and services into new and
existing markets. The Company expects to continue to focus on increasing its
customer base and expanding its broadband operations. Accordingly, the Company
expects that its operating expenses and capital expenditures will continue to
increase as it extends its broadband communications networks in the existing and
new markets in accordance with its business plan. On December 22, 1998, KNOLOGY
Holdings entered into a $50 million four-year senior secured credit facility,
which may be used for working capital and other purposes, including capital
expenditures and permitted acquisitions (Note 3). On February 7, 2000, the
Company completed a private placement of Series B preferred stock to a small
group of institutional investors and certain officers of the Company for
approximately $100 million to provide additional funds for its expansion plans
(Note 11). While management expects its expansion plans will result in
profitability, there can be no assurance that growth in the Company's revenue or
customer base will continue or that the Company will be able to achieve or
sustain profitability and/or positive cash flow.
F-8
<PAGE> 119
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and its wholly owned and
majority-owned subsidiaries. Investments in which the Company does not exercise
significant control are accounted for using the cost method of accounting.
Investments in which the Company does exercise significant control and owns less
than 50% are accounted for using the equity method. All significant intercompany
balances have been eliminated. Certain prior year amounts have been reclassed to
be consistent with 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.
UNAUDITED PRO FORMA NET LOSS AND NET LOSS PER SHARE
Following the distribution (Note 11), the Company will become a separate
taxable entity. Accordingly, the pro forma income taxes reflect income taxes as
if the Company were a separate taxable entity. In addition, the pro forma
earnings per share reflect the distribution as if it had occurred at the
beginning of each year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
UNAUDITED PRO FORMA DATA:
Pro forma income tax (provision)
benefit...................... $(1,010,779) $ 2,382,644 $ 0
=========== ============ ============
Pro forma net loss attributable
to common stockholders....... $(5,020,617) $(27,232,497) $(78,488,275)
=========== ============ ============
Pro forma basic and diluted net
loss attributable to common
stockholders per share....... $(50,206.17) $(272,324.97) $ (15.29)
=========== ============ ============
</TABLE>
F-9
<PAGE> 120
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of stockholders' equity until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific identification
basis. Securities available for sale at December 31, 1998 and 1999 are primarily
comprised of commercial paper.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as incurred.
The cost and accumulated depreciation of property and equipment disposed of are
removed from the related accounts, and any gain or loss is included in or
deducted from income. Depreciation and amortization (excluding telephone plant)
are provided over the estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 25
System and installation equipment........................... 7-10
Production equipment........................................ 7
Test and office equipment................................... 3-7
Automobiles and trucks...................................... 5
Leasehold improvements...................................... 5
</TABLE>
Depreciation of telephone plant is provided on a straight-line method,
using class or overall group rates acceptable to regulatory authorities. Such
rates range from 2% to 24%.
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to system and installation
equipment when installed.
F-10
<PAGE> 121
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
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. Approximately $2,469,000 and $3,040,000 of interest cost was capitalized
in 1998 and 1999, respectively.
INTANGIBLE ASSETS
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired as well as various other acquired
intangibles. Intangible assets and the related useful lives and accumulated
amortization at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
1998 1999 (YEARS)
----------- ----------- ------------
<S> <C> <C> <C>
Goodwill............................ $33,377,468 $56,291,468 10-40
Subscriber base..................... 34,863,072 34,429,332 3
Noncompete agreement................ 1,500,000 1,500,000 3
Other............................... 102,978 405,202 10-15
----------- -----------
69,843,518 92,626,002
Less accumulated amortization....... 4,651,333 19,440,223
----------- -----------
Intangibles, net.................... $65,192,185 $73,185,779
=========== ===========
</TABLE>
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires
that all nongovernmental entities expense costs of start-up activities,
including pre-operating, preopening, and organization activities, as the costs
are incurred. Adoption of this statement resulted in a cumulative effect of
change in accounting principle of $582,541.
DEFERRED ISSUANCE COSTS
Deferred issuance costs include costs associated with the issuance of debt
and the consummation of a credit facility (Note 3). Deferred issuance costs and
the related useful lives and accumulated amortization at December 31, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
1998 1999 (YEARS)
---------- ----------- ------------
<S> <C> <C> <C>
Deferred issuance costs.............. $9,433,742 $ 9,382,124 4-10
Accumulated amortization............. (1,555,708) (648,321)
---------- -----------
Deferred issuance costs, net......... $7,878,034 $ 8,733,803
========== ===========
</TABLE>
F-11
<PAGE> 122
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and cost in excess of net assets acquired
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The effect of adopting SFAS
No. 121 was not material to the Company's consolidated financial statements.
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying amount
of an asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows are
based on many factors, including current operating results, expected market
trends, and competitive influences. If an impairment has occurred, a loss equal
to the difference between the carrying value of the asset and its fair value is
recognized. The resulting reduced carrying amount of the asset is accounted for
as its new cost and depreciated over the asset's remaining useful life.
Management believes that the long-lived assets in the accompanying consolidated
balance sheets are appropriately valued.
INVESTMENTS
Investments and equity ownership in associated companies consisted of the
following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Nonmarketable investments, at cost:
ClearSource common and preferred stock, 333,444
and 817,386 shares in 1998 and 1999,
respectively.................................. $825,072 $3,249,056
======== ==========
</TABLE>
At December 31, 1999, KNOLOGY, Inc., through its wholly-owned subsidiaries,
owned approximately 18% of ClearSource. ClearSource was formed during 1998 to
build and operate advanced broadband networks offering a bundle of
communications services to residential and business customers. The Company's
investment in ClearSource is accounted for under the cost method of accounting.
F-12
<PAGE> 123
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
The following summarizes the results of operations for the year ended
December 31, 1997 of associated companies in which the Company's investments
were accounted for by the equity method.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
RESULTS OF OPERATIONS:
Operating revenues................................... $10,355,068
Operating loss....................................... (5,511,386)
Net loss.......................................... (9,091,533)
</TABLE>
REVENUE RECOGNITION
The Company's revenues are recognized when services are provided,
regardless of the period in which they are billed. Fees billed in advance are
included in the accompanying consolidated 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
$9,000, $587,000, and $1,476,000 of advertising expense are recorded in the
Company's consolidated statements of operations for the years ended December 31,
1997, 1998, and 1999, respectively.
INSTALLATION FEES
The Company recognizes installation revenue when the customer is initially
billed for the connection of services as the installation direct costs exceed
installation revenue on a per customer basis.
SOURCES OF SUPPLIES
The Company purchases customer premise equipment and plant materials from
outside vendors. Although numerous suppliers market and sell customer premise
equipment and plant materials, the Company currently purchases each customer
premise component from a single vendor and has several suppliers for plant
materials. If the suppliers are unable to meet the Company's needs as it
continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Company's network could result, which would
adversely affect operating results.
F-13
<PAGE> 124
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The potential for material credit loss
is mitigated by the large number of customers with relatively small receivable
balances. The carrying amount of the Company's receivables approximates their
fair values.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes,
as set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred taxes are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Deferred
tax benefit represents the change in the deferred tax asset and liability
balances (Note 6).
For the years ended December 31, 1998 and 1999, the Telephone Operations
Group was included in the consolidated tax returns of the Company's parent
company, ITC Holding. Effective August 1998, KNOLOGY Holdings was included in
the consolidated federal income tax return of ITC Holding. The Company and its
subsidiaries file separate state income tax returns. Under a tax sharing
arrangement, the Company recorded an income tax benefit of $5,631,618 and
$19,697,270 and an affiliate receivable in the amount of $6,785,691 and
$12,205,546 at December 31, 1998 and 1999, respectively, for the utilization of
net operating losses included in the consolidated tax return of ITC Holding. For
the period from January 1, 1998 to July 31, 1998, KNOLOGY Holdings filed a
separate federal income tax return.
Investment tax credits related to telephone plant have been deferred and
are being amortized as a reduction of federal income tax expense over the
estimated useful lives of the assets giving rise to the credits.
COMPREHENSIVE LOSS
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive loss and its components in a full set of general purpose financial
statements. The Company has chosen to disclose comprehensive loss, which
consists of net loss and unrealized gains (losses) on marketable securities, in
the consolidated statements of stockholders' equity and comprehensive loss.
Prior years have been restated to conform to the SFAS No. 130 requirements.
F-14
<PAGE> 125
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." That
statement requires the disclosure of basic net loss per share and diluted net
loss per share. Basic net loss per share is computed by dividing net loss
available to common stockholders 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 effect of the Company's stock options
(using the treasury stock method) was not included in the computation of diluted
EPS as their effect was anti-dilutive.
3. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Senior Discount Notes, with a face value
of $444,100,000, bearing interest at
11.875% beginning October 15, 2002,
payable semiannually beginning April
15, 2003 with principal and any unpaid
interest due October 15, 2007.......... $255,020,209 $270,818,870
Senior secured credit facility, at a rate
of LIBOR plus 2.5%, interest payable
quarterly with principal and any unpaid
interest due November 15, 2002......... 0 19,000,000
Capitalized lease obligation, at a rate of
10% payable in quarterly installments
of $6,304 through December 2006,
secured................................ 134,244 122,694
------------ ------------
255,154,453 289,941,564
Less current maturities................... 12,174 12,174
------------ ------------
$255,142,279 $289,929,390
============ ============
</TABLE>
F-15
<PAGE> 126
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
Following are maturities of long-term debt for each of the next five years
as of December 31, 1999:
<TABLE>
<S> <C>
2000................................................... $ 12,174
2001................................................... 16,098
2002................................................... 19,016,374
2003................................................... 18,074
2004................................................... 19,950
Thereafter............................................. 444,140,024
------------
Total...................................... $463,222,694
============
</TABLE>
The fair values of the Senior Discount Notes at December 31, 1999 are
estimated to be approximately $297,547,000, based on the closing bond price at
year-end.
On December 22, 1998, KNOLOGY Holdings entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp., which may be used for working capital and other purposes,
including capital expenditures and permitted acquisitions. At KNOLOGY Holdings'
option, interest will accrue based on either the Alternate Base Rate plus
applicable margin or the LIBOR rate plus applicable margin as defined.
Obligations under the credit facility will be secured by substantially all
tangible and intangible assets of KNOLOGY Holdings and its current and future
subsidiaries. The credit facility includes a number of covenants, including,
among others, covenants limiting the ability of KNOLOGY Holdings and its
subsidiaries and their present and future subsidiaries to incur debt, create
liens, pay dividends, make distributions or stock repurchases, make certain
investments, engage in transactions with affiliates, sell assets, and engage in
certain mergers and acquisitions. The credit facility also includes covenants
requiring compliance with certain operating and financial ratios on a
consolidated basis. The credit facility allows KNOLOGY Holdings to borrow up to
five times certain individual subsidiary's "consolidated adjusted cash flow" as
defined in the credit facility. In connection with the initiation of the
revolving credit facility, KNOLOGY Holdings incurred approximately $1,256,000 in
related costs which are being amortized on a straight-line basis over the
five-year term.
In the fourth quarter of 1997, KNOLOGY Holdings issued units consisting of
senior discount notes due in 2007 and warrants to purchase Preferred Stock for
gross proceeds of approximately $250 million. The notes were offered at a
substantial discount from face value, with no interest payable for the first
five years. Approximately $2.5 million of the gross proceeds has been allocated
to the warrants. Each warrant allowed the holder to purchase .003734 shares of
KNOLOGY Holdings' preferred stock. The warrants have been exchanged for warrants
to purchase KNOLOGY, Inc. Series A preferred stock. KNOLOGY Holdings incurred
approximately $7.9 million in costs to
F-16
<PAGE> 127
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
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 KNOLOGY
Holdings to incur indebtedness, pay dividends, prepay subordinated indebtedness,
repurchase capital stock, make investments, engage in transactions with
stockholders and affiliates, create liens, sell assets, and engage in mergers
and consolidations. The proceeds from the offering of the units have been, and
will be, used to repay certain indebtedness of KNOLOGY Holdings, to fund
expansion of KNOLOGY Holdings' business, and for additional working capital and
general corporate purposes.
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for
varying periods. Leases that expire are generally expected to be renewed or
replaced by other leases.
Future minimum rental payments required under the operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000..................................................... $ 499,863
2001..................................................... 273,477
2002..................................................... 198,158
2003..................................................... 154,071
2004..................................................... 134,044
Thereafter............................................... 457,747
----------
Total minimum lease payments................. $1,717,360
==========
</TABLE>
Total rental expense for all operating leases was approximately $0,
$435,000, and $745,000 for the years ended December 31, 1997, 1998, and 1999,
respectively.
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into contracts with various entities to provide
programming to be aired by KNOLOGY Holdings. The Company pays a monthly fee as
cost for the programming services, generally based on the number of average
subscribers to the program, although some fees are adjusted based on the total
number of subscribers to the system and/or the system penetration percentage.
Certain contracts have minimum monthly fees. The Company estimates that it will
pay approximately $19 million in programming fees under these contracts during
2000.
F-17
<PAGE> 128
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 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
The (provision) benefit for income taxes from continuing operations
consisted of the following for the years ended December 31, 1997, 1998, and
1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ -----------
<S> <C> <C> <C>
Current............................. $(1,775,581) $ 5,392,803 $19,375,611
Deferred............................ 1,596,002 10,662,185 9,276,376
Increase in valuation allowance..... (831,200) (10,423,370) (8,954,717)
----------- ------------ -----------
Income tax (provision) benefit...... $(1,010,779) $ 5,631,618 $19,697,270
=========== ============ ===========
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities as of December 31, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 8,923,583 $ 10,916,459
Equity in losses of subsidiaries............. 1,188,958 1,188,958
Deferred bond interest....................... 12,919,184 26,117,681
Deferred revenues............................ 190,918 194,901
Other........................................... 1,841,404 877,914
Valuation allowance............................. (15,777,328) (24,732,047)
------------ ------------
Total deferred tax assets........... 9,286,719 14,563,866
Deferred tax liabilities:
Depreciation and amortization................ 9,608,377 14,563,866
------------ ------------
Net deferred income taxes.................... $ 321,658 $ 0
============ ============
</TABLE>
The Company has available, at December 31, 1999, unused net operating loss
carryforwards of approximately $85,211,735 expiring in various years from 2005
to 2019, unless utilized. Management has recorded a total valuation allowance of
$24,732,047 in 1999 on these operating loss carryforwards, the majority of which
contain limitations on utilization, and the equity losses of subsidiaries.
