<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2000
REGISTRATION NO. 333-89179
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
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)
---------------------
Copies to:
STEVEN M. KAUFMAN, ESQ.
HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004
(202) 637-5600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES OFFERING PRICE REGISTRATION
TO BE REGISTERED (1) FEE
- ----------------------------------------------------------------------------------------------
Common Stock $.01 par value (3) Series A Preferred Stock,
$.01 par value Options to Purchase Series A Preferred
Stock....................................................... $234,980,443 $65,324.56(2)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
(2) A fee of $66,334.58 was paid previously.
(3) Includes an indeterminate number of shares of common stock issuable upon
conversion of the Series A preferred stock. Pursuant to Rule 457(i), no
separate registration fee is payable with respect to these shares of common
stock. Pursuant to Rule 416, this Registration Statement also covers such
shares of common stock as may be issuable pursuant to the anti-dilution
provisions of the Series A preferred stock.
---------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and is not
seeking an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 18, 2000
PRELIMINARY PROSPECTUS
KNOLOGY, INC.
[KNOLOGY LOGO]
43,211,531 SHARES OF SERIES A PREFERRED STOCK
OPTIONS TO PURCHASE 6,258,036 SHARES OF SERIES A PREFERRED STOCK
We are sending you this prospectus in connection with the distribution by
ITC Holding Company of all of its 43,211,531 shares of Series A preferred stock,
which is approximately 90% of the capital stock, of KNOLOGY, Inc. to ITC Holding
stockholders and options to purchase 6,258,036 shares of Series A preferred
stock of KNOLOGY to ITC Holding option holders.
In the distribution, you will receive the following:
- 1.09153 shares of our Series A preferred stock for every share of ITC
Holding common stock that you own.
- 4.36612 shares of our Series A preferred stock for every share of ITC
Holding preferred stock that you own.
- An option to purchase 1.09153 shares of our Series A preferred stock for
every option to purchase one share of common stock of ITC Holding that
you own.
This distribution is being made by ITC Holding to each holder of record of ITC
Holding securities at the close of business on December 15, 1999. Cash in the
amount of $4.75 per share is being paid in lieu of fractional shares or options.
You are receiving the distribution in your capacity as an ITC Holding
Company stockholder or option holder. YOU DO NOT NEED TO MAKE ANY DECISIONS OR
TAKE ANY ACTION TO RECEIVE YOUR SHARE OF THE DISTRIBUTION.
This prospectus also relates to the common stock into which our preferred
stock is convertible and the common stock underlying the preferred stock
issuable upon exercise of our stock options being distributed by ITC Holding.
ITC Holding may be deemed an underwriter and a distributing stockholder under
applicable law with respect to the securities being distributed by it. ITC
Holding will not own any KNOLOGY stock or options upon completion of the
distribution.
THE SECURITIES THAT YOU RECEIVE IN THIS DISTRIBUTION WILL NOT BE TRADED ON
ANY EXCHANGE OR LISTED ON THE NASDAQ MARKET SYSTEM.
THE SECURITIES BEING DISTRIBUTED PURSUANT THIS PROSPECTUS INVOLVE A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FACTORS DESCRIBED UNDER THE
HEADING "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
---------------------
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.
---------------------
JANUARY 18, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 9
THE DISTRIBUTION............................................ 23
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION............................................. 33
NO MARKET FOR OUR STOCK..................................... 42
DIVIDEND POLICY............................................. 42
CAPITALIZATION.............................................. 43
SELECTED CONSOLIDATED FINANCIAL DATA........................ 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................ 47
OUR BUSINESS................................................ 67
MANAGEMENT.................................................. 104
CERTAIN TRANSACTIONS AND RELATIONSHIPS...................... 115
PRINCIPAL STOCKHOLDERS...................................... 123
DESCRIPTION OF SECURITIES................................... 126
LEGAL MATTERS............................................... 132
EXPERTS..................................................... 132
WHERE YOU CAN FIND MORE INFORMATION......................... 133
INDEX TO OUR CONSOLIDATED FINANCIAL STATEMENTS.............. F-1
</TABLE>
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights more detailed information and financial statements
contained later in this prospectus. This summary does not contain all of the
information that you should consider with respect to owning the shares or
options. You should read the entire prospectus carefully, especially the risks
of holding the shares discussed under "Risk Factors."
KNOLOGY, INC.
We were formed in September 1998. We own 100% of KNOLOGY Holdings, Inc. and
100% of several other companies previously owned by ITC Holding Company, Inc.
KNOLOGY Holdings is our principal subsidiary. We currently offer our residential
and business customers broadband communication services, including:
- Video. We offer traditional cable television and digital cable
television services. Digital cable uses advanced technology to deliver
many more channels over the same amount of transmission capacity.
- Telephone. We offer local and long distance telephone service.
- Internet. We offer high-speed connections to the Internet using cable
modems.
Our customers have the choice of receiving these services individually or as
part of a bundle of services. We provide these services using high-speed,
high-capacity networks which are called broadband networks because they can
handle large volumes of voice, video and data at high speeds.
We presently have broadband networks in Montgomery, Alabama; Columbus,
Georgia; Augusta, Georgia; Panama City, Florida; and Charleston, South Carolina.
We also provide traditional analog and digital cable television services in
Huntsville, Alabama, and these facilities are being upgraded to provide
telephone and Internet services. Further, we provide local telephone services
and broadband services throughout the Georgia/Alabama border area known as the
valley.
We also provide access to our networks and various network-related services
to other telecommunications carriers. We refer to these services as broadband
carrier services. Other local telephone companies use our broadband carrier
services to provide local telephone service and long distance carriers use our
broadband carrier services to deliver long distance telephone service.
We are incorporated in the State of Delaware. Our principal executive
offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833, and
our telephone number is (706) 645-8553. We maintain a website at www.knology.com
where general information about our business is available. Reference to this
website shall not be deemed to incorporate the contents of our website into this
prospectus.
1
<PAGE> 5
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
We have determined that we will need substantial capital in the near future
to fund our planned upgrades and expansion, as discussed in more detail below
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations." As described in that section, we intend to seek
additional capital through private and public equity and debt financings. We
determined that our access to capital in the private equity market and our
ability to achieve a higher per share value would be enhanced if we no longer
had a single stockholder, ITC Holding, holding 90% of our capital stock.