F-18
<PAGE> 129
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended December 31, 1997, 1998,
and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax (provision) benefit at statutory
rate....................................... (34)% 34% 34%
State income taxes, net of federal benefit.... (4) 4 3
Other......................................... (60) 1 0
Increase in valuation allowance............... (453) (25) (12)
---- --- ---
Income tax (provision) benefit................ (551)% 14% 25%
==== === ===
</TABLE>
7. EQUITY INTERESTS
CAPITAL TRANSACTIONS
The Company has authorized 200,000,000 shares of $.01 par value common
stock, 75,000,000 shares of $.01 par value Series A convertible preferred stock,
and 50,000,000 shares of $.01 par value Series B convertible preferred stock.
In connection with the Reorganization (Note 1), the Company's warrant
holders elected to exchange the Bond Warrants of Knology Holdings for warrants
in KNOLOGY, Inc.'s preferred stock. Knology Holdings' Bond Warrants were
subsequently canceled.
In October 1999, KNOLOGY Holdings issued to SCANA warrants to purchase 753
shares of the KNOLOGY Holdings' preferred stock in connection with certain loan
agreements between the two parties. SCANA exercised these warrants in November
1999. The weighted average exercise price of the warrant was $1,500 per share of
preferred stock. KNOLOGY Holdings received net proceeds of $1.1 million and
recorded the fair value of the warrants, as determined by the Black-Scholes
option pricing model, of $1.9 million to additional paid-in capital. Related
interest expense of $0.8 million was recorded in the accompanying consolidated
statements of operations; SCANA elected to exchange its 753 shares of KNOLOGY
Holdings preferred stock for 451,800 shares of KNOLOGY, Inc.'s preferred stock
in connection with the reorganization (Note 1).
KNOLOGY HOLDINGS' STOCK OPTION PLAN
Under KNOLOGY Holdings' 1995 stock option plan (the "Stock Option Plan"),
as adopted in December 1995 and amended in February 1998, 8,000,000 shares of
KNOLOGY Holdings' common stock are reserved and authorized for issuance upon the
exercise of the options. All employees of KNOLOGY Holdings are eligible to
receive options under the Stock Option Plan. The Stock Option Plan is
administered by the
F-19
<PAGE> 130
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
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 accounts for KNOLOGY Holdings' stock-based compensation plans
under APB Opinion No. 25, under which no compensation cost has been recognized
by the Company. However, the Company has computed, for pro forma disclosure
purposes, the value of all options for shares of KNOLOGY Holdings' common stock
to employees of KNOLOGY Holdings using the Black-Scholes option pricing model
and the following weighted average assumptions in 1997, 1998, and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate............ 6.43% 5.42% 5.78%
Expected dividend yield............ 0% 0% 0%
Expected lives..................... Seven years Seven years Seven years
Expected volatility................ 30% 30% 30%
</TABLE>
The total fair value of options for KNOLOGY Holdings' stock granted to
employees of KNOLOGY Holdings during 1997, 1998, and 1999 was computed as
approximately $304,000, $1,832,000 and $5,735,000, respectively, which would be
amortized on a pro forma basis over the five-year vesting period of the options.
F-20
<PAGE> 131
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
A summary of the status of KNOLOGY Holdings' stock option plan at December
31, 1999 is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996:................. 211,188 2.00
Granted........................................ 505,536 2.11
Forfeited...................................... (63,756) 2.00
---------
Outstanding at December 31, 1997:................. 652,968 2.07
Granted........................................ 2,261,504 2.55
Forfeited...................................... (144,224) 2.38
Exercised...................................... (1,576) 2.00
---------
Outstanding at December 31, 1998:................. 2,768,672 2.42
Granted........................................ 4,625,376 2.85
Forfeited...................................... (816,604) 2.48
Exercised...................................... (6,400) 2.05
---------
Outstanding at December 31, 1999:................. 6,571,044 2.71
=========
Exercisable shares as of December 31, 1999:....... 281,700 2.07
=========
</TABLE>
TELEPHONE OPERATIONS GROUP STOCK OPTION PLAN
The Company's parent, ITC Holding, sponsors a stock option plan which
provides for the granting of stock options to substantially all employees of the
Telephone Operations Group. Options are generally granted at a price
(established by ITC Holding's board of directors based on equity transactions
and other analyses) equal to at least 100% of the fair market value of ITC
Holding's common stock on the option grant date. Options granted generally
become exercisable 40% after two years and 20% per annum for the next three
years and remain exercisable for ten years after the option grant date.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
ITC Holding accounts for its stock-based compensation plans under APB
Opinion No. 25, under which no compensation cost has been recognized by the
Company. However, the Company has computed, for pro forma disclosure purposes,
the value of all options for shares of ITC Holding's common stock granted to
employees of the Telephone Operations Group using the Black-Scholes option
pricing model prescribed by SFAS No. 123 and the following weighted average
assumptions:
F-21
<PAGE> 132
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate................. 6.0% 5.3% 5.8%
Expected dividend yield................. 0% 0% 0%
Expected lives.......................... Ten years Ten years Ten years
Expected volatility..................... 60% 50% 50%
</TABLE>
The total fair value of options for ITC Holding's stock granted to
employees of the Telephone Operations Group during 1997, 1998, and 1999 was
computed as approximately $744,000, $602,000 and $755,000, respectively, which
would be amortized on a pro forma basis over the five-year vesting period of the
options.
A summary of the status of the Telephone Operations Group's portion of ITC
Holding's stock option plan at December 31, 1999 is presented in the following
table:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
-------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996:.................. 479,756 $ 0.15-$3.36
Granted......................................... 188,732 $ 3.36-$7.75
Forfeited....................................... (33,800) $ 0.49-$7.75
Exercised....................................... (31,000) $ 0.28-$2.73
--------
Outstanding at December 31, 1997:.................. 603,688 $ 0.15-$7.75
Granted......................................... 86,968 $ 8.38-$12.50
Forfeited....................................... (93,172) $ 1.26-$12.50
Exercised....................................... (149,372) $ 0.28-$3.36
--------
Outstanding at December 31, 1998:.................. 448,112 $ 0.15-$12.50
Granted......................................... 60,132 $15.89-$21.65
Forfeited....................................... (69,953) $ 1.96-$18.85
Exercised....................................... (84,814) $ 1.58-$3.50
--------
Outstanding at December 31, 1999:.................. 353,477 $ 0.15-$21.65
========
Exercisable shares as of December 31, 1999:........ 231,062 2.52
========
</TABLE>
F-22
<PAGE> 133
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
PRO FORMA NET LOSS
If the Company had accounted for these plans in accordance with SFAS No.
123, the Company's net loss for the periods presented would be as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net loss attributable to common stockholders
for the years ended December 31:
1997....................................... $ (5,020,617) $ (7,113,134)
1998....................................... (23,983,523) (24,642,829)
1999....................................... (58,791,005) (60,348,055)
Net loss per share attributable to common
stockholders for the years ended December
31:
1997....................................... $ (50,206.17) $ (71,134.34)
1998....................................... (239,835.23) (246,428.29)
1999....................................... (11.45) (11.76)
</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, 1997, 1998,
and 1999, the Company recorded approximately $3,459,000, $3,230,000, and
$2,574,000, respectively, in selling, operations, and administrative expenses
related to these services. In the opinion of management, amounts charged to the
Company are consistent with costs that would be incurred from third party
providers.
Certain of ITC Holding's affiliates provide the Company with various
services and/or receives services provided by the Company. These entities
include InterCall, Inc., which provides conference calling services. In
addition, the Company receives services from ITCDeltaCom, Inc., an affiliate of
ITC Holding, which provides wholesale long-distance and related services and
which leases capacity on certain of its fiber routes. ITC Holding also holds
equity investments in the following entities which do business with the Company:
Powertel, Inc., which provides cellular services, and EarthLink, Inc., which is
a national provider of Internet access. In management's opinion, the Company's
transactions with these affiliated entities are representative of arm's-length
transactions.
For the years ended December 31, 1997, 1998, and 1999, the Company received
services from these affiliated entities in the amounts of approximately
$707,000, $1,570,000, and $2,344,000, respectively, which are reflected in cost
of services and
F-23
<PAGE> 134
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
selling, operations, and administrative expenses in the Company's consolidated
statements of operations.
The Company also provides switching, programming, and other services for
various affiliated companies on a contracted or time and materials basis. Total
amounts paid by the affiliated companies for these services approximated
$1,517,000, $2,186,000, and $1,795,000, respectively, for the years ended
December 31, 1997, 1998, and 1999, and are reflected in operating revenues in
the Company's consolidated statements of operations.
During 1998 and 1999, the Company leased office space to ITCDeltaCom, Inc.
and Powertel, Inc. Approximately $234,000 and $152,000 of lease income related
to these transactions is recorded as other income in the Company's consolidated
statements of operations for the years ended December 31, 1998 and 1999,
respectively.
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 $221,000, $628,000, and $977,000 for the
years ended December 31, 1997, 1998, and 1999, respectively.
9. BUSINESS ACQUISITIONS
KNOLOGY HOLDINGS ACQUISITIONS
In January 1998, the Company acquired an additional 6,747 shares of KNOLOGY
Holdings preferred stock, representing an approximate 13% ownership interest in
KNOLOGY Holdings, in exchange for cash of $10,177,234. The acquisition of the
additional interest was accounted for as a step acquisition. The fair value of
net assets acquired totaled $6,775,879, resulting in goodwill of $3,401,355.
Effective July 1998, the Company acquired an additional 42,565 shares,
representing approximately 43% of KNOLOGY Holdings' outstanding stock. The
Company recorded its acquisition of this additional ownership interest under the
purchase method of accounting as a step acquisition. Accordingly, the Company
recorded the pro rata share of net assets acquired at fair value. The Company
determined that the book value of the pro rata share of assets and trade
liabilities acquired approximated fair value. The fair value of KNOLOGY
Holdings' senior discount notes (Note 3) was determined to be less than book
value at the date of acquisition based on quoted market prices. As a result, a
debt discount of approximately $8,542,000 was recorded to adjust the book value
of the pro rata share of senior notes acquired to fair value (Note 3).
The total value paid by the Company was $36,687,424, including cash of
$2,155,100 and common and preferred stock valued at $34,532,324. The fair value
of net assets acquired totaled $22,678,372, resulting in goodwill of
$14,009,052. Prior to the acquisition, the Company owned more stock than any
other single KNOLOGY Holdings
F-24
<PAGE> 135
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
stockholder, owning approximately 42% of the outstanding stock. As a result of
the acquisition, the Company owned approximately 85% of the outstanding stock of
KNOLOGY Holdings at December 31, 1998.
The goodwill and debt discount created upon the acquisition of KNOLOGY
Holdings is amortized over 10 years on a straight line basis and the term of the
senior notes on the effective interest method, respectively.
CABLE ALABAMA ACQUISITION
On October 30, 1998, KNOLOGY Holdings acquired substantially all of the
assets of Cable Alabama Corporation ("Cable Alabama") for approximately
$60,733,000 in cash and also purchased for $5,000,000 in cash certain real
property located in Huntsville, Alabama. Cable Alabama owned and operated a
cable television system serving the Huntsville, Alabama area. KNOLOGY Holdings
plans to upgrade the existing Cable Alabama plant to provide local and
long-distance telephone service and high-speed Internet access services. The
acquisition has been accounted for under the purchase method of accounting.
TTE, INC. ACQUISITION
On June 1, 1998, KNOLOGY Holdings acquired TTE, Inc., a non-facilities
based reseller of local, long distance, and operator services to small and
medium-sized business customers throughout South Carolina, for a purchase price
of $1.3 million. The acquisition has been accounted for under the purchase
method of accounting.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The assets of TTE, Inc. and Cable Alabama have been included in the
Company's consolidated financial statements effective June 1, 1998 and September
1, 1998, respectively. The following unaudited pro forma results of operations
for the year ended December 31, 1998 assume that the acquisitions occurred on
January 1, 1998. The unaudited pro forma information is presented for
informational purposes only and may not be indicative of the actual results of
operations had the acquisitions occurred on the assumed date, nor is the
information necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Operating revenues..................................... $ 55,359,204
Loss before extraordinary items........................ (37,454,927)
Net loss attributable to common stockholders........... (33,830,072)
Net loss per share attributable to common stockholders
(a)................................................. (338,300.72)
</TABLE>
- ---------------
(a) Loss per share is computed using 100 as the number of shares
outstanding in 1998.
F-25
<PAGE> 136
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements. Management has identified the
reportable segments based on broadband services offered.
While management of the Company monitors the revenue generated from each of
the various broadband services, operations are managed and financial performance
is evaluated based upon the delivery of a multiple of the services to customers
over a single network. As a result of multiple services being provided over a
single network, there are many shared expenses and shared assets related to
providing the various broadband services to customers. Management believes that
any allocation of the shared expenses or assets to the broadband services would
be arbitrary and impractical.
The Company owns and operates advanced hybrid fiber/coaxial networks and
provides residential and business customers broadband communications services,
including video analog and digital cable television and local and long-distance
telephone. Internet services include high-speed Internet access via cable
modems, local transport services, such as local Internet transport, special
access, local private line, and local exchange transport services.
<TABLE>
<CAPTION>
INTERNET
SERVICES
VIDEO TELEPHONE AND OTHER
----------- ----------- -----------------
<S> <C> <C> <C>
1997
Operating revenues.............. $ 0 $17,633,313 $ 0
Cost of services................ 0 3,121,108 0
----------- ----------- ----------
Gross margin.................... $ 0 $14,512,205 $ 0
=========== =========== ==========
1998
Operating revenues.............. $22,527,403 $22,318,344 $ 286,775
Cost of services................ 8,750,858 7,947,852 97,883
----------- ----------- ----------
Gross margin.................... $13,776,545 $14,370,492 $ 188,892
=========== =========== ==========
1999
Operating revenues.............. $35,165,411 $28,774,150 $2,781,368
Cost of services................ 15,066,574 11,601,064 296,881
----------- ----------- ----------
Gross margin.................... $20,098,837 $17,173,086 $2,484,487
=========== =========== ==========
</TABLE>
F-26
<PAGE> 137
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1998, AND 1999
11. SUBSEQUENT EVENTS
DISTRIBUTION AND PRIVATE PLACEMENT
On February 4, 2000, ITC Holding Company distributed to its option holders
options to purchase 6,258,036 shares of the Company's Series A preferred stock.
On February 7, 2000, ITC Holding distributed to its shareholders all of its
43,211,531 shares of the Company's Series A preferred stock. On February 7,
2000, the Company completed a private placement of its Series B preferred stock
to a small group of institutional investors and certain officers of the Company
for approximately $100.6 million.
F-27
<PAGE> 138
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1998, we issued 100 shares of our common stock to InterCall,
Inc., a wholly owned subsidiary of ITC Holding Company, Inc.
In November 1999, we completed an exchange with KNOLOGY Holdings
stockholders, including AT&T venture funds and SCANA Communications, in which we
exchanged our common stock and Series A preferred stock for KNOLOGY Holdings
common stock and preferred stock. Through this exchange offering, we acquired
7,113 shares of preferred stock of KNOLOGY Holdings from AT&T venture funds for
4,267,800 shares of our Series A preferred stock and 753 shares of preferred
stock of KNOLOGY Holdings from SCANA Communications for 451,800 shares of our
Series A preferred stock. In November 1999, we also issued 43,211,531 shares of
our Series A preferred stock to ITC Holding in exchange for ITC Holding
contributing to us:
- stock representing 85% of the outstanding equity of KNOLOGY Holdings;
- stock representing 100% of each of Interstate Telephone, Valley
Telephone, Globe Telecommunications and ITC Globe, which together
provide telephone, cable and Internet access services in western
Georgia and eastern Alabama;
- a note of KNOLOGY Holdings in the amount of $9,641,189; and
- 272,832 shares of preferred stock of ClearSource, Inc., and
subscription rights to purchase an additional 810,501 shares of
preferred stock of ClearSource in future ClearSource financings,
together with cash in the amount of $5.6 million to be used to make the
subscription payments. ClearSource is a company planning to operate
broadband systems in Texas and other southern or mid-western states
similar to our services in the southeast. Currently, our investment in
ClearSource represents approximately 18% ownership interest in this
company.
The shares of Series A preferred stock are convertible into shares of our
common stock at any time at the option of the holder and automatically upon the
completion of a public offering in which (1) the per share price to the public
is at least $6.00, (2) the gross proceeds to us are at least $50 million and (3)
the common stock sold in the offering is listed on the Nasdaq National Market or
on a national securities exchange. The shares are convertible into shares of
common stock on a one-to-one basis, subject to customary anti-dilution
adjustments.
In November 1999 we also completed the exchange of warrants to purchase
shares of KNOLOGY Holdings preferred stock for warrants to purchase 994,961
shares of our Series A preferred stock. The warrants may be exercised at any
time at an exercise price of $.01 per share. The warrants expire on October 21,
2007.
II-1
<PAGE> 139
On February 7, 2000 we completed a private placement of 21,180,131 shares
of our Series B preferred stock to a small group of institutional investors and
certain of our executive officers for approximately $100.6 million. The shares
of Series B preferred stock are convertible into shares of our common stock at
any time at the option of the holder and automatically upon the completion of a
public offering in which (1) the per share price to the public is at least
$6.00, (2) the gross proceeds to us are at least $50 million and (3) the common
stock sold in the offering is listed on the Nasdaq National Market or on a
national securities exchange. The shares are convertible into shares of common
stock on a one-to-one basis, subject to customary anti-dilution adjustments.
The issuances of securities described above were made in reliance on
exemptions from registration provided by Section 4(2) or Regulation D of the
Securities Act, as amended, as transactions by an issuer not involving any
public offering. The persons and entities exchanging securities in the
transactions represented their intention to acquire the securities for
investment only and not with a view to or for distribution in connection with
such transactions, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access to
information about our company, through their relationship with us or through
information about us made available to them.
II-2
<PAGE> 140
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
2.2 Purchase Agreement between Cable Alabama Corporation and
KNOLOGY of Huntsville, Inc., dated as of October 19, 1998
(Incorporated herein by reference from Exhibit 2.2 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K in the
year ended December 31, 1998).
3.1 Certificate of Incorporation of KNOLOGY, Inc. (Previously
filed).
3.2 Bylaws of KNOLOGY, Inc. (Previously filed).
4.1 Specimen of Stock Certificate for Shares of Common Stock,
par value $0.01 (Previously filed).
4.2 Specimen of Stock Certificate for Shares of Series A
Preferred Stock, par value $0.01 (Previously filed).
4.5 Registration Rights Agreement, dated October 22, 1997,
between KNOLOGY Holdings, Inc., the Placement Agents and
SCANA Communications, Inc. (Incorporated herein by reference
from Exhibit 4.2 to KNOLOGY Holdings, Inc.'s Registration
Statement on Form S-4, (File No. 333-43339)).
5.1 Opinion of Hogan & Hartson L.L.P. (Previously filed).
8.1 Opinion of Arthur Andersen LLP regarding certain tax matters
(Previously filed).
10.1 Unit Purchase Agreement, dated as of October 16, 1997
between KNOLOGY Holdings, Inc. and SCANA Communications,
Inc. (Incorporated herein by reference from Exhibit 10.1 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
10.4 Lease Agreement dated April 15, 1996 by and between D.L.
Jordan and American Cable Company, Inc. (Incorporated herein
by reference from Exhibit 10.5 to KNOLOGY Holdings, Inc.'s
Registration Statement on Form S-4 (File No. 333-43339)).
10.5 Pole Attachment Agreement dated January 1, 1998 by and
between Gulf Power Company and Beach Cable, Inc.
(Incorporated herein by reference from Exhibit 10.7 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
10.6 Telecommunications Facility Lease and Capacity Agreement,
dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc.
(Incorporated herein by reference from Exhibit 10.16 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339)).
</TABLE>
II-3
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
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 (Incorporated
herein by reference from Exhibit 10.17 to KNOLOGY Holdings,
Inc.'s Registration Statement on Form S-4 (File No.
333-43339)).
10.11 Lease Agreement, dated December 5, 1997 by and between The
Hilton Company and KNOLOGY of Panama City, Inc.
(Incorporated herein by reference from Exhibit 10.25 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339).
10.13 Certificate of Membership with National Cable Television
Cooperative, dated January 29, 1996, of Cybernet Holding,
Inc. (Incorporated herein by reference from Exhibit 10.34 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339).
10.18 Ordinance No. 99-16 effective March 16, 1999 between
Columbus consolidated Government and KNOLOGY of Columbus
Inc. (Incorporated herein by reference from Exhibit 10.18 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.19 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6,
1990 (Incorporated herein by reference from Exhibit 10.44 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339).
10.20 Ordinance No. 50-76 (Montgomery, Alabama) (Incorporated
herein by reference from Exhibit 10.45 to KNOLOGY Holdings,
Inc.'s Registration Statement on Form S-4 (File No.
333-43339).
10.21 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16,
1990 (Incorporated herein by reference from Exhibit 10.45.1
to KNOLOGY Holdings, Inc.'s Registration Statement on Form
S-4 (File No. 333-43339).
10.22 Resolution No. 58-95 (Montgomery, Alabama) dated April 6,
1995 (Incorporated herein by reference from Exhibit 10.46 to
KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4
(File No. 333-43339).
10.25 Resolution No. 97-22 (Panama City Beach, Florida) dated
December 3, 1997 (Incorporated herein by reference from
Exhibit 10.49 to KNOLOGY Holdings, Inc.'s Registration
Statement on Form S-4 (File No. 333-43339).
10.27 Ordinance No. 5999 (Augusta, Georgia) dated January 20, 1998
(Incorporated herein by reference from Exhibit 10.53 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1997).
10.28 Ordinance No. 1723 (Panama City, Florida) dated March 10,
1998 (Incorporated herein by reference from Exhibit 10.54 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1997).
</TABLE>
II-4
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.31 Franchise Agreement (Charleston County, South Carolina)
dated December 15, 1998 (Incorporated herein by reference
from Exhibit 10.31 to KNOLOGY Holdings, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1998).
10.32 Ordinance No. 1998-47 (North Charleston, South Carolina)
dated May 28, 1998 (Incorporated herein by reference from
Exhibit 10.32 to KNOLOGY Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998).
10.33 Ordinance No. 1998-77 (Charleston, South Carolina) dated
April 28, 1998 (Incorporated herein by reference from
Exhibit 10.33 to KNOLOGY Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998).
10.34 Ordinance No. 98-5 (Columbia County, Georgia) dated August
18, 1998 (Incorporated herein by reference from Exhibit
10.34 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998).
10.36 Network Access Agreement dated July 1, 1998 between SCANA
Communications, Inc., f/k/a MPX Systems, Inc. and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from
Exhibit 10.36 to KNOLOGY Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998).
10.37 Internet Access Contract dated September 1, 1998 between
ITCDeltaCom, Inc. and KNOLOGY Holdings, Inc. (Incorporated
herein by reference from Exhibit 10.37 to KNOLOGY Holdings,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998).
10.38 Collocation Agreement for Multiple Sites dated on or about
June 1998 between Interstate FiberNet, Inc. and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from
Exhibit 10.38 to KNOLOGY Holdings, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998).
10.39* Lease Agreement dated October 12, 1998 between Southern
Company Services, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.39 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
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 (Incorporated
herein by Reference from Exhibit 10.40 to KNOLOGY Holdings,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998).
</TABLE>
II-5
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.41 License Agreement dated March 3, 1998 between BellSouth
Telecommunications, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.41 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.44 Pole Attachment Agreement dated February 18, 1998 between
KNOLOGY Holdings, Inc. and Georgia Power Company
(Incorporated Herein by reference from Exhibit 10.44 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.46 Assignment Agreement dated March 4, 1998 between Gulf Power
Company and KNOLOGY of Panama City, Inc. (Incorporated
herein by reference from Exhibit 10.46 to KNOLOGY Holdings,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998).
10.47 Adoption Agreements dated March 1, 1999 between KNOLOGY
Holdings, Inc. and BellSouth Telecommunications, Inc.
(Incorporated herein by reference from Exhibit 10.47 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.50* Carrier Services Agreement dated September 30, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.50 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.51* Reseller Services Agreement dated September 9, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.51 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.52* Private Line Services Agreement dated September 10, 1998
Between BTI Communications Corporation and KNOLOGY Holdings,
Inc. (Incorporated herein by reference from Exhibit 10.52 to
KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998).
10.53 Credit Facility Agreement between First Union National Bank,
First Union Capital Markets Corp. and KNOLOGY Holdings, Inc.
Dated December 22, 1998 (Incorporated herein by reference
from Exhibit 10.53 to KNOLOGY Holdings, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1998).
10.59 Tax Separation Agreement between ITC Holding and KNOLOGY,
Inc. (Incorporated herein by reference from Exhibit 10.33 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.60 Right of First Refusal and Option Agreement, dated November
19, 1999 by and between KNOLOGY of Columbus, Inc. and ITC
Service Company, Inc. (Previously filed).
10.61 Services Agreement dated November 2, 1999 between KNOLOGY,
Inc. and ITC Service Company, Inc. (Previously filed).
</TABLE>
II-6
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.62 Support Agreement, dated November 2, 1999 between Interstate
Telephone Company, Inc. and ITC Service Company, Inc.
(Previously filed).
10.63 1995 KNOLOGY Holdings, Inc. Stock Option Plan, assumed by
KNOLOGY, Inc. as of November 23, 1999 (Previously filed).
10.64 KNOLOGY, Inc. Long Term Incentive Plan (Previously filed).
10.65 Warrant Agreement, dated as of December 3, 1999, between
KNOLOGY, Inc. and United States Trust Company of New York
(including form of Warrant Certificate) (Previously filed).
10.66 Warrant Registration Rights Agreement, dated as of December
3, 1999, between KNOLOGY, Inc. and United States Trust
Company of New York (Previously filed).
10.67 Section 351 Agreement by and among KNOLOGY, Inc., InterCall,
Inc., Valley Telephone Company and Globe Telecommunications,
Inc., dated November 1, 1999 (Previously filed).
10.68 Amendment to Section 351 Agreement by and among KNOLOGY,
Inc., InterCall, Inc., Valley Telephone Company and Globe
Telecommunications, Inc., dated November 22, 1999
(Previously filed).
10.71 KNOLOGY, Inc. Spin-Off Plan (Previously filed).
10.72 Loan Agreement between InterCall, Inc. and KNOLOGY, Inc.
dated December 22, 1999 (Previously filed).
10.73 Line of Credit Note from KNOLOGY, Inc. to InterCall, Inc.
dated December 22, 1999 (Previously filed).
10.74 Form of Residual Note from KNOLOGY, Inc. to ITC Holding
Company, Inc. (Previously filed).
10.75 Joint Ownership Agreement dated as of December 8, 1998,
among ITC Service Company, Powertel, Inc., ITCDeltaCom
Communications, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.48 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.76 On/Line Operating and License Agreement dated March 18, 1998
Between KNOLOGY Holdings, Inc. and CableData, Inc.
(Incorporated herein by reference from Exhibit 10.49 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.77 Dedicated Capacity Agreement between DeltaCom and KNOLOGY
Holdings, Inc. dated August 22, 1997 (Incorporated herein by
reference from Exhibit 10.50 to KNOLOGY, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1999).
</TABLE>
II-7
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.78 Agreement for Telecommunications Services dated April 28,
1999 between ITCDeltaCom Communications, Inc. and KNOLOGY
Holdings, Inc. (Incorporated herein by reference from
Exhibit 10.51 to KNOLOGY, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1999).