ITC Holding is distributing the stock of KNOLOGY it holds to eliminate the
large block of KNOLOGY stock while allowing ITC Holding stockholders to maintain
directly the interest in KNOLOGY that they held indirectly before the
distribution. ITC Holding is also distributing KNOLOGY options to ITC Holding
option holders so they can maintain the economic value of their ITC Holding
options, which otherwise would be diluted as a result of the distribution.
See the section under the caption "The Distribution" for a fuller
discussion of the background and reasons for the distribution. If you are an ITC
Holding option holder, please review carefully the information under the caption
"The Distribution -- Option Distribution" for a fuller description of the
rationale for the option distribution and the terms of the option distribution.
TERMS OF THE DISTRIBUTION
In the distribution, ITC Holding is distributing to its stockholders and
option holders all of the 43,211,531 shares of our Series A preferred stock and
options to purchase 6,258,036 shares of our Series A preferred stock held by ITC
Holding. The distribution is expected to be completed concurrently with the
circulation of this prospectus.
In the distribution, you will receive the following:
- 1.09153 shares of our Series A preferred stock for every share of ITC
Holding common stock that you own.
- 4.36612 shares of our Series A preferred stock for every share of ITC
Holding preferred stock that you own.
- An option to purchase 1.09153 shares of our Series A preferred stock, for
every option to purchase one share of common stock of ITC Holding that
you own.
The exercise price of each KNOLOGY option will be approximately 20% of the
exercise price of the holder's ITC Holding option. The exact percentage will be
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
2
<PAGE> 6
exercise price of each ITC Holding option will be decreased to approximately 80%
of its original exercise price.
Only ITC Holding security holders of record as of December 15, 1999 are
receiving securities in the distribution. Cash in the amount of $4.75 will be
paid in lieu of fractional shares or options.
Example:
As an example, suppose before the distribution you hold 1,000 shares of ITC
Holding common stock and you hold options to buy 100 shares of ITC Holding
common stock for an aggregate exercise price of $500. Also suppose that ITC
Holding determines that KNOLOGY's value as a company before the distribution is
20% of the value of ITC Holding.
- Stock. In the distribution, you would receive 1,091 shares of KNOLOGY
Series A preferred stock, determined by multiplying your 1,000 shares
times the common stock distribution ratio of 1.09153. You would also
receive $2.52 in cash, equal to 0.53 fractional shares of KNOLOGY Series
A preferred stock times the cash value for fractional shares of $4.75 per
share.
The effect of the distribution is that you will hold directly as KNOLOGY
stock the interest in KNOLOGY that you held indirectly through your ITC
Holding stock prior to the distribution.
- Options. In the distribution, you would receive options to purchase 109
shares of KNOLOGY Series A preferred stock, determined by multiplying
your options to purchase 100 shares times the option distribution ratio
of 1.09153. You would also receive $0.73 in cash, equal to options to
purchase 0.153 fractional shares of KNOLOGY Series A preferred stock
times the cash value for fractional options of $4.75 per share.
The value of your ITC Holding option would have declined in the
distribution because part of ITC Holding, worth 20% of its value, would
no longer belong to ITC Holding after the distribution. ITC Holding would
therefore reduce the aggregate exercise price of your ITC Holding option
by 20%, to $400. The $100 difference would become the aggregate exercise
price of your KNOLOGY option, since 20% of the value of your old ITC
Holding option is now represented by your KNOLOGY option.
Since the option distribution ratio is the same as the stock distribution
ratio, you would pay the same exercise price and you would own the same
number of shares whether (1) you exercised your ITC Holding option
immediately before the distribution and received stock in the
distribution or (2) you exercised both your ITC Holding option and your
KNOLOGY option immediately after the distribution.
3
<PAGE> 7
The effect of the distribution is that you will hold directly as a
KNOLOGY option the interest in KNOLOGY that you held indirectly through
your ITC Holding option prior to the distribution.
NO ACTION REQUIRED BY ITC HOLDING STOCKHOLDERS OR OPTION HOLDERS
In this distribution:
- You are not required to pay cash or any other consideration for the
securities you receive.
- You do not need to make any decisions or take any action to receive your
shares or options. You do not need to surrender your ITC Holding stock or
options.
- There are no conditions to the completion of the distribution. No further
board action is necessary and no stockholder vote is necessary.
- There are no proceeds to us or to ITC Holding.
- No recipients of the distribution or stockholders of KNOLOGY are entitled
to appraisal rights in connection with the distribution.
KNOLOGY STOCK AND OPTIONS DISTRIBUTED IN THE DISTRIBUTION CANNOT EASILY BE
TRANSFERRED
The securities that you receive in this distribution will not be traded on
any exchange or listed on the NASDAQ market system. They are also subject to
restrictions on transfer described below under the caption "Description of
Capital Stock."
THE DISTRIBUTION MAY HAVE INCOME TAX CONSEQUENCES TO YOU
The following summarizes the material federal income tax consequences of
the distribution. You should review this section carefully.
Material Federal Income Tax Consequences of the Stock Distribution to ITC
Holding Stockholders
ITC Holding has received rulings from the IRS that the distribution of our
stock to ITC Holding stockholders as described to the IRS would qualify as a
tax-free spin-off under Section 355 of the Internal Revenue Code. Based on these
rulings, if you receive KNOLOGY stock in the distribution:
- Upon the receipt of our stock in the distribution, you will not recognize
any gain or loss, and no amount will be included in your income.
- The total amount of the basis of our stock plus the basis of the ITC
Holding stock held by you after the distribution will be the same as the
basis of the ITC Holding stock held by you immediately before the
distribution.
- If you receive cash in lieu of a fractional share of our stock, you will
be taxed as if you had received the fractional share and we redeemed it
for the amount of cash. The gain or loss, based on the difference between
the amount of cash and
4
<PAGE> 8
your basis in the stock, will be a capital gain or loss if you hold the
fractional share interest as a capital asset.
These IRS rulings are subject to factual representations made by ITC Holding to
the IRS. If those factual representations and assumptions made by ITC Holding
are or become incorrect in any material respect, the reliability of the IRS
rulings will be jeopardized. However, ITC Holding is not aware of any facts and
circumstances that would cause those representations and assumptions to be
untrue.
If the distribution were not to constitute a tax-free spin-off, then the
distribution could have adverse tax consequences to you. These potential adverse
tax consequences are discussed in detail below under the caption "Material
Federal Income Tax Consequences of the Distribution."
Material Federal Income Tax Consequences of the Option Distribution to ITC
Holding Option Holders
The tax treatment of the option 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 proposed issuance of the KNOLOGY options.
The 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. 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.
The tax opinion provides as follows:
1. What is the federal tax effect of the distribution of KNOLOGY stock
options to ITC Holding employees who hold ITC Holding incentive stock options?
- More likely than not the KNOLOGY options distributed to ITC holding
employees holding ITC Holding incentive stock options are incentive stock
options until three months after the distribution of KNOLOGY. The
issuance of KNOLOGY options to ITC Holding employees is more likely than
not treated as a nontaxable substitution of KNOLOGY options for ITC
Holding incentive stock options and not treated as a taxable
modification.
- If the IRS were to recharacterize the KNOLOGY stock option as a
nonqualified option, the issuance of the KNOLOGY stock option should not
be taxable to the recipients at the time of the distribution.
2. What is the federal tax effect of the distribution of KNOLOGY stock
options to KNOLOGY employees who hold ITC Holding incentive stock options?
- The KNOLOGY options distributed to KNOLOGY employees holding ITC Holding
incentive stock options should be classified as incentive stock options
after the distribution of KNOLOGY. The issuance of KNOLOGY options to
KNOLOGY employees should be treated as a nontaxable substitution of
KNOLOGY options for ITC Holding incentive stock options and not treated
as a taxable modification.
5
<PAGE> 9
- If the IRS were to recharacterize the KNOLOGY stock option as a
nonqualified option, the issuance of the KNOLOGY stock option should not
be taxable to the recipients at the time of the distribution.
3. What is 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 options to nonemployees and employees holding
nonqualified stock options of ITC Holding should not result in any
current taxation at the time of distribution.
Based on the existing Internal Revenue Code and Treasury Regulations,
Arthur Andersen LLP has issued a "more likely than not" opinion on the first
issue identified above and a "should" opinion on the remaining issues identified
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 one of the issues addressed by the opinion.
The potential tax consequences for holders of ITC options and the related
risks associated with the distribution of options to purchase our stock are
discussed in detail below under the caption "The Distribution -- Material
Federal Income Tax Consequences of the Distribution -- Federal Income Tax
Consequences of the Distribution to ITC Holding Option Holders."
6
<PAGE> 10
INTENDED SUBSEQUENT PRIVATE PLACEMENT
Shortly after this distribution, we intend to make a private offering of
shares of our Series B preferred stock. This offering is expected to be to a
small group of institutional investors for approximately $100 million. Once
issued, the Series B preferred stock would represent approximately 25% of our
total outstanding shares on a fully diluted basis. Each share of Series B
preferred stock is expected to be convertible initially into one share of our
common stock. We have received firm commitments from some of the proposed
institutional investors to purchase the Series B preferred shares at $4.75 per
share, and we expect to sell the Series B preferred shares at this price. The
terms of this private offering could change and it is possible that the offering
will not be consummated. The private offering is contingent upon the completion
of the distribution described by this prospectus.
7
<PAGE> 11
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>
NINE NINE
YEAR YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998(a) 1998 1999
------------ ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues........................ $17,527,208 $ 17,633,313 $ 45,132,522 $ 30,285,049 $ 48,824,228
Operating expenses:
Cost of services........................ 2,991,412 3,121,108 12,739,540 9,010,401 18,573,719
Selling, operations and
administrative........................ 8,331,795 9,498,461 37,323,345 24,256,479 35,760,116
Depreciation and amortization........... 3,022,056 2,781,800 17,326,895 9,013,477 29,526,358
----------- ------------ ------------ ------------ ------------
Total operating expenses.......... 14,345,263 15,401,369 67,389,780 42,280,357 83,860,193
----------- ------------ ------------ ------------ ------------
Operating income (loss)................... 3,181,945 2,231,944 (22,257,258) (11,995,308) (35,035,965)
----------- ------------ ------------ ------------ ------------
Other expense, net........................ (379,889) (2,048,506) (18,645,199) (12,389,198) (22,967,976)
----------- ------------ ------------ ------------ ------------
Income (loss) before minority interest,
income tax (provision) benefit and
cumulative effect of a change in
accounting principle.................... 2,802,056 183,438 (40,902,457) (24,384,506) (58,003,941)
Minority interest......................... -- -- 13,294,079 11,292,126 3,267,653
Income tax (provision) benefit............ (1,371,865) (1,010,779) 5,631,618 1,704,350 11,011,711
Cumulative effect of a change in
accounting principle.................... -- -- (582,541) (582,541) --
----------- ------------ ------------ ------------ ------------
Net income (loss)......................... 1,430,191 (827,341) (22,559,301) (11,970,571) (43,724,577)
Subsidiary preferred stock dividends...... -- (4,193,276) (1,424,222) (63,907) --
----------- ------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders............................ $ 1,430,191 $ (5,020,617) $(23,983,523) $(12,034,478) $(43,724,577)
=========== ============ ============ ============ ============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common stockholders..... $ 14,301.91 $ (50,206.17) $(239,835.23) $(120,344.78) $(437,245.77)
Basic and diluted weighted average number
of common shares outstanding............ 100 100 100 100 100
OTHER FINANCIAL DATA:
Capital expenditures...................... $ 995,320 $ 1,727,079 $120,227,057 $ 80,913,266 $ 64,290,709
Cash provided by (used in) operating
activities.............................. 4,770,730 3,680,116 23,035,488 9,515,039 (3,069,133)
Cash (used in) provided by investing
activities.............................. (197,362) (22,223,940) (34,586,803) (22,997,766) 1,021,793
Cash (used in) provided by financing
activities.............................. (4,457,176) 18,726,407 16,083,187 15,176,704 18,088,543
EBITDA(b)................................. 5,640,550 2,509,854 8,564,129 8,475,265 (2,067,832)
Ratio of earnings to fixed charges........ 3.57 1.03 -- -- --
Insufficient earnings to cover fixed
charges................................. -- -- $ 27,608,378 $ 13,092,380 $ 54,736,288
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 2,977,835 $(1,240,180) $ 49,965,918 $ 12,646,729
Property and equipment, net......................... 11,374,950 11,260,846 211,885,668 258,655,902
Total assets........................................ 22,883,276 30,196,492 374,680,811 363,667,403
Long-term debt, including accrued interest.......... -- -- 276,165,900 321,627,291
Total liabilities................................... 7,235,555 6,656,317 314,414,049 350,418,909
Minority interest................................... -- -- 3,267,653 --
Retained earnings (accumulated deficit)............. 9,598,225 3,181,179 (20,802,344) (64,526,921)
Total stockholders' equity.......................... 15,647,721 23,540,175 54,512,149 10,761,534
</TABLE>
- ---------------
(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.