10.79 Amendment to Master Capacity Lease dated November 1, 1999
between Interstate Fibernet, Inc. and KNOLOGY Holdings, Inc.
(Incorporated herein by reference from Exhibit 10.52 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.80 Duct Sharing Agreement dated July 27, 1999 between KNOLOGY
Holdings, Inc. and Interstate Fiber Network. (Incorporated
herein by reference from Exhibit 10.53 to KNOLOGY, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1999).
10.81 Assumption of Lease Agreement dated November 9, 1999 between
KNOLOGY Holdings, Inc. ITC Holding Company, Inc. and J.
Smith Lanier II. (Incorporated herein by reference from
Exhibit 10.54 to KNOLOGY, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1999).
10.82 Assumption of Lease Agreement dated November 9, 1999 among
KNOLOGY Holdings, Inc. ITC Holding Company, Inc. and Midtown
Realty, Inc. (Incorporated herein by reference from Exhibit
10.55 to KNOLOGY, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1999).
10.83 Contract for Centrex Switching Services dated January 4,
1999 between Interstate Telephone Company and InterCall,
Inc. (Incorporated herein by reference from Exhibit 10.56 to
KNOLOGY, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1999).
10.84 Stockholders Agreement dated February 7, 2000 among KNOLOGY,
Inc., certain holders of the Series A preferred stock, the
holders of the Series B preferred stock, certain management
holders and certain additional stockholders (Filed
herewith).
12.1 Computation of Ratio of Earnings to Fixed Charges (Filed
herewith).
21.1 Subsidiaries of KNOLOGY, Inc. (Filed herewith).
23.1 Consent of Arthur Andersen LLP (Filed herewith).
23.4 Consent of Hogan & Hartson L.L.P. (Previously filed).
23.5 Consent of Arthur Andersen relating to Exhibit 8.1
(Previously filed).
24.1 Power of Attorney (Previously filed).
99.1 IRS Private Letter Ruling, dated April 1, 1999 (Previously
filed).
99.2 IRS Private Letter Ruling, dated December 22, 1999
(Previously filed).
</TABLE>
- ---------------
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit was filed separately with the
Secretary of the
II-8
<PAGE> 146
Commission without such text pursuant to the approval of our Application
Requesting Confidential Treatment under Rule 406 of the Securities Act.
(b) Financial Statement Schedules
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.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
maybe permitted to directors, officers or controlling persons pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
II-9
<PAGE> 147
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;"
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-10
<PAGE> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-1 and has duly caused this Amended Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Washington, DC on this 25th day of April, 2000.
KNOLOGY, INC.
By: *
------------------------------------
Rodger L. Johnson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amended
Registration Statement has been signed as of April 25, 2000 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
* President, Chief Executive Officer
- ------------------------------------- and Director
Rodger L. Johnson
* Chief Financial Officer (Principal
- ------------------------------------- Financial and Accounting Officer)
Robert K. Mills
* Chairman of the Board of Directors
- -------------------------------------
Campbell B. Lanier, III
* Director
- -------------------------------------
William H. Scott
* Director
- -------------------------------------
Richard Bodman
* Director
- -------------------------------------
Alan A. Burgess
* Director
- -------------------------------------
Donald W. Burton
* Director
- -------------------------------------
L. Charles Hilton, Jr.
* Director
- -------------------------------------
Donald W. Weber
*By: /s/ CHAD WACHTER
- -------------------------------------
Chad Wachter
Attorney-in-Fact
</TABLE>
II-11
<PAGE> 149
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the financial statements of KNOLOGY, Inc. included in this Annual Report on Form
10-K and have issued our report thereon dated February 25, 2000. 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.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 25, 2000
S-1
<PAGE> 150
SCHEDULE II
KNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Allowance for doubtful accounts,
balance at beginning of year........ $ 30,524 $ 110,528 $ 418,499
Addition charged to cost and expense... 432,256 1,395,384 1,415,697
Deductions............................. (352,252) (1,087,413) (1,139,129)
--------- ----------- -----------
Allowance for doubtful accounts,
balance at end of year.............. $ 110,528 $ 418,499 $ 695,067
========= =========== ===========
</TABLE>
S-2
<PAGE> 1
EXHIBIT 10.84
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (this "Agreement") is entered into as of
February 7, 2000 by and among:
(i) KNOLOGY, Inc., a Delaware corporation (the "Company");
(ii) certain holders of the Company's Series A Preferred Stock
identified on the signature pages hereto who received their shares of Series A
Preferred Stock pursuant to an exchange offer ("Series A Exchange Holders");
(iii) holders of the Company's Series B Preferred Stock identified on
the signature pages hereto ("Series B Investors");
(iv) holders of other securities issued by the Company who execute
joinder agreements to this Agreement as contemplated by Section 6.01 hereof
("Other Investors" and collectively with Series A Exchange Holders and Series B
Investors, "Investors");
(v) members of the Company's management that have agreed and that
subsequently agree to be bound by the provisions hereof ("Management Holders");
and
(vi) certain other holders of the Company's Series A Preferred Stock
identified on Exhibit A to this Agreement who received such shares pursuant to
the Company's Registration Statement on Form S-1 (SEC File No. 333-89179) (the
"Additional Stockholders").
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
1.01 "Affiliate" of a person shall mean any other person that controls,
is controlled by, or is under common control with, such person.
1.02 "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
1.03 "Common Stock" shall mean the Company's Common Stock, $0.01 par
value per share.
1.04 "Exchange Act" shall mean the Securities Exchange Act of 1934 (or
any similar successor federal statute), as amended, and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
<PAGE> 2
1.05 "Holder" shall mean any holder of Registrable Securities.
1.06 "Initiating Holders" shall mean, (i) prior to such time as the
Company becomes eligible to utilize Form S-3 ("S-3 Eligible"), Holders of
Investor Stock representing not less than 25% of the then-outstanding Investor
Stock on a fully-diluted, as-converted, as-exercised basis and (ii) after such
time as the Company becomes S-3 Eligible, Holders of Investor Stock representing
not less than an aggregate of 5% of the then-outstanding Common Stock of the
Company on a fully-diluted, as-converted, as-exercised basis.
1.07 "Investor Stock" shall mean (i) shares of Common Stock issued or
issuable upon the conversion or exercise of any stock (including, without
limitation, the Series A Preferred Stock, the Series B Preferred Stock or any
other convertible preferred or common stock of the Company issued from time to
time), warrants, options or other securities of the Company owned by the
Investors or any Permitted Transferee thereof; and (ii) any shares of Common
Stock issued as a dividend or other distribution with respect to or in exchange
for or in replacement of the shares referenced in (i) above.
1.08 "Management Stock" shall mean (i) shares of Common Stock issued or
issuable upon the conversion or exercise of any stock (including, without
limitation, the Series A Preferred Stock, the Series B Preferred Stock or any
other convertible preferred or common stock of the Company issued from time to
time), warrants options or other securities of the Company owned from time to
time by the Management Holders or any Permitted Transferee thereof; and (ii) any
shares of Common Stock issued as a dividend or other distribution with respect
to or in exchange for or in replacement of the shares referenced in (i) above.
1.09 "Permitted Transferee" shall mean, (i) with respect to a
Management Holder, a member of such Management Holder's immediate family, a
trust established for the benefit of members of such Management Holder's
immediate family, or a transferee of such Management Holder by will or the laws
of intestate succession and (ii) with respect to a holder of Investor Stock, any
Affiliate of such holder or any partner or retired partner, the estates and
family members of any such partners and retired partners and of their spouses,
and trusts for the benefit of any of the foregoing persons, or a shareholder or
other equity owner of such holder (including, with respect to J. H. Whitney IV,
L.P., any investment fund also managed by J. H. Whitney & Co.).
1.10 "Preferred Stock" shall mean together the Series A Preferred Stock
and the Series B Preferred Stock.
1.11 "Qualified Public Offering" shall mean an underwritten public
offering of Common Stock resulting in gross proceeds to the Company of not less
than $50 million (prior to expenses and underwriting commissions) and at an
offering price per share equal to at least $6.00 (as appropriately adjusted for
future stock splits, stock dividends, recapitalizations and similar transactions
affecting the Common Stock) and the Common Stock shall be listed for quotation
on the Nasdaq National Market or on a national securities exchange.
- 2 -
<PAGE> 3
1.12 "Registrable Securities" shall mean Management Stock and Investor
Stock; provided, however, that Registrable Securities shall not include any
shares of Management Stock or Investor Stock that previously have been
registered under the Securities Act or that have otherwise been sold to the
public in an open-market transaction under Rule 144.
1.13 The terms "registers", "registered" and "registration" shall refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of the
effectiveness of such registration statement by the Commission.
1.14 "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including without
limitation all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, expenses of any regular or special audits incident to or required
by any such registration, and the fees and expenses of one counsel for the
selling Holders, but excluding Selling Expenses.
1.15 "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
1.16 "Securities Act" shall mean the Securities Act of 1933 (or any
similar successor federal statute), as amended, and the rule and regulations
thereunder, all as the same shall be in effect from time to time.
1.17 "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for each of the Holders other than fees and
expenses of one counsel for all the selling Holders.
1.18 "Series A Preferred Stock" shall mean the Company's Series A
Preferred Stock, $0.01 par value per share.
1.19 "Series B Preferred Stock" shall mean the Company's Series B
Preferred Stock, $0.01 par value per share.
1.20 "Significant Stockholder" shall mean each Investor, Management
Holder and Additional Stockholder who holds 5% or more of the outstanding Common
Stock of the Company on a fully-diluted, as-converted, as-exercised basis as of
the date hereof, provided that a Significant Stockholder will no longer be
deemed a Significant Stockholder when such Significant Stockholder no longer
holds at least 5% of the outstanding Common Stock of the Company on a
fully-diluted, as-converted, as-exercised basis; provided that for the purposes
of Article 3, the term "Significant Stockholder" shall include J. H. Whitney (as
defined in Section 4.01) and Blackstone (as defined in Section 4.03), as
applicable, so long as J. H. Whitney or Blackstone, as applicable, has the right
to elect a director to the board of directors of the Company as provided in
Article 4.
- 3 -
<PAGE> 4
1.21 "Significant Stockholder Stock" shall mean (i) shares of Common
Stock or Preferred Stock owned, from time to time, by any Significant
Stockholder or any transferee thereof; (ii) shares of Common Stock or Preferred
Stock issued or issuable upon the conversion or exercise of any stock
(including, without limitation, the Series A Preferred Stock, the Series B
Preferred Stock or any other convertible preferred or common stock of the
Company issued from time to time), warrants, options or other securities of the
Company owned by the Significant Stockholder or any transferee thereof; and
(iii) any shares of Common Stock or Preferred Stock issued as a dividend or
other distribution with respect to or in exchange for or in replacement of the
shares referenced in (i) and (ii) above.
ARTICLE 2
REGISTRATION RIGHTS
2.01 Demand Registrations.
(a) Request for Registration. At any time or times after the
effective date of the first registration statement filed by the Company under
Section 12 of the Exchange Act, the Initiating Holders may require that the
Company effect a registration under the Securities Act (i) up to two times, in
the case of a requested registration on Form S-1 or any similar form (a "Long
Form Registration"), with respect to at least twenty-five percent (25%) of the
Registrable Securities, other than Management Stock, then outstanding on a
fully-diluted, as-converted, as-exercised basis, or (ii) as many times as
requested, in the case of a requested registration on Form S-3 or any similar
form, if available (a "Short-Form Registration"), with respect to at least
twenty-five percent (25%) of the Registrable Securities then held by such
Initiating Holders (each a "Demand Registration"); provided that the Company
shall not be obligated to effect, or take any action to effect, any such
registration pursuant to this Section 2.01:
(w) Solely with respect to underwritten registrations
requested pursuant to this Agreement, if the Company shall have
previously effected an underwritten registration with respect to
Registrable Securities pursuant to Section 2.01 or 2.02 hereof, then the
Company shall not be required to effect any underwritten registration
pursuant to this Section 2.01 until a period of 180 days shall have
elapsed from the effective date of the most recent such previous
registration;
(x) If, upon receipt of a registration request pursuant
to this Section 2.01, the Company is advised in writing (with a copy to
each Initiating Holder) by a recognized national independent investment
banking firm selected by the Company that, in such firm's opinion, a
registration at the time and on the terms requested would adversely
affect any public offering of securities of the Company by the Company
(other than in connection with benefit and similar plans) (a "Company
Offering") with respect to which the Company has commenced preparations
for a registration prior to the receipt of a registration request
pursuant to this Section 2.01, the Company shall not be required to
effect a registration pursuant to this Section 2.01 until the earlier of
(i) 90 days after the completion of such Company Offering, (ii) promptly
after any abandonment of such
- 4 -
<PAGE> 5
Company Offering or (iii) 60 days after the date of receipt of a
registration request pursuant to this Section 2.01;
(y) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the
Company is already subject to service in such jurisdiction and except as
may be required by the Securities Act or applicable rules or regulations
thereunder;
(z) In the case of a Long-Form Registration, after the
Company has effected two such registrations pursuant to this Section 2.01
(in the aggregate for all Holders) and such registrations have been
declared or ordered effective and the sales of such Registrable
Securities shall have closed.
Upon receipt of written notice of such demand, the Company will promptly give
written notice of the proposed registration to all other Holders, and will
include in such registration all Registrable Securities specified in such
demand, together with any Registrable Securities of any other Holder joining in
such demand as are specified in a written request received by the Company within
20 days after delivery of the Company's notice.
(b) Deferral of Demand Registration. The Company shall file a
registration statement with respect to each Demand Registration requested
pursuant to Section 2.01(a) as soon as reasonably practicable after receipt of
the demand of the Initiating Holders; provided, however, that if in the good
faith judgment of the Board of Directors of the Company, such registration would
be seriously detrimental to the Company in that such registration would
interfere with any material corporate transaction by the Company, or require
disclosure of facts surrounding any proposed or pending acquisition,
disposition, strategic alliance or financing transaction or other material
development involving the Company, and the Board of Directors concludes, as a
result, that it is advisable to defer the filing or effectiveness of such
registration statement at such time (as evidenced by an appropriate resolution
of the Board), then the Company shall have the right to defer such filing for
the period during which such registration would be seriously detrimental;
provided, however, that (i) the Company may not defer the filing or
effectiveness for a period of more than 180 days, (ii) the Company may not take
such option to defer filing or effectiveness of such registration(s) for more
than 180 days in any 12-month period, and (iii) the Company shall not exercise
its right to defer a Demand Registration more than three times.
(c) Underwriting. The Investors shall be entitled to two
underwritten Demand Registrations. If the Initiating Holders intend to
distribute the Registrable Securities covered by a Demand Registration by means
of an underwriting, they shall so advise the Company as part of their demand
made pursuant to Section 2.01, and the Company shall include such information in
its written notice to Holders. The Initiating Holders shall have the right to
select the managing underwriter(s) for an underwritten Demand Registration,
subject to the approval of the Company's Board of Directors (which will not be
unreasonably withheld or delayed). The right of any Holder to participate in an
underwritten Demand Registration shall be conditioned upon
- 5 -
<PAGE> 6
such Holder's participation in such underwriting in accordance with the terms
and conditions thereof, and the Company and such Holders will enter into an
underwriting agreement in customary form.
(d) Priorities. The Investors who hold Registrable Securities
will have absolute priority over any other securities included in a Demand
Registration. If other securities are included in any Demand Registration that
is an underwritten offering, and the managing underwriter for such offering
advises the Company that in its opinion the amount of securities to be included
exceeds the amount of securities which can be sold in such offering without
adversely affecting the marketability thereof, notwithstanding any other
provision of this Section 2.01(d), if the managing underwriter advises the
Holders in writing that marketing factors require a limitation on the number of
shares to be underwritten, the securities of the Company held by persons who are
not Holders shall be excluded from such registration to the extent so required
by such limitation. If, after the exclusion of such shares, still further
reductions are required, the number of shares included in the registration by
each Holder of Management Stock shall be reduced on a pro rata basis (based on
the percentage of the outstanding Common Stock held by each such Holder,
assuming the conversion of the Preferred Stock and any other convertible
preferred or common stock and the exercise of any options, warrants and similar
rights held by such Holder), by such minimum number of shares as is necessary to
comply with such request. If, after the exclusion of such shares, still further
reductions are required, the number of shares included in the registration by
each Holder of Investor Stock shall be reduced on a pro rata basis (based on the
percentage of the outstanding Common Stock held by each such Holder, assuming
the conversion of the Preferred Stock and any other convertible preferred or
common stock and the exercise of any options, warrants and similar rights held
by such Holder), by such minimum number of shares as is necessary to comply with
such request. No Registrable Securities or any other securities excluded from
the underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. If the underwriter has not limited the number of
Registrable Securities or other securities to be underwritten, the Company and
officers and directors of the Company who are not Management Holders may include
its or their securities for its or their own account in such registration if the
underwriters so agree and if the number of Registrable Securities and other
securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
2.02 Piggyback Registrations.
(a) Request for Inclusion. If the Company shall determine to
register any of its securities for its own account or for the account of other
security holders of the Company on any registration form (other than a
registration relating solely to benefit plans, or a registration relating solely
to a Rule 145 transaction, or a registration on any registration form which does
not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities) which permits the inclusion of
Registrable Securities (a "Piggyback Registration"), the Company will promptly
give each Holder written notice thereof and, subject to Section 2.02(c), shall
include in such registration all the Registrable Securities requested to be
included therein pursuant to the written requests of Holders received within 10
days after the delivery of the Company's notice.
- 6 -
<PAGE> 7
Notwithstanding the foregoing, if, at any time after giving such written notice
of its intention to effect such registration and prior to the effective date of
the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such securities, the
Company may, at its election, give written notice of such determination to the
Holders and thereupon the Company shall be relieved of its obligation to
register such Holders' Registrable Securities in connection with the
registration of such securities (but not from its obligation to pay Registration
Expenses to the extent incurred in connection therewith as provided herein),
without prejudice, however, to the rights (if any) of Initiating Holders
immediately to request that such registration be effected as a registration
under Section 2.01(a) hereof.
(b) Underwriting. If the Piggyback Registration relates to an
underwritten public offering, the Company shall so advise the holders of
Registrable Securities as a part of the written notice given pursuant to Section
2.02(a). The Company shall have the right to select the managing underwriter(s)
for an underwritten Piggyback Registration. In the event of an underwritten
public offering, the right of any Holder to participate in such registration
shall be conditioned upon such Holder's participation in such underwriting in
accordance with the terms and conditions thereof. All Holders proposing to
distribute their Registrable Securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by the
Company.
(c) Priorities. If such proposed Piggyback Registration is an
underwritten offering and the managing underwriter for such offering advised the
Company that the securities requested to be included therein exceed the amount
of securities that can be sold in such offering without adversely affecting the
marketability thereof, the Company shall so advise all holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be allocated
in the following manner: The securities of the Company held by persons who are
not Holders shall be excluded from such registration and underwriting to the
extent required by such limitation, and, if a further limitation on the number
of shares is still required, the number of shares that may be included in the
registration and underwriting by each Holder of Management Stock shall be
reduced, on a pro rata basis (based on the percentage of the outstanding Common
Stock held by each such Holder, assuming the conversion of the Preferred Stock
and any other convertible preferred or common stock and the exercise of any
options, warrants and similar rights held by such Holder), by such minimum
number of shares as is necessary to comply with such limitation, and, if a
further limitation on the number of shares is still required, the number of
shares that may be included in the registration and underwriting by each Holder
of Investor Stock shall be reduced, on a pro rata basis (based on the percentage
of the outstanding Common Stock held by each such Holder, assuming the
conversion of the Preferred Stock and any other convertible preferred or common
stock and the exercise of any options, warrants and similar rights held by such
Holder), by such minimum number of shares as is necessary to comply with such
limitation. Any Registrable Securities or other securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration. The Company
shall not grant any registration rights that entitle the holders of other
securities to any priority over the Registrable Securities in any Piggyback
- 7 -
<PAGE> 8
Registration without the prior consent of the holders of at least sixty percent
(60%) of the combined then-outstanding Registrable Securities.
2.03 Expenses of Registration.
All Registration Expenses incurred in connection with all Demand
Registrations and all Piggyback Registrations shall be borne by the Company. All
Selling Expenses relating to Registrable Securities included in any Demand
Registration or Piggyback Registration shall be borne by such Holders pro rata
on the basis of the number of shares sold by them.
2.04 Registration Procedures.
In the case of each registration effected by the Company pursuant to this
Article 2, the Company will keep each Holder advised in writing as to the
initiation of such registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(a) cause such registration to be declared effective by the
Commission and, in the case of a Demand Registration, keep such registration
effective for a period of 270 days or until the holders of Registrable
Securities included therein have completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement (including post-effective amendments) as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement;
(c) to the extent practicable, promptly prior to the filing of
any document that is to be incorporated by reference into any registration
statement or prospectus forming a part thereof subsequent to the effectiveness
thereof, and in any event no later than the date such document is filed with the
Commission, provide copies of such document to the Holders, if requested, and to
any underwriter, and make representatives of the Company available for
discussion of such document and other customary due diligence matters, and
include in such document prior to the filing thereof such information as any
Holder or any such underwriter reasonably may request;
(d) obtain appropriate qualifications of the securities covered
by such registration under state securities or "blue sky" laws in such
jurisdictions as may be requested by the holders of Registrable Securities;
provided, however, that the Company shall not be required to file a general
consent to service of process in any jurisdiction in which it is not otherwise
subject to service in order to obtain any such qualification;
(e) furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Holder from time to time may reasonably request;
- 8 -
<PAGE> 9
(f) notify each Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such Holder, prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(g) cause all Registrable Securities covered by such
registration to be listed on each securities exchange or inter-dealer quotation
system on which similar securities issued by the Company are then listed;
(h) provide a transfer agent and registrar for all Registrable
Securities covered by such registration and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration;
(i) furnish to the Holders of Registrable Securities covered by
such registration, addressed to them, an opinion of counsel for the Company,
dated the date of the closing under the underwriting agreement, if any, or the
date of effectiveness of the registration statement if such registration is not
an underwritten offering, and use its reasonable best efforts to furnish to the
Holders of Registrable Securities covered by such registration, addressed to
them, a "cold comfort" letter signed by the independent certified public
accountants who have certified the Company's financial statements included in
such registration, covering substantially the same matters with respect to such
registration (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities and such other matters as such Holders may reasonably
request;
(j) otherwise comply with all applicable rules and regulations
of the Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at least 12
months, but not more than 18 months, beginning with the first month after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act;
(k) in connection with any underwritten Demand Registration,
the Company will enter into an underwriting agreement reasonably satisfactory to
the Initiating Holders containing customary underwriting provisions, including
indemnification and contribution provisions; and
- 9 -
<PAGE> 10
(l) in the case of an underwritten Demand Registration,
participate in customary "roadshow" presentations in connection with such
registration.
2.05 Indemnification.
(a) The Company will indemnify each underwriter of Registrable
Securities, each Holder, each of such Holders' officers, directors, partners,
agents, employees and representatives, and each person controlling such
underwriter or Holder within the meaning of Section 15 of the Securities Act,
with respect to each registration, qualification or compliance effected pursuant
to this Article 2, against all expenses, claims, losses, damages and liabilities
(or actions, proceedings or settlements in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or any other document (including
any related registration statement, notification or the like) incident to any
such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of the Securities Act or any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse each such indemnified person for any legal and any other
expenses reasonably incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by such Holder or such underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
2.05(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Company (which consent has not been unreasonably withheld).
(b) Each Holder of Registrable Securities included in any
registration effected pursuant to this Article 2 shall indemnify the Company,
each of its directors, officers, agents, employees and representatives, each
underwriter, and each person who controls the Company or such underwriter within
the meaning of Section 15 of the Securities Act, each other participating Holder
and each of their officers, directors and partners, and each person controlling
such holders, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
such indemnified persons for any legal or any other expenses reasonably incurred
in connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in strict conformity with written
information furnished to the Company by such Holder or such underwriter;
provided, however, that (x) no Holder shall be liable hereunder for any amounts
in excess of the net proceeds received by such Holder pursuant to such
registration, and (y) the
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obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent has not been unreasonably withheld).
(c) Each party entitled to indemnification under this Section
2.05 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom through counsel approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense but the fees and disbursements
of counsel to an Indemnified Party so choosing to participate shall be at the
expense of such party, unless (i) the Indemnifying Party shall have failed to
retain counsel for the Indemnified Party as aforesaid, or (ii) the Indemnified
Party shall have reasonably concluded that there may be reasonable defenses
available to it which are different from or additional to those available to the
Indemnifying Party or that the interests of the Indemnified Party conflict with
the interests of the Indemnifying Party; provided, however, that the failure of
any Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 2.05 to the extent such
failure is not prejudicial. No Indemnifying Party in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include an unconditional release of such Indemnified Party from all liability in
respect to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 2.05 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations; provided, however, that in any case, no Indemnifying Party shall
be required to contribute an amount in excess of the net proceeds received by it
from all Registrable Securities sold in the transactions related to such
statements or omissions. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in an underwriting
agreement entered into in
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<PAGE> 12
connection with an underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall
control.
2.06 Other Obligations. With a view to making available the benefits of
certain rules and regulations of the Commission which may effectuate the
registration of Registrable Securities or permit the sale of Registrable
Securities to the public without registration, the Company agrees to:
(a) after the effective date of the first registration
statement filed by the Company under Section 12 of the Exchange Act, exercise
reasonable efforts to cause the Company become and remain S-3 Eligible;
(b) at such time as any Registrable Securities are eligible for
transfer under Rule 144(k), upon the request of the Holder of such Registrable
Securities, remove any restrictive legend from the certificates evidencing such
securities at no cost to such Holder;
(c) make and keep available public information as defined in
Rule 144 under the Securities Act at all times from and after 90 days following
its initial registration under the Section 12 of the Exchange Act;
(d) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act at any time after it has become subject to such reporting
requirements; and
(e) furnish any Holder upon request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at any
time from and after 90 days following the effective date of the first
registration statement filed by the Company under Section 12 of the Exchange
Act), and of the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of the Company, and such other reports and documents as a
Holder may reasonably request in availing itself of any rule or regulation of
the Commission (including Rule 144A) allowing a Holder to sell any such
securities without registration.
2.07 Hold-Back Agreements. If requested by the Company or any
underwriter of any Common Stock or other equity securities of the Company, no
Holder shall sell or otherwise transfer or dispose of any Common Stock or other
equity securities of the Company (other than pursuant to such registration)
during (a) in the case of the Company's first underwritten public offering of
Common Stock or other equity securities of the Company for its own account, the
180-day period following the effective date of such registration statement, and
(b) in the case of all subsequent registrations of the Company's Common Stock or
other equity securities of the Company, the 90-day period following the
effective date of such registration statement; provided, however, that if any
holder of Management Stock or any Significant Stockholder is subject to
hold-back restrictions of shorter duration, such shorter periods shall apply to
all Holders. The obligations described in this Section 2.07 shall not apply to a
registration on Form S-4 or Form S-8 or similar forms which may be promulgated
in the future and, except in the case of the
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<PAGE> 13
Company's first underwritten public offering, shall not apply to a Holder of
Registrable Securities representing less than 1% of the then-outstanding Common
Stock (on an as-converted basis).
2.08 Other Agreements. Notwithstanding the provisions of this Article
2, to the extent there is any conflict between the terms of this Agreement and
that certain Warrant Registration Rights Agreement between the Company and
United States Trust Company of New York, as Warrant Agent, dated as of December
3, 1999 (the Warrant Registration Rights Agreement"), the terms of the Warrant
Registration Rights Agreement shall control; provided however that the Company
shall not amend the terms of the Warrant Registration Rights Agreement in a
manner that is materially adverse to the Holders without the prior consent of
the holders of at least sixty percent (60%) of the combined then-outstanding
Registrable Securities.