8
<PAGE> 12
RISK FACTORS
The securities being distributed pursuant to this prospectus involve a high
degree of risk, including those risks described below.
WE HAVE LOST MONEY ON OUR OPERATIONS TO DATE, AND WE EXPECT TO LOSE MORE MONEY
DURING THE NEXT SEVERAL YEARS.
As of September 30, 1999, we had an accumulated deficit of $64.5 million.
We expect to incur net losses and negative cash flow during the next several
years as we build our networks. Our ability to generate profits and positive
cash flow will depend in large part on our obtaining enough subscribers for our
services to offset the costs of constructing and operating our networks. If we
cannot achieve operating profitability or positive cash flows from operating
activities, our business, financial condition and operating results will be
adversely affected.
FAILURE TO OBTAIN ADDITIONAL FUNDING WOULD LIMIT OUR ABILITY TO EXPAND OUR
BUSINESS.
We expect to spend approximately $170 million during the next three years
to expand or upgrade our Panama City, Augusta, Charleston and Huntsville
networks. If we expand to new cities, we estimate the cost of constructing and
implementing networks in additional cities at approximately $50 million to $75
million per city, though costs could be as much as $85 million to $90 million
per city for larger markets. Actual costs may exceed this estimate. We will need
significant additional financing to complete this expansion and upgrade, to
expand into additional cities, for new business activities and for any
additional acquisitions. We cannot assure you that the proposed private
placement of our Series B preferred stock, intended to raise approximately $100
million in equity funding, will be consummated. If we cannot obtain sufficient
funds we may be required to defer or abandon our expansion plans, which could
limit our growth and prospects.
NO TRADING MARKET EXISTS FOR OUR SECURITIES, AND OUR SECURITIES ARE SUBJECT TO
TRANSFER RESTRICTIONS.
Our stock is not listed on any stock exchange or on the Nasdaq market
system, and no market makers currently make a market in our stock. We do not
expect that an active public market for our stock will develop after the
distribution. In addition, all shares of our stock are subject to transfer
restrictions. If one of our stockholders decides to sell his shares of our
stock, he must first offer those shares to us to purchase before he can offer
the shares to a third party. With the lack of an active public market for our
stock and our rights of first refusal on the sale of our stock, your ability to
sell our securities will be limited.
ITC HOLDING AND ITS STOCKHOLDERS, INCLUDING YOU, COULD RECOGNIZE SIGNIFICANT TAX
IF OUR TAX RULINGS BECOME INVALID.
The IRS tax rulings relating to the distribution are subject to factual
representations made by ITC Holding to the IRS. If those factual representations
are or become
9
<PAGE> 13
incorrect in any material respect, the rulings might not apply to the
distribution. If the distribution were not to constitute a tax-free spinoff,
then the distribution could have the following significant tax consequences to
you:
- ITC Holding stockholders, including you -- Each holder of ITC Holding
stock who received shares of our stock in the distribution would be
treated as having received a taxable dividend in an amount equal to the
fair market value of our stock received at the time of the distribution,
to the extent of such holder's share of ITC Holding's current and
accumulated earnings and profits.
- ITC Holding -- ITC Holding would recognize a taxable gain equal to the
difference between the fair market value of the shares of our stock and
its adjusted basis in those shares at the time of the distribution. This
could reduce the value of your existing ITC Holding stock.
THE FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING OPTION
HOLDERS ARE NOT COVERED BY IRS RULINGS AND ARE SUBJECT TO UNCERTAINTY.
The tax treatment of the ITC Holding option holders was not the subject of
any IRS rulings. 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 one of the issues
addressed by the opinion and a "should" opinion on the remaining issues. The
opinion is therefore subject to uncertainty. Arthur Andersen LLP is not able to
issue a more certain "will" opinion 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 one
of the issues addressed by the opinion. A tax opinion merely represents the
opinion giver's best judgment with respect to the probable outcome, may be
incorrect and is not binding on the IRS or the courts. If the IRS disagrees with
the tax opinion and it ultimately is not upheld by the courts, recipients of
KNOLOGY stock options who believe they are receiving incentive stock options may
be deemed to have received nonqualified stock options. The tax effect of this
recharacterization is discussed below under the caption "The
Distribution -- Material Federal Income Tax Consequences of the Distribution --
Federal Income Tax Consequences of the Distribution to ITC Holding Option
Holders."
ITC HOLDING COULD RECOGNIZE SIGNIFICANT TAX IF THE DISTRIBUTION IS PART OF A
PLAN IN WHICH A 50% OR GREATER INTEREST IS ACQUIRED, WHICH COULD AFFECT THE
VALUE OF YOUR EXISTING ITC HOLDING STOCK.