2.09 Termination of Registration Rights. The right of any Holder to
request inclusion of Registrable Securities in any registration pursuant to this
Article 2 shall terminate when (i) all Registrable Securities beneficially owned
by such Holder immediately may be sold under Rule 144(k) and (ii) the Company's
Common Stock is listed on a national securities exchange or traded in The Nasdaq
Stock Market. Notwithstanding the foregoing or anything else to the contrary set
forth in this Agreement, each of J. H. Whitney and Blackstone shall have the
right to demand registration pursuant to Section 2.01 of the Registrable
Securities held by them so long as the fair market value of the amount requested
to be registered is at least $50 million and so long as the participating
Holders pay all Registration Expenses and Selling Expenses for such demand
registration. The Company shall not be obligated to effect or take any action to
effect any registration pursuant to this section 2.09 (a) on more than one
occasion or (b) following the third anniversary of a Qualified Public Offering.
If other securities are included in the Demand Registration provided by this
Section 2.09 that is an underwritten offering, and the managing underwriter for
such offering advises the Company that in its opinion the amount of securities
to be included exceeds the amount of securities which can be sold in such
offering without adversely affecting the marketability thereof, notwithstanding
any other provision of this Agreement to the contrary, if the managing
underwriter advises the Holders in writing that marketing factors require a
limitation on the number of shares to be underwritten, the securities of the
Company held by persons who are not Holders shall be excluded from such
registration to the extent so required by such limitation. If, after the
exclusion of such shares, still further reductions are required, the number of
shares included in the registration by each Holder of Management Stock shall be
reduced on a pro rata basis (based on the percentage of the outstanding Common
Stock held by each such Holder, assuming the conversion of the Preferred Stock
and any other convertible preferred or common stock and the exercise of any
options, warrants and similar rights held by such Holder), by such minimum
number of shares as is necessary to comply with such request. Notwithstanding
anything herein to the contrary, if, after the exclusion of such shares held by
persons who are not Holders and each Holder of Management Stock, further
reductions are required, the number of shares included in the registration by
each Holder of Investor Stock (excluding J. H. Whitney and Blackstone) shall be
reduced on a pro rata basis (based on the percentage of the outstanding Common
Stock held by each such Holder, assuming the conversion of the Preferred Stock
and any other convertible preferred or common stock and the exercise of any
options, warrants and similar rights held by such Holder), by such minimum
number of shares as is necessary to comply with such request. If, after such
reductions, further reductions are
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<PAGE> 14
required, the number of shares included in the registration by each of J. H.
Whitney and Blackstone shall be reduced on a pro rata basis (based on the
percentage of the outstanding Common Stock held by each of J. H. Whitney and
Blackstone, assuming the conversion of the Preferred Stock and any other
convertible preferred or common stock and the exercise of any options, warrants
and similar rights held by J. H. Whitney and Blackstone).
ARTICLE 3
FIRST OFFER AND CO-SALE RIGHTS
3.01 Prohibition on Transfer.
No Significant Stockholder shall sell, transfer, assign, pledge or
otherwise dispose of (whether with or without consideration and whether
voluntarily or involuntarily or by operation of law) any interest in any
Preferred Stock or Common Stock (a "Transfer") other than in compliance with
this Article 3. Each Significant Stockholder agrees not to consummate any
Transfer (other than a Transfer to a Permitted Transferee pursuant to Section
3.03) until the expiration of a 30-day period (the "Election Period") following
delivery by such Significant Stockholder to the Company and the other
Significant Stockholders of an Offer Notice pursuant to Section 3.02(a), unless
the parties to the Transfer have been finally determined prior to the expiration
of the Election Period.
3.02 First Offer and Co-Sale Rights.
(a) At least 30 days prior to making any Transfer of any
Significant Stockholder Stock, the transferring Significant Stockholder (the
"Transferring Stockholder") shall deliver a written notice (the "Offer Notice")
to the Company (as required by Section 4.5.1(b) of the Amended and Restated
Certificate of Incorporation) and the other Significant Stockholders (the "Other
Significant Stockholders"), stating the Transferring Stockholder's intention to
transfer, and specifying all particulars of the proposed Transfer, including,
but not limited to, (i) the name(s) and address(es) of the proposed
transferee(s), (ii) the number and class of capital stock involved in the
proposed Transfer (the "Offered Shares"), (iii) a description of all of the
terms of the Transfer (which must include a cash price unless the Transfer is
proposed to be made in exchange for either partly or wholly consideration other
than cash), and a copy of any third party offer, and (iv) the address of the
Transferring Stockholder to which notice or acceptance of the Offer Notice is to
be sent. In the event that the Company declines to exercise its right to
purchase any or all of the Offered Shares pursuant to the Amended and Restated
Certificate of Incorporation, such Offered Shares shall be offered to the Other
Significant Stockholders on a pro rata basis (and the Company may also purchase
Offered Shares), until the expiration of the Election Period. If the Other
Significant Stockholders and the Company have not elected to purchase any of the
of the Offered Shares prior to the expiration of the Election Period, the
Transferring Stockholder may, within 60 days after the expiration of the
Election Period, Transfer the Offered Shares to one or more third parties at a
price not less than 100% of the price per share specified in the Offer Notice;
provided that such third parties execute joinder agreements to this Agreement as
provided in Section 6.01. Any Offered Shares not transferred during such 60-
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<PAGE> 15
day period shall again be subject to the provisions of this Section 3.02(a) upon
subsequent Transfer. Notwithstanding the foregoing, if the terms of a third
party offer require that all or a specified minimum (the "Specified Minimum")
number of shares be sold to the proposed transferee, then the Other Significant
Stockholders and the Company (either pursuant to Section 4.5 of the Amended and
Restated Certificate of Incorporation or to this Section 3.02(a) must purchase
in the aggregate either (i) all of the Offered Shares or (ii) no more than that
number of Offered Shares which when deducted from the total number of Offered
Shares results in the Specified Minimum. Otherwise such Offer Notice shall be
deemed to have been completely rejected by the Other Significant Stockholders
and the Company (a "Deemed Rejection").
(b) Each Other Significant Stockholder who (i) has not
exercised its rights pursuant to Section 3.02(a) or (ii) has exercised its
rights pursuant to Section 3.02(a) but is unable to purchase Offered Shares
pursuant to Section 3.02(a) as a result of a Deemed Rejection (each a
"Non-Purchasing Holder") may elect to participate in the contemplated Transfer
at the same price per share and on the same terms by delivering written notice
to the Transferring Stockholder within 15 days after expiration of the Election
Period. If any Non-Purchasing Holders have elected to participate in such
Transfer, the Transferring Stockholder and such Non-Purchasing Holders shall be
entitled to sell in the contemplated Transfer, at the same price and on the same
terms, a number of shares of Significant Stockholder Stock equal to the product,
calculated on a fully-diluted, as-converted, as-exercised basis, of (i) the
quotient determined by dividing the percentage of shares of Significant
Stockholder Stock owned by such Holder by the aggregate percentage of shares of
Significant Stockholder Stock owned by the Transferring Stockholder and all
Non-Purchasing Holders participating in such sale and (ii) the number of shares
of Significant Stockholder Stock to be sold in the contemplated Transfer. Each
Transferring Stockholder shall use best efforts to obtain the agreement of the
prospective transferee(s) to the participation of the Non-Purchasing Holders in
any contemplated Transfer, and no Transferring Stockholder shall transfer any of
its shares of Significant Stockholder Stock to any prospective transferee if
such prospective transferee(s) declines to allow the participation of the
Non-Purchasing Holders.
3.03 Exempt Transactions. The restrictions set forth in this Article 3
shall not apply to Transfers of Significant Stockholder Stock (i) to a Permitted
Transferee of the transferring Stockholder; provided, however, that such
Permitted Transferee shall agree in writing to be bound by such restrictions in
connection with subsequent Transfers, or (ii) by a Significant Stockholder who
is an individual to any of Campbell B. Lanier III, SCANA Communications, Inc.,
the South Atlantic Funds, or ITC Holding Company, Inc. Notwithstanding the
foregoing, no party hereto shall avoid the provisions of this Agreement by
making one or more transfers to one or more Permitted Transferees and then
disposing of all or any portion of such party's interest in any such Permitted
Transferee.
3.04 Repurchase Rights. In the event of termination of a Management
Holder's employment with the Company and its subsidiaries for any reason, the
Company shall have the right, exercisable by written notice to the Management
Holder at any time prior to the expiration of a 90-day period following such
termination of employment, to repurchase all or any portion of the Management
Stock held by such Management Holder and its Permitted Transferees at a cash
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<PAGE> 16
price per share equal to the fair market value of the Management Stock as
determined in good faith by the Company's Board of Directors as of the date of
termination. The closing of the repurchase of Management Stock shall occur
within 120 days of termination of the Management Holder's employment.
ARTICLE 4
DIRECTORS OF THE COMPANY
4.01 J. H. Whitney Series B Director. The Company and each of the
Series B Investors (for so long as such Series B Investor owns any Series B
Preferred Stock) shall take or cause to be taken all such action within their
respective power and authority as may be required, for so long as J. H. Whitney
IV, L.P. and its Affiliates (collectively, "J. H. Whitney") together shall own
45% or more of the shares of Investor Stock held by J. H. Whitney as of the date
shares of Series B Preferred Stock are first issued to J. H. Whitney (as
adjusted to reflect stock splits and combinations):
(a) To cause to be elected to the board of directors of the
Company one director designated by J. H. Whitney to fill one of the two Series B
board seats provided for by Section 4.4.2(e) of the Amended and Restated
Certificate of Incorporation (the "J. H. Whitney Series B Director"); provided,
however, that for so long as J. H. Whitney owns less than 45% of the shares of
Investor Stock held by J. H. Whitney as of the date shares of Series B Preferred
Stock are first issued to J. H. Whitney (as adjusted to reflect stock splits and
combinations), J. H. Whitney shall not have the right under this Section 4.01 to
have one person designated by it to be elected as a Series B Director; further
provided that such person designated by J. H. Whitney may be any general partner
of J. H. Whitney & Co. or its affiliated funds, or any other person reasonably
satisfactory to the Company, and shall have executed a non-disclosure agreement
with the Company; and
(b) To remove forthwith any Series B Director designated by J.
H. Whitney when (and only when) such removal is requested, with or without
cause, by J. H. Whitney, and in the case of death, resignation or other removal
as herein provided of such director, to elect another Series B Director
designated by J. H. Whitney (if at the time the vacancy occurs, J. H. Whitney
shall have the right to have a person designated by J. H. Whitney elected as the
Series B Director pursuant to Section 4.01 hereof).
4.02 J. H. Whitney Board Observer Rights. In the event that J. H.
Whitney shall not have the right to designate the J. H. Whitney Series B
Director pursuant to Section 4.01, but for so long as J. H. Whitney owns at
least 25% of the shares of Investor Stock held by J. H. Whitney as of the date
shares of Series B Preferred Stock are first issued to J. H. Whitney (as
adjusted to reflect stock splits and combinations) the Company shall provide J.
H. Whitney notice (in the same manner as notice is given to directors), and
permit one person designated by J. H. Whitney to attend as observer, all
meetings of the Company's board of directors and shall provide to J. H. Whitney
the same information concerning the Company, and access thereto, provided to
members of the Company's board of directors; provided that such person
designated by J. H. Whitney may
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<PAGE> 17
be any general partner of J. H. Whitney & Co. or its affiliated funds, or any
other person reasonably satisfactory to the Company, and shall have executed a
non-disclosure agreement with the Company. The reasonable out-of-pocket travel
expenses incurred by any such designee of J. H. Whitney in attending any board
meeting shall be reimbursed by the Company to the extent consistent with the
Company's then existing policy of reimbursing directors generally for such
expenses.
4.03 Blackstone Series B Director. The Company and each of the Series B
Investors (for so long as such Series B Investors owns any Series B Preferred
Stock) shall take or cause to be taken all such action within their respective
power and authority as may be required, for so long as Blackstone CCC Capital
Partners L.P., Blackstone CCC Offshore Capital Partners L.P., and Blackstone
Family Investment Partnership III L.P. and their respective Affiliates
(collectively, "Blackstone") together shall own 45% or more of the shares of
Investor Stock held by Blackstone as of the date shares of Series B Preferred
Stock are first issued to Blackstone (as adjusted to reflect stock splits and
combinations):
(a) To cause to be elected to the board of directors of the
Company one director designated by Blackstone to fill one of the two Series B
board seats provided for by Section 4.4.2(e) of the Amended and Restated
Certificate of Incorporation (the "Blackstone Series B Director"); provided,
however, that for so long as Blackstone, owns less than 45% of the shares of
Investor Stock held by Blackstone as of the date shares of Series B Preferred
Stock are first issued to Blackstone (as adjusted to reflect stock splits and
combinations), Blackstone shall not have the right under this Section 4.03 to
have one person designated by it to be elected as a Series B Director; further
provided that such person designated by Blackstone shall be any reasonably
satisfactory to the Company and shall have executed a non-disclosure agreement
with the Company; and
(b) To remove forthwith any Series B Director designated by
Blackstone when (and only when) such removal is requested, with or without
cause, by Blackstone, and in the case of death, resignation or other removal as
herein provided of such director, to elect another Series B Director designated
by Blackstone (if at the time the vacancy occurs, Blackstone shall have the
right to have a person designated by Blackstone elected as the Series B Director
pursuant to Section 4.03 hereof).
4.04 Blackstone Board Observer Rights. In the event that Blackstone
shall not have the right to designate the Blackstone Series B Director pursuant
to Section 4.03, but for so long as Blackstone owns at least 25% of the shares
of Investor Stock held by Blackstone as of the date shares of Series B Preferred
Stock are first issued to Blackstone (as adjusted to reflect stock splits and
combinations), the Company shall provide Blackstone notice (in the same manner
as notice is given to directors), and permit one person designated by Blackstone
to attend as observer, all meetings of the Company's board of directors and
shall provide to Blackstone the same information concerning the Company, and
access thereto, provided to members of the Company's board of directors;
provided that such person designated by Blackstone shall be reasonably
satisfactory to the Company, and shall have executed a non-disclosure agreement
with the Company. The reasonable out-of-pocket travel expenses incurred by any
such designee of
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<PAGE> 18
Blackstone in attending any board meeting shall be reimbursed by the Company to
the extent consistent with the Company's then existing policy of reimbursing
directors generally for such expenses.
4.05 First Union Board Observer Rights. For so long as First Union
Investors, Inc. and its Affiliates (collectively, "First Union") together shall
own at least 25% of the shares of Investor Stock held by First Union as of the
date shares of Series B Preferred Stock are first issued to First Union (as
adjusted to reflect stock splits and combinations) the Company shall provide
First Union notice (in the same manner as notice is given to directors), and
permit one person designated by First Union to attend as observer, all meetings
of the Company's board of directors and shall provide to First Union the same
information concerning the Company, and access thereto, provided to members of
the Company's board of directors; provided that such person designated by First
Union shall be reasonably satisfactory to the Company, and shall have executed a
non-disclosure agreement with the Company. The reasonable out-of-pocket travel
expenses incurred by any such designee of First Union in attending any board
meeting shall be reimbursed by the Company to the extent consistent with the
Company's then existing policy of reimbursing directors generally for such
expenses.
4.06 J. H. Whitney Director After a Qualified Public Offering. After
the Company has completed a Qualified Public Offering, the Company and each of
the parties to this Agreement (for so long as such parties own any voting stock
of the Company) shall take or cause to be taken all such action within their
respective power and authority as may be required, for so long as J. H. Whitney
shall own 5% or more of the outstanding shares of Common Stock on a
fully-diluted basis:
(a) To cause to be elected to the board of directors of the
Company one director designated by J. H. Whitney (the "J. H. Whitney Director");
provided, however, that for so long as J. H. Whitney owns less than 5% of the
outstanding shares of Common Stock on a fully-diluted basis, J. H. Whitney shall
not have the right under this Section 4.06 to have one person designated by it
to be elected as to the board of directors of the Company; further provided that
such person designated by J. H. Whitney may be any general partner of J. H.
Whitney & Co. or its affiliated funds, or any other person reasonably
satisfactory to the Company, and shall have executed a non-disclosure agreement
with the Company; and
(b) To remove forthwith any director designated by J. H.
Whitney when (and only when) such removal is requested, with or without cause,
by J. H. Whitney, and in the case of death, resignation or other removal as
herein provided of such director, to elect another director designated by J. H.
Whitney (if at the time the vacancy occurs, J. H. Whitney shall have the right
to have a person designated by J. H. Whitney elected to the board of directors
of the Company pursuant to Section 4.06 hereof).
4.07 Blackstone Director After a Qualified Public Offering. After the
Company has completed a Qualified Public Offering, the Company and each of the
parties to this Agreement (for so long as such parties own any voting stock of
the Company) shall take or cause to be taken all such action within their
respective power and authority as may be required, for so long as
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<PAGE> 19
Blackstone shall own 5% or more of the outstanding shares of Common Stock on a
fully-diluted basis:
(a) To cause to be elected to the board of directors of the
Company one director designated by Blackstone (the "Blackstone Director");
provided, however, that for so long as Blackstone owns less than 5% of the
outstanding shares of Common Stock on a fully-diluted basis, Blackstone shall
not have the right under this Section 4.07 to have one person designated by it
to be elected as to the board of directors of the Company; further provided that
such person designated by Blackstone shall be reasonably satisfactory to the
Company, and shall have executed a non-disclosure agreement with the Company;
and
(b) To remove forthwith any director designated by Blackstone
when (and only when) such removal is requested, with or without cause, by
Blackstone, and in the case of death, resignation or other removal as herein
provided of such director, to elect another director designated by Blackstone
(if at the time the vacancy occurs, Blackstone shall have the right to have a
person designated by Blackstone elected to the board of directors of the Company
pursuant to Section 4.07 hereof).
ARTICLE 5
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees, so long as any Investor Stock is
outstanding as follows:
5.01 Basic Financial Information. If at any time the Company is not
subject to the reporting requirements at Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company will furnish the following reports to each
Holder:
(a) As soon as practicable after the end of each fiscal year of
the Company, and in any event within 90 days thereafter, a consolidated and
consolidating balance sheet of the Company and its subsidiaries, if any, as of
the end of such fiscal year, and consolidated and consolidating statements of
income and cash flow of the Company and its subsidiaries, if any, for such year,
prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and audited by a
"Big Five" international accounting firm selected by the Company;
(b) As soon as practicable after the end of each quarterly
accounting period in each fiscal year of the Company, and in any event within 45
days thereafter, a consolidated and consolidating balance sheet of the Company
and its subsidiaries, if any, as of the end of each such quarterly period, and
consolidated and consolidating statements of income and cash flow of the Company
and its subsidiaries, if any, for such period and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles
consistently applied and
- 19 -
<PAGE> 20
setting forth in comparative form the figures for the corresponding periods of
the previous fiscal year, subject to changes resulting from normal year-end
audit adjustments, all in reasonable detail and certified by the chief financial
officer of the Company, except that such statements need not contain the notes
required by generally accepted accounting principles; and
(c) As soon as practicable after the end of each monthly
accounting period and in any event within 30 days thereafter, a consolidated and
consolidating balance sheet of the Company and its subsidiaries, if any, as of
the end of such month and consolidated and consolidating statements of income
and of cash flow of the Company and its subsidiaries, if any, for each month and
for the current fiscal year of the Company to date, all subject to normal
year-end audit adjustments, prepared in accordance with generally accepted
accounting principles consistently applied and certified by an officer of the
Company, except that such statements need not contain the notes required by
generally accepted accounting principles. Such balance sheet and statements
shall include a comparison to the Company's financial plan for such month and
fiscal year-to-date period and shall show variances therefrom.
5.02 Prompt Payment of Taxes, etc. The Company will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful
taxes, assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company or any subsidiary; provided,
however, that any such tax, assessment, charge or levy need not be paid if the
validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company shall have set aside on its books adequate
reserves with respect thereto; and provided, further, that the Company will pay
all such taxes, assessments, charges or levies forthwith upon the commencement
of proceedings to foreclose any lien which may have attached as security
therefor. The Company will promptly pay or cause to be paid when due, in
conformance with customary trade terms, all other obligations incident to the
operations of the Company.
5.03 Maintenance of Properties and Leases. The Company will keep its
properties and those of its subsidiaries, if any, in good repair, working order
and condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company and its subsidiaries will at all times comply with each
material provision of all leases to which any of them is a party or under which
any of them occupies property if the breach of such provision might have a
material and adverse effect on the condition, financial or otherwise, or
operations of the Company.
5.04 Insurance. The Company will keep its assets and those of its
subsidiaries which are of an insurable character insured by financially sound
and reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in the Company's line of business, and
the Company will maintain, with financially sound and reputable insurers,
directors and officers' insurance and insurance against other hazards and risks
and liability to persons and property to the extent and in the manner customary
for companies in similar businesses similarly situated.
- 20 -
<PAGE> 21
5.05 Accounts and Records. The Company will keep true records and books
of account in which full, true and correct entries will be made of all dealings
or transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis. The
Company shall provide access during regular business hours to such records and
books of accounts to the Investors for inspection; provided that such Investors
provide reasonable notice to the Company of their intention to inspect.
5.06 Independent Accountants. The Company will retain a "Big Five"
international accounting firm as its independent public accountants who shall
certify the Company's financial statements at the end of each fiscal year. In
the event the services of the independent public accountants so selected are
terminated, the Company will promptly thereafter notify the holders of Investor
Stock and will request the firm of independent public accountants whose services
are terminated to deliver to the Investors a letter from such firm setting forth
the reasons for the termination of their services. In the event of such
termination, the Company will promptly thereafter engage another "Big Five"
international accounting firm as its independent public accountants. In its
notice to the holders of Investor Stock the Company shall state whether the
change of accountants was recommended or approved by the Board of Directors of
the Company or any committee thereof.
5.07 Compliance with Laws. The Company and all its subsidiaries shall
duly observe and conform to all applicable laws and valid requirements of
governmental authorities relating to the conduct of their businesses or to their
properties or assets.
5.08 Maintenance of Corporate Existence, etc. The Company shall
maintain in full force and effect its corporate existence, rights and franchises
and all licenses and other rights in or to use patents, processes, licenses,
trademarks, trade names or copyrights owned or possessed by it or any subsidiary
and deemed by the Company to be necessary to the conduct of their business.
5.09 Preemptive Rights.
(a) In the event that the Company proposes to issue any
Preferred Stock, Common Stock or any other equity securities, including, without
limitation, warrants, options and other convertible securities, the Company
shall give not less than 30 days' prior written notice to each Investor and
Additional Stockholder holding Preferred Stock representing, on an as-converted
basis, at least 5% of the Company's outstanding Common Stock (after giving
effect to the exercise of any outstanding warrants or options to purchase Common
Stock and conversion in full of all Preferred Stock or other securities that are
convertible into Common Stock) ("Eligible Holders") setting forth the terms and
conditions of such proposed issuance (the "Issuance Notice"). Each Eligible
Holder shall have the preemptive right to purchase the securities so offered on
the terms and conditions set forth herein and in the Issuance Notice by giving
written notice to the Company within 15 days after receipt of the Issuance
Notice (the "Preemptive Election Period"). Each electing Eligible Holder shall
have the right to purchase all or any portion of its pro rata share of 75% of
the offered securities. For purposes of this Section 5.09, an Eligible Holder's
pro rata share shall equal the ratio of (i) the aggregate number of shares of
Common Stock held by such Eligible Holder (including all shares of Common Stock
issuable upon conversion of Preferred Stock held by such Eligible Holder and
issuable upon exercise of any outstanding warrants or options for Common Stock
or Preferred Stock held by such Eligible Holder) to (ii) the total number of
outstanding shares of Common Stock held by all Eligible Holders (including all
shares of Common Stock issuable
- 21 -
<PAGE> 22
upon conversion of all outstanding Preferred Stock and other securities
convertible into Common Stock and issuable upon exercise of any outstanding
warrants or options for Common Stock or Preferred Stock) as determined
immediately prior to the proposed issuance. The Company may issue and sell all
offered securities not purchased by the Eligible Holders on the terms and
conditions set forth in the Issuance Notice within 120 days after the expiration
of the Preemptive Election Period; provided, however, that any offered
securities not sold within such 120-day period or any offered securities that
are proposed to be sold on terms and conditions less favorable to the Company
than those set forth in the Issuance Notice shall again be subject to the
procedure set forth in this Section 5.09 prior to issuance. An Eligible Holder
may assign its rights pursuant to this Section 5.09 to one or more of its
Affiliates, subject only to compliance with applicable securities laws.
(b) Notwithstanding the foregoing, the provisions of Section
5.09(a) shall not apply to:
(i) any issuance to non-Affiliates of the Company of
equity securities for consideration other than cash which are approved by
a Series B Director or such issuances which in the aggregate are less
than 2% of the outstanding Common Stock of the Company calculated on a
fully-diluted, as-converted, as-exercised basis;
(ii) shares of Common Stock (or options, warrants or
other rights to purchase Common Stock) issued or to be issued to
employees, officers or directors of, or consultants or advisors to, the
Company or any subsidiary pursuant to stock purchase plans, stock option
plans, or other compensation plans or arrangements that are approved by
the Board of Directors;
(iii) any equity securities issued pursuant to a Qualified
Public Offering; and
(iv) any equity securities issued (A) in connection with
any stock split, stock dividend or recapitalization by the Company, so
long as immediately after such stock split, stock dividend or
recapitalization the Investors own the same relative proportion of the
Company's equity securities as immediately prior to such stock split,
stock dividend or recapitalization, or (B) upon conversion of the Series
A Preferred Stock or the Series B Preferred Stock.
5.10 Affiliate Transactions. In the event that the Company enters into
a contract or transaction between the Company and one or more of its directors,
officers, or Significant Stockholders (or Affiliates thereof) or between the
Company and any other corporation, partnership, association, or other
organization in which one or more of its directors, officers or Significant
Stockholders, are directors or officers, or have a financial interest (an
"Affiliate Transaction"), such Affiliate Transaction shall (i) be fair as to the
Company at the time it is
- 22 -
<PAGE> 23
entered into and (ii) be approved by the affirmative votes of a majority of the
disinterested directors of the Company, even though such disinterested directors
be less than a quorum.
ARTICLE 6
MISCELLANEOUS
6.01 Addition of Parties. Notwithstanding any other provisions of this
Agreement, with the approval of the Board of Directors of the Company, and
without any further action on part of any of the other parties to this
Agreement, the Company may allow persons acquiring shares of Common Stock,
Preferred Stock or any other securities from the Company or as provided in this
Agreement to agree in writing to become party to this Agreement and to be bound
by all of the terms and conditions hereof applicable to an Investor prior to
acquiring such shares. Each such stockholder shall become party to this
Agreement by executing a joinder to this Agreement in form and substance
reasonably acceptable to the Board of Directors of the Company (it being agreed
that a joinder in substantially the form of Exhibit B shall be sufficient), and
shall thereafter enjoy the rights of and be bound by the obligations of an
Investor under this Agreement.
6.02 Legend. The certificates or other evidence of the Company's Common
Stock and Preferred Stock now or hereinafter owned by the parties hereto shall
bear a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE, INCLUDING, WITHOUT
LIMITATION, THE TRANSFER THEREOF, ARE SUBJECT TO THE TERMS AND PROVISIONS
OF A STOCKHOLDERS AGREEMENT, AS AMENDED HEREAFTER, A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE CORPORATION AND WILL BE PROVIDED FREE OF
CHARGE UPON REQUEST.
6.03 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Georgia as such laws are applied to agreements between
Georgia residents entered into and performed entirely in Georgia, except that
the General Corporation Law of the State of Delaware shall govern as to matters
of corporate law.
6.04 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
6.05 Entire Agreement, Amendment and Waiver; Termination of Prior
Agreements.
(a) This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof.