Even if the distribution is otherwise treated as a tax-free spin-off, ITC
Holding would recognize a large taxable gain if the distribution is part of a
plan or series of related transactions in which a 50% or greater interest in
KNOLOGY or ITC Holding is
10
<PAGE> 14
being acquired by one or more persons. Any cumulative 50% change of ownership
within the four-year period beginning two years before the date of the
distribution will be presumed under applicable tax law to be part of such a
plan. If this presumption applies, it would need to be rebutted to avoid a large
taxable gain. Proposed regulations interpreting this provision could make it
extremely difficult for us to rebut this presumption with respect to the
distribution and a cumulative 50% change of ownership.
OUR TAX SEPARATION AGREEMENT WITH ITC HOLDING MAY LIMIT OUR ABILITY TO RAISE
EQUITY FUNDING OR CONDUCT ACQUISITIONS FOR STOCK, AND BREACH OF THIS AGREEMENT
COULD SUBJECT US TO SUBSTANTIAL DAMAGES.
ITC Holding and KNOLOGY have entered into a tax separation agreement in
which they have made representations and covenants that impose limitations on
the future actions of KNOLOGY. Because we could have substantial liability, up
to $50 million under the tax separation agreement, if we breach our
representations and covenants, KNOLOGY could be discouraged from entering into
transactions that might result in a breach. KNOLOGY might not pursue any
transaction that would be presumed to be part of a plan or series of related
transactions which results in any cumulative 50% change of ownership within the
four-year period beginning two years before the date of the spin-off.
Transactions that could involve a possible breach include an actual or
constructive change of control of KNOLOGY, and exceeding limits on the raising
of equity capital or the use of our stock to acquire other companies. We may
have to forego some growth opportunities that may occur during the two years
subsequent to the distribution because of our representations and covenants.
COMPETITION FROM OTHER TELEVISION PROVIDERS COULD CAUSE US TO LOSE SUBSCRIBERS.
To be successful, we will need to attract cable television subscribers away
from our competitors. We often are not the first cable television provider in
our markets, and we have to compete with other companies that have long-standing
customer relationships with the residents in these areas. Some of our
competitors have other competitive advantages over us, such as greater
experience, resources, marketing capabilities and name recognition. In addition,
a continuing trend toward business combinations and alliances in the cable
television area and in the telecommunications industry as a whole may create
significant new competitors for us. In providing television service, we
currently compete with AT&T Cable Services, Comcast Cable Communications, Time
Warner Cable, Mediacom and Charter Communications, Inc. We also compete with
satellite television providers DirecTV and Echostar. Our other competitors
include:
- other cable television providers;
- broadcast television stations;
- other satellite television companies;
- wireless cable services; and
- private satellite dishes.
11
<PAGE> 15
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.
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
12
<PAGE> 16
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 have entered into exclusivity
arrangements with the WeB channel, which is the distribution channel for WB
programming, in different markets. We provide programming in each of these
markets as well, and these exclusivity arrangements restrict our access to
programming. Limiting our ability to offer certain programming on our cable
television systems may adversely affect the demand for our cable services.
THE SIGNIFICANT AMOUNT OF DEBT WE HAVE COULD HARM OUR BUSINESS.
As of September 30, 1999, we had $321.6 million of debt, including accrued
interest, and our stockholders' equity was $10.8 million. We anticipate that we
will incur more debt as we expand our existing networks and move into new
markets in the future. Our debt could adversely affect our business in a number
of ways, as:
- we have to use a lot of our money to pay interest and repay principal on
debt;
- we may have trouble obtaining future financing;
- we may have limited flexibility in planning for or reacting to changes in
our business;
- we may have more debt relative to our competitors, which may place us at
a disadvantage; and
- we may be more vulnerable to any economic downturn.
13
<PAGE> 17
Our earnings were not sufficient to cover our fixed charges in 1998 and through
the first nine months of 1999. We will need to grow and generate profits in
order to generate the cash to repay our debt. If we cannot meet our debt
payments, we may need to seek additional financing or sell some of our assets,
which would affect our business, operations and the value of our company.
RESTRICTIONS ON OUR BUSINESS IMPOSED BY OUR DEBT AGREEMENTS COULD LIMIT OUR
GROWTH OR ACTIVITIES.
Our indenture and credit facility agreements place operating and financial
restrictions on us and our subsidiaries. These restrictions affect our and our
subsidiaries' ability to:
- incur additional debt;
- create liens on our assets;
- use the proceeds from any sale of assets; and
- make distributions on or redeem our stock.
In addition, our credit facility requires us to maintain certain financial
ratios. These limitations may affect our ability to finance our future
operations or to engage in other business activities that may be in our
interest. If we violate any of these restrictions, we could be in default under
one or both of these agreements and be required to repay our debt immediately
rather than at the maturity of the debt.
WE MAY ENCOUNTER DIFFICULTIES EXPANDING INTO ADDITIONAL MARKETS.
To expand into additional cities we will have to obtain pole attachment
agreements, construction permits, franchises and other regulatory approvals.
Delays in receiving the necessary construction permits and in conducting the
construction itself have adversely affected our schedule in the past and could
do so again in the future. Further, we may face resistance from competitors who
are already in these markets. A competitor may oppose or delay our franchise
application or our request for pole attachment space. These difficulties could
harm the development of our business in new markets.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH, OUR BUSINESS WILL BE HARMED.
Our ability to grow will depend, in part, upon our:
- successfully implementing our strategy;
- evaluating markets;
- securing financing;
- constructing facilities;
- obtaining any required government authorizations; and
- hiring and retaining qualified personnel.
14
<PAGE> 18
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.
Ongoing consolidation in the telecommunications industry may be shrinking
the number of attractive acquisition targets.
WE OPERATE OUR NETWORKS UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL OR
TERMINATION, EITHER OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Our networks generally operate pursuant to franchises, permits or licenses
typically granted by a municipality or other state or local government
controlling the public rights-of-way. Often, franchises are terminable if the
franchisee fails to comply with material terms of the franchise order or the
local franchise authority's regulations. Further, franchises generally have
fixed terms and must be renewed periodically. Local franchising authorities may
resist granting a renewal if they consider either past performance or the
prospective operating proposal to be inadequate. Our franchises for Montgomery,
Columbus, Panama City, Augusta, Charleston, Huntsville and the Georgia/Alabama
border area will expire in March 2005, March 2009, July 2007, January 2013,
April 2013, March 2001 and January 2013, respectively. If one of our franchises
is not renewed or terminated, our business will be harmed.