(b) Neither Article 1, Article 2 nor Article 3 of this
Agreement may be amended, waived, discharged or terminated except by a written
instrument signed by the Company and the holders of at least 75% of the combined
outstanding Investor Stock on an as-
- 23 -
<PAGE> 24
converted basis, and any such amendment, waiver, discharge or termination,
whether retroactively or prospectively effective, shall be binding on all of the
Investors and Management Holders.
(c) Article 4 of this Agreement may not be amended, waived,
discharged or terminated except by a written instrument signed by the Company
and the holders of in excess of 70% of outstanding shares of Series B Preferred
Stock, and any such amendment, waiver, discharge or termination, whether
retroactively or prospectively effective, shall be binding on all of the Series
B Investors.
6.06 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given:
(i) upon personal delivery to the party to be notified, (ii) when sent by
confirmed telex, facsimile or electronic mail if sent during normal business
hours of the recipient, if not, then on the next business day, (iii) five (5)
days after having been sent by United States first class registered or certified
mail, return receipt requested, postage prepaid, or (iv) one day after deposit
with a nationally recognized overnight courier, special next day delivery, with
verification of receipt (a) if to an Investor, Management Holder or Additional
Stockholder, to the address reflected in the Company's stock ledger, or at such
other address as such stockholder shall have furnished to the Company in
writing, and, with respect to J. H. Whitney and its Affiliates, with a copy to
Morrison Cohen Singer & Weinstein, LLP, Lexington Avenue, New York, New York
10022, Attn: David A Scherl, Esq., email address: [email protected] or (b) if to
the Company, at 1241 O.G. Skinner Drive, West Point, Georgia 31833, email
address: [email protected], Attention: President, with a copy to Alston
& Bird LLP, One Atlantic, 1201 W. Peachtree Street, Atlanta, Georgia 30309-3424,
email address: [email protected], Attention: Robert C. Reynolds, or at such
other address as the Company shall have furnished to each stockholder in
writing.
6.07 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any Investor, Management Holder or Additional
Stockholder under this Agreement shall impair any such right, power or remedy of
such Investor, Management Holder or Additional Stockholder nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any Investor,
Management Holder or Additional Stockholder of any breach or default under this
Agreement or any waiver on the part of any Investor, Management Holder or
Additional Stockholder of any provisions or conditions of this Agreement must be
made in writing and shall be effective only to the extent specifically set forth
in such writing. All remedies, either under this Agreement or by law or
otherwise afforded to any Investor, Management Holder or Additional Stockholder,
shall be cumulative and not alternative.
6.08 Severability. Unless otherwise expressly provided herein, an
Investor's, Management Holder's or Additional Stockholder's rights hereunder are
several rights, not rights jointly held with any of the other stockholders. In
case any provision of the Agreement shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
- 24 -
<PAGE> 25
6.09 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.10 Termination. The provisions of this Agreement (other than Article
2, Sections 4.06 and 4.07 and Article 6 hereof) shall terminate upon
consummation of a Qualified Public Offering.
6.11 Specific Enforcement. Any holder of Investor Stock shall be
entitled to specific enforcement of its rights under this Agreement. The parties
acknowledge that money damages would be an inadequate remedy for a breach of
this Agreement and consent to an action for specific performance or other
injunctive relief in the event of any such breach.
[SIGNATURE PAGES FOLLOW]
- 25 -
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth in the first Paragraph hereof
COMPANY:
KNOLOGY, INC.
By: /s/ Chad S. Wachter
----------------------------------------------
Chad S. Wachter
Vice President/General Counsel/Secretary
<PAGE> 27
SERIES B INVESTORS:
J. H. WHITNEY IV, L.P.
By: J. H. WHITNEY EQUITY PARTNERS IV, LLC
Its General Partner
By: /s/ James R. Matthews
--------------------------------------------------
Name: James R. Matthews
Title: Managing Member
<PAGE> 28
VENTURE FUND I, LP
By: Venture Management I, GP
Its General Partner
By: /s/ Richard Bodman
-----------------------------------------
Name: Richard Bodman
Title: General Partner
AT&T VENTURE FUND II, LP
By: Venture Management LLC
Its General Partner
By: /s/ Richard Bodman
-----------------------------------------
Name: Richard Bodman
Title: Manager
SPECIAL PARTNERS FUND, LP
By: Venture Management III LLC
Its General Partner
By: /s/ Richard Bodman
-----------------------------------------
Name: Richard Bodman
Title: Manager
SPECIAL PARTNERS FUND INTERNATIONAL, LP
By: Venture Management III LLC
Its General Partner
By: /s/ Richard Bodman
-----------------------------------------
Name: Richard Bodman
Title: Manager
<PAGE> 29
SOUTH ATLANTIC PRIVATE EQUITY FUND IV,
LIMITED PARTNERSHIP
By: South Atlantic Private Equity Partners IV, Inc.
Its General Partner
By: /s/ Donald W. Burton
-----------------------------------------
Name: Donald W. Burton
Title: Chairman and Managing Director
<PAGE> 30
SOUTH ATLANTIC PRIVATE EQUITY FUND IV (QP),
LIMITED PARTNERSHIP
By: South Atlantic Private Equity Partners IV, Inc.
Its General Partner
By: /s/ Donald W. Burton
-----------------------------------------
Name: Donald W. Burton
Title: Chairman and Managing Director
<PAGE> 31
THE BURTON PARTNERSHIP,
LIMITED PARTNERSHIP
By: /s/ Donald W. Burton
-----------------------------------------
Name: Donald W. Burton
Title: General Partner
<PAGE> 32
PRIME VIII, L.P.
By: PRIME SKA-1, L.L.C.,
Its General Partner
By: /s/ Duncan T. Butler
-----------------------------------------
Name: Duncan T. Butler
Title: Managing Director
<PAGE> 33
BLACKSTONE CCC CAPITAL PARTNERS L.P.
By: Blackstone Management Associates III L.L.C., its
General Partner
By: /s/ Bret Pearlman
-----------------------------------------
Name: Bret Pearlman
Title: Member
BLACKSTONE CCC OFFSHORE CAPITAL PARTNERS L.P.
By: Blackstone Management Associates III L.L.C., its
General Partner
By: /s/ Bret Pearlman
-----------------------------------------
Name: Bret Pearlman
Title: Member
BLACKSTONE FAMILY INVESTMENT PARTNERSHIP III L.P.
By: Blackstone Management Associates III L.L.C., its
General Partner
By: /s/ Bret Pearlman
-----------------------------------------
Name: Bret Pearlman
Title: Member
<PAGE> 34
BESSEMER VENTURE PARTNERS V L.P.
By: Deer V & Co. LLC
Its General Partner
By: /s/ Robert H. Buescher
-----------------------------------------
Name: Robert H. Buescher
Title: Manager
BESSEC VENTURES V L.P.
By: Deer V & Co. LLC
Its General Partner
By: /s/ Robert H. Buescher
-----------------------------------------
Name: Robert H. Buescher
Title: Manager
<PAGE> 35
By: /s/ Benjamin Russell
-----------------------------------------
Benjamin Russell
<PAGE> 36
MORGAN STANLEY DEAN WITTER EQUITY
FUNDING, INC.
By: /s/ David Powers
-----------------------------------------
Name: David Powers
Title: Vice President
<PAGE> 37
FIRST UNION INVESTORS, INC.
By: /s/ Arthur C. Roselle
-----------------------------------------
Name: Arthur C. Roselle
Title: Vice President
<PAGE> 38
MELLON VENTURES II, L.P.
By: MVMA II, L.P.
Its General Partner
By: MVMA, Inc.
Its General Partner
By: /s/ John Adams
-----------------------------------------
Name: John Adams
Title: Vice President
<PAGE> 39
SERIES A EXCHANGE HOLDERS:
SCANA COMMUNICATIONS, INC.
By: /s/ Kevin B. Marsh
-----------------------------------------
Name: Kevin B. Marsh
Title: Chief Operating Officer
<PAGE> 40
MANAGEMENT HOLDERS:
/s/ Rodger L. Johnson
-----------------------------------------
Rodger L. Johnson
/s/ Chad S. Wachter
-----------------------------------------
Chad S. Wachter
/s/ Anthony J. Palermo, Jr.
-----------------------------------------
Anthony J. Palermo, Jr.
/s/ Bret T. McCants
-----------------------------------------
Bret T. McCants
/s/ Felix Boccucci
-----------------------------------------
Felix Boccucci
/s/ Peggy B. Warner
-----------------------------------------
Peggy B. Warner
/s/ Marcus R. Luke
-----------------------------------------
Marcus R. Luke
/s/ James T. Markle
-----------------------------------------
James T. Markle
/s/ Robert K. Mills
-----------------------------------------
Robert K. Mills
<PAGE> 41
ADDITIONAL STOCKHOLDERS:
<PAGE> 42
/s/ Campbell B. Lanier III
--------------------------------------
Campbell B. Lanier III
<PAGE> 43
EXHIBIT A
ADDITIONAL STOCKHOLDERS
Campbell B. Lanier III
<PAGE> 44
EXHIBIT B
STOCKHOLDER JOINDER AGREEMENT
THIS STOCKHOLDER JOINDER AGREEMENT (this "Agreement") is made and
entered into as of ________, ____, by and among KNOLOGY, INC., a Delaware
corporation (the "Company"), and the stockholders thereof whose signatures
appear below (the "New Stockholders").
Premises
Pursuant to a [Stock Purchase Agreement], dated as of _________,
_____ (the "Purchase Agreement"), by and among [the Company] and the New
Stockholders, each of the New Stockholders have become stockholders of the
Company and as such desire to derive the benefits and burdens associated with
being a stockholder of the Company.
The Company is party to a Stockholders Agreement, dated as of
______, 1999 (as the same may be amended from time to time, the "Stockholders
Agreement"), with certain of the Company's existing stockholders ("Existing
Stockholders") governing certain rights and obligations of the Existing
Stockholders as stockholders of the Company. It is a condition to the obligation
of the Company under the Purchase Agreement that the Company and each of the New
Stockholders execute this Agreement evidencing such New Stockholders' agreement
to be bound by the terms of the Stockholders Agreement. Capitalized terms used
and not otherwise defined herein shall have the respective meanings ascribed
thereto in the Stockholders Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and each New Stockholder hereby agree as
follows:
1. The Company and each of the New Stockholders agrees that, from and
after the [issuance/transfer] of the shares of Company Common Stock or Preferred
Stock pursuant to [the Purchase Agreement], by virtue of such New Stockholders'
execution of this Agreement, (i) each of the New Stockholders shall, without any
further action on the part of the Company or any of the New Stockholders, become
parties to the Stockholders Agreement subject to and bound by, and entitled to
the benefits of, all the terms and conditions of the Stockholders Agreement
applicable to an Investor, (ii) the shares of Company Common Stock or Preferred
Stock received by the New Stockholders pursuant to [the Purchase Agreement],
shall be "Investor Stock" for all purposes under the Stockholders Agreement, and
(iii) each of the New Stockholders shall be an "Other Investor" for purposes of
the Stockholders Agreement.
2. A legend in substantially the form required by Section 6.01 of the
Stockholders Agreement shall appear on each certificate representing Shares
issued to the New Stockholders pursuant to the Purchase Agreement.
<PAGE> 45
IN WITNESS WHEREOF, each of the parties hereto has executed or caused
this Agreement to be executed by its duly authorized representative as an
agreement under seal as of the date first above written.
KNOLOGY, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
NEW STOCKHOLDERS:
---------------------------------------
---------------------------------------
<PAGE> 1
Exhibit 12.1
KNOLOGY, INC.
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income (Loss) before
cumulative effect of
change in accounting
principle and
(provision) benefit for
income taxes per
statement
of operations............. $1,047,874 $2,802,056 $183,438 $(27,608,378) $(76,743,572)
ADD:
Portion of rents
representative of the
interest factor........... 0 0 0 86,192 248,333
Interest on indebtedness.. 555,815 9,933 12,431 29,033,088 34,308,742
Capitalized interest...... 0 0 0 2,469,000 3,040,000
Amortization of debt
discount.................. 0 0 0 13,651,778 15,798,661
Fixed charges of
unconsolidated
subsidiary................ 0 1,078,831 6,249,356 0 0
---------- ---------- ---------- ----------- -------------
Income as adjusted........... $1,603,689 $3,890,820 $6,445,225 $17,631,680 $(23,347,836)
========== ========== ========== =========== =============
FIXED CHARGES:
Portion of rents
representative of the
interest factor........... 0 0 0 86,192 248,333
Interest on indebtedness.. 555,815 9,933 12,431 29,033,088 34,308,742
Capitalized interest...... 0 0 0 2,469,000 3,040,000
Amortization of debt
discount.................. 0 0 0 13,651,778 15,798,661
Fixed charges of
unconsolidated
subsidiary ............... 0 1,078,831 6,249,356 0 0
---------- ---------- ---------- ----------- -------------
Fixed charges............. $555,815 $1,088,764 $6,261,787 $45,240,058 $53,395,736
========== ========== ========== =========== =============
Ratio of earnings to fixed
charges................... 2.89 3.57 1.03 -- --
Insufficient earnings to
cover fixed charges....... -- -- -- 27,608,378 76,743,572
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF KNOLOGY, INC:
Interstate Telephone Company, Inc.
Valley Telephone Company, Inc.
ITC Globe, Inc.
Globe Telecommunications, Inc.
KNOLOGY Holdings, Inc.
KNOLOGY of Augusta, Inc.
KNOLOGY of Charleston, Inc.
KNOLOGY of Columbus, Inc.
KNOLOGY of Huntsville, Inc.
KNOLOGY of Montgomery, Inc.
KNOLOGY of Panama City, Inc.
KNOLOGY of Alabama, Inc.
KNOLOGY of Florida, Inc.
KNOLOGY of Georgia, Inc.
KNOLOGY of South Carolina, Inc.
KNOLOGY of Tennessee, Inc.
KNOLOGY of Knoxville, Inc.
KNOLOGY of Nashville, Inc.
KNOLOGY of Kentucky, Inc.
KNOLOGY of Louisville, Inc.
KNOLOGY of Lexington, Inc.
KNOLOGY of North Carolina
-11-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made part of this
registration statement.
/s/ Arthur Anderson LLP
Atlanta, GA
April 21, 2000