IF WE ARE NOT ABLE TO OBTAIN AND RENEW OUR FRANCHISES IN A TIMELY MANNER AND ON
ACCEPTABLE TERMS AND CONDITIONS, OUR BUSINESS WILL BE HARMED.
Our business depends on our ability to obtain and renew our franchises in a
timely manner and on acceptable terms and conditions. We cannot predict whether
we will obtain franchises in new cities on terms that will make construction of
a network and provision of broadband communications services economically
attractive for us.
15
<PAGE> 19
SINCE WE OPERATE OUR SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE, LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE MORE
COMPETITION FOR US IN OUR MARKETS.
Our franchises are non-exclusive. The local franchising authorities can
grant franchises to competitors who may build networks in our market areas. This
could adversely affect our growth and our profitability.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE REGULATORY CONSTRAINTS OR
REQUIREMENTS ON OUR BUSINESS, WHICH COULD INCREASE OUR EXPENSES.
Local franchise authorities can impose regulatory constraints by local
ordinance or as part of a grant or renewal of a franchise. They also may impose
customer service or other requirements. This would increase our expenses in
operating our business.
LOSS OF ACCESS TO OTHER COMPANIES' NETWORKS COULD IMPAIR OUR TELEPHONE SERVICE.
We rely on other companies to provide:
- communications capacity between our facility that switches telephone
calls and our local networks;
- long distance telephone services;
- space at areas along our network or in switching centers to locate
equipment. Since for efficiency reasons our equipment needs to be located
near and often connected to similar equipment operated by other
providers, which is called co-location, available space can be quite
limited;
- special network services for internet transport requirements.
We purchase these services from two primary vendors, Business Telecom, Inc. and
ITC*DeltaCom, both of which compete with us. ITC*DeltaCom, which was spun off by
ITC Holding to its stockholders in 1998, may be deemed a related party. We have
a minimum purchase commitment of $50,000 with Business Telecom. We do not have a
minimum purchase commitment with ITC*DeltaCom. If we lost services from either
of these companies, we would have to find another entity who could provide these
services for us and may have to pay more for the same services or meet a higher
minimum purchase commitment. Further, if either of these companies reduced our
access to its facilities because that company did not have the capacity to
provide these services to us, our business would be harmed.
LOSS OF INTERCONNECTION ARRANGEMENTS COULD IMPAIR OUR TELEPHONE SERVICE.
We rely on other companies to connect with users of telephone service who
are not our customers. We presently have access to BellSouth's telephone network
under a nine-state interconnection agreement which expires in April 2000. This
agreement may not be renegotiated on favorable terms or at all, since BellSouth
is our competitor. If our interconnection agreement is not renewed, we will have
to negotiate another interconnec-
16
<PAGE> 20
tion agreement with BellSouth. The renegotiated agreement could be on terms less
favorable than our current terms.
It is generally expected that the Telecommunications Act of 1996 will
continue to undergo considerable interpretation and implementation over the next
several years, which could have a negative impact on our interconnection
agreement with BellSouth. Our ability to compete successfully in the provision
of services will depend on the timing of such implementing regulations and
whether they are favorable to us.
CHANGES IN DEMAND FOR OUR TELEPHONE SERVICES COULD HARM OUR BUSINESS.
We could be affected by changes in demand for our local and long distance
telephone services, including:
- traditional telephone services;
- premium telephone services;
- additional access lines per household;
- billing and collection services; and
- local competition in the Georgia/Alabama border area.
Any downturn in demand will harm our business, profitability and growth
prospects. In addition, recent price decreases and promotional activities by
major long distance carriers could have a material adverse impact on our cash
flow and margins.
WE DO NOT KNOW THE DEMAND FOR OUR BUNDLED COMMUNICATIONS SERVICES.
Our plan to provide bundled broadband communications services is fairly new
and untested. It could be unsuccessful due to:
- competition;
- pricing;
- regulatory uncertainties; or
- operating and technical difficulties.
In addition, the demand for some of our planned broadband communications
services, either alone or as part of a bundle, cannot readily be determined. Our
business could be adversely affected if demand for bundled services is
materially lower than we expect.
FUTURE TECHNOLOGICAL DEVELOPMENTS MAY HURT OUR BUSINESS.
Future technological developments may reduce our network's competitiveness
or require expensive and time-consuming upgrades or additional equipment. In
addition, we may be required to select in advance one technology over another
and may not choose the technology that turns out to be the most economic,
efficient or attractive to customers.
17
<PAGE> 21
WE DEPEND UPON A VERY SMALL NUMBER OF SUPPLIERS FOR OUR CABLE EQUIPMENT.
Since the cable equipment industry is a consolidated industry, there are
relatively few manufacturers of cable equipment. We purchase digital cable
equipment from one supplier, Scientific Atlanta. This supplier has informed us
that it may decide not to sell equipment to us in some markets to which we may
expand in the future because of its existing relationship with Time Warner
Cable, which is one of our large competitors. If we are unable to resolve this
issue with Scientific Atlanta favorably or are unable to identify an alternate
source of digital cable equipment, our ability to expand into these markets may
be impaired.
All of our contracts with Scientific Atlanta are short term contracts. If
Scientific Atlanta decides not to renew our contracts and we are unable to
secure an alternate source of digital cable equipment on equivalent terms, our
business may be adversely affected.
WE HAVE EXPERIENCED DIFFICULTY ENGAGING SUFFICIENT CONSTRUCTION CONTRACTORS AND
OUR CONSTRUCTION COSTS ARE INCREASING.
The expansion and upgrade of our existing networks and the development of
future networks require us to hire construction contractors. We could have
difficulty hiring experienced contractors because of increases in demand for
cable construction services. Our construction costs may increase significantly
over the next few years as demand for cable construction services continues to
grow.
WE COULD BE HURT BY FUTURE INTERPRETATION OR IMPLEMENTATION OF REGULATIONS.
The current communications and cable legislation is complex and in many
areas sets forth policy objectives to be implemented by regulation.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' capacity available to other Internet service providers,
such as telephone companies. AT&T recently announced that it would open its
systems to competing Internet service providers, including MindSpring, with
which it already has entered into an agreement. Certain local franchising
authorities are considering or have already approved similar open access
requirements. If regulators decide to require us to provide competing telephone
or Internet service providers with access to our broadband networks, much of the
competitive advantage we have from owning our own networks could be eliminated.
Competing Internet service providers could stream video over their systems, in
direct competition with our programming services. Our interconnection
agreements, which we depend on to reach users who are not our customers, are
subject to regulation by the Federal Communications Commission and state
authorities. Unfavorable regulation that delays interconnection or increases the
cost of interconnection would hurt our business.
As stated earlier, it is generally expected that the Telecommunications Act
of 1996 will continue to undergo considerable interpretation and implementation
over the next
18
<PAGE> 22
several years. Our ability to compete successfully will depend on the timing of
such implementing regulations and whether they are favorable to us.
OUR RELATIONSHIPS WITH ITC HOLDING'S COMPANIES AND AT&T'S VENTURE FUNDS MAY
CAUSE CONFLICTS OF INTERESTS.
We have relationships with several of ITC Holding's subsidiaries and
affiliated companies. Some of our directors are directors, stockholders, and/or
officers of various ITC Holding companies. AT&T's venture funds collectively are
a significant stockholder and also have a representative on our board of
directors. When the interests of ITC Holding, other ITC Holding companies or
AT&T's venture funds differ from ours, the ITC Holding companies and AT&T
venture funds act in their own respective best interests, which could be adverse
to our interests.
SOME OF OUR MAJOR STOCKHOLDERS OWN STOCK IN OUR COMPETITORS AND MAY HAVE
CONFLICTS OF INTEREST WITH RESPECT TO THOSE COMPANIES AND US.
Campbell B. Lanier, the chairman of our board of directors and one of our
major stockholders following the distribution, owns approximately 16% of the
outstanding stock of ITC*DeltaCom. South Atlantic Venture Funds, another one of
our major stockholders following the distribution, owns approximately 4.4% of
ITC*DeltaCom. When the interests of one of our competitors differs from ours,
these stockholders may support our competitor or take other actions which could
adversely affect our interests.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD DISRUPT OUR OPERATIONS AND HARM
OUR BUSINESS.
The year 2000 issue affects our owned and licensed computer systems and
equipment used in connection with internal operations. It also affects our non-
information technology systems, including embedded systems in our buildings and
other infrastructure. Additionally, we rely directly and indirectly, in the
regular course of business, on the proper operation and compatibility of third
party systems, and the year 2000 problem could cause these systems to fail, err
or become incompatible with our systems.
Much of our assessment effort regarding the year 2000 problem has involved,
and depends on, inquiries to third party service providers. If we, or
significant third parties with whom we communicate and do business through
computers, are not year 2000 ready, or if the year 2000 problem causes our
systems to become internally incompatible or incompatible with key third party
systems, our business could suffer material disruptions. We could also face
disruptions if the year 2000 problem causes general widespread problems or an
economic crisis. We cannot now estimate the extent of these potential
disruptions. We cannot assure you that our efforts to date and our ongoing
efforts to prepare for the year 2000 problem will be sufficient to prevent a
material disruption of our operations. If any such disruption occurs, our
growth, profitability and operating results could suffer materially.
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remediated all significant year 2000
problems.
19
<PAGE> 23
WE WILL NOT BE ABLE TO RELY ON ITC HOLDING FOR ACCESS TO CAPITAL.
As a subsidiary of ITC Holding, we had access to capital that we may not
have as a stand-alone company. Following the distribution, we will not have
access to capital through ITC Holding and it will be less likely that ITC
Holding will be willing to provide financing to us or enter into other
transactions with us. In the past, ITC Holding has contributed equity to us and
has lent money to us. We can no longer rely on financing from ITC Holding, and
we must depend on our own resources.
SINCE OUR BUSINESS IS CONCENTRATED IN SPECIFIC GEOGRAPHIC LOCATIONS, OUR
BUSINESS COULD BE HURT BY A DEPRESSED ECONOMY IN THESE AREAS.
We provide our services to areas in Alabama, Georgia, Florida and South
Carolina, which are all in the southeastern United States. Our networks are
built in small to mid-sized markets. A stagnant or depressed economy in the
southeastern United States could affect all of our markets, and our entire
business and profitability would be damaged.
OUR SERVICE NETWORK OR OTHER FACILITIES COULD BE DAMAGED BY NATURAL CATASTROPHE.
Our success depends on the efficient and uninterrupted operation of our
communications services. Our networks are attached to poles and other structures
in our service areas, and our ability to provide service depends on the
availability of electric power. A tornado, hurricane, flood or other
catastrophic event in one of these areas could damage our network, interrupt our
service and harm our business in the affected area. In addition, many of our
markets are close together, and a single natural disaster could damage several
of our networks.
ALTHOUGH OUR STOCK IS NOT PUBLICLY TRADED, THE VALUE OF OUR STOCK COULD BE HURT
BY SUBSTANTIAL PRICE FLUCTUATIONS.
The value of our capital stock could be subject to sudden and material
increases and decreases, even though it is not publicly traded. The value of our
stock could fluctuate in response to:
- our quarterly operating results;
- changes in our business;
- changes in the market's perception of our bundled services;
- changes in the businesses or market perceptions of our competitors; and
- changes in general market or economic conditions.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the value of
securities of many companies. The changes often appear to occur without regard
to specific operating performance. The value of our capital stock could increase
or decrease based on change of this type, even though our stock is not publicly
traded. These fluctuations could materially reduce the value of our stock.
20
<PAGE> 24
IF WE ISSUE MORE STOCK IN FUTURE OFFERINGS, THE PERCENTAGE OF OUR STOCK THAT YOU
OWN WILL BE DILUTED.
Following this distribution, we will have 2,476 shares of common stock and
48,035,531 shares of Series A preferred stock outstanding. Shortly after this
distribution, we intend to make a private offering of shares of our Series B
preferred stock to a small group of institutional investors for approximately
$100 million at $4.75 per share. Each share of Series B preferred stock issued
is expected to be convertible into one share of our common stock. This private
offering, if consummated, will significantly dilute your percentage ownership in
KNOLOGY. Future stock issuances also will reduce your percentage ownership.
FOLLOWING THE DISTRIBUTION, A SMALL NUMBER OF STOCKHOLDERS WILL CONTROL A
SIGNIFICANT PORTION OF KNOLOGY.
Following the distribution, approximately 22.6% of our outstanding voting
stock will be beneficially owned by Campbell B. Lanier, the chairman of our
board of directors, and members of Mr. Lanier's family. Our directors and
executive officers as a group will beneficially own 36.6% of our outstanding
voting stock. Further, AT&T venture funds, SCANA Communications Holdings, Inc.,
American Water Works Company, Inc. and South Atlantic funds beneficially own
approximately 8.9%, 15.0%, 7.9% and 7.4% of our outstanding voting stock,
respectively. As a result, these stockholders will each have a dominant voting
position with respect to the ability to:
- elect our directors;
- amend our certificate of incorporation or bylaws; or
- effect a merger, sale of assets or other corporate transaction.
The extent of ownership by these stockholders may also discourage a potential
acquirer from making an offer to acquire KNOLOGY. This could reduce the value of
our stock.
WE EXPECT TO ENTER INTO A STOCKHOLDERS' AGREEMENT WITH SERIES B PREFERRED
STOCKHOLDERS WHEN WE ISSUE OUR SERIES B PREFERRED STOCK, WHICH AGREEMENT MAY
EFFECT THE RIGHTS OF HOLDERS OF OUR COMMON AND SERIES A PREFERRED STOCK.
We intend to make a private offering of shares of our Series B preferred
stock in the near future, and we expect to enter into a stockholders' agreement
with the Series B stockholders. This stockholders' agreement is expected to give
the Series B stockholders rights to subscribe when we offer additional stock in
the future and rights to elect two directors. The subscription right may inhibit
our ability to conduct sales of our securities to strategic investors and limit
our ability to dilute the interests of the Series B stockholders. The right to
elect two directors may give the Series B stockholders disproportionate
representation on our board of directors.
WE COULD BE DAMAGED BY THE LOSS OF OUR KEY PERSONNEL.
Our business is currently managed by a small number of key management and
operating personnel. We do not have any employment agreements with, nor do we
maintain "key man" insurance on, these or any other employees. As we have
numerous new employees resulting from our recent growth, we are particularly
dependent upon our
21
<PAGE> 25
management and longer-term employees who are familiar with our company and our
needs and can train our new hires.
ANTI-TAKEOVER PROVISIONS IN DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD MAKE IT
HARD FOR A THIRD PARTY TO ACQUIRE US.
As a Delaware company we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. Section 203 could delay or
prevent a third party or a significant stockholder from acquiring control of us.
In addition, our charter and bylaws may have the effect of discouraging,
delaying or preventing a merger, tender offer or proxy contest involving our
company. Any of these anti-takeover provisions could lower the market price of
our stock. No active market for our stock exists.
FORWARD-LOOKING STATEMENTS SHOULD BE READ WITH CAUTION.
This prospectus contains certain forward-looking statements regarding our
operations and business. Statements in this document that are not historical
facts are "forward-looking statements." Such forward-looking statements include
those relating to:
- future business developments;
- projected or anticipated expansion or construction;
- possible acquisitions and alliances;
- projected revenues, working capital, liquidity, capital needs, interest
costs and income; and
- year 2000 readiness.
The words "estimate," "project," "intend," "expect," "believe," "may,"
"could" and similar expressions are intended to identify forward-looking
statements. Wherever they occur in this prospectus or in other statements
attributable to us, forward-looking statements are necessarily estimates
reflecting our best judgment. However, these statements still involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. We caution you not to
place undue reliance on these forward-looking statements, which speak only as of
today's date.
22
<PAGE> 26
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
Decision to Conduct a Private Placement to Raise Needed Funds. We have
determined that to maintain and increase stockholder value we must continue to
grow by upgrading and expanding our networks. We will need substantial capital
in the near term to fund our planned upgrades and expansion, as discussed in
more detail below under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We intend to seek additional
capital through private and public equity and debt financings. Our board of
directors, together with the KNOLOGY Holdings board of directors, has decided
that at present KNOLOGY should pursue equity capital by making a private
offering of our capital stock. The material factors considered by the boards
were:
- the amount of indebtedness at KNOLOGY Holdings and the impact of that
indebtedness on our ability to raise additional debt financing.
- the stage of our development, our financial performance to date, and our
current and projected cash flows.
- the perceived timing, valuation and risks involved in a public equity
financing.
- the expected availability of funding from various possible funding
transactions and perceived costs of that funding.
- the apparent condition of the capital markets at the present time.
This private offering will not satisfy all of our capital needs, and we
will need to raise additional capital from future private and public equity and
debt offerings, as described more fully under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Decision to Make the Distribution. The reason our board of directors
decided to make the distribution was to enhance our ability to complete a
private placement at a higher per-share value. Our board of directors and the
board of KNOLOGY Holdings considered making a private offering of our stock as a
majority-owned indirect subsidiary of ITC Holding, which would remain our parent
company. However, the boards decided that our access to capital in the private
equity market and our ability to achieve a higher per-share value would be
enhanced if we did not have a single stockholder holding a majority of our
capital stock. The boards determined that we could achieve broader and diverse
equity ownership by having ITC Holding complete the distribution prior to our
making the private offering of our stock.
The boards of directors of KNOLOGY and KNOLOGY Holdings also considered
factors weighing against approving the distribution. The material factors
considered by the boards were:
- the significant time required and expenses expected to be incurred in
completing the distribution.
23
<PAGE> 27
- the possible limitations arising out of the tax separation agreement on
our ability to raise equity funding or conduct acquisitions for stock.
- the loss of intercompany loans and other favorable arrangements with ITC
Holding and/or its subsidiaries and affiliates.
The boards concluded that these negative factors do not outweigh the
benefits of the distribution. The boards determined that the costs of the
distribution, together with the costs of the proposed private placement, are
significantly less than the costs of pursuing other types of financing. Also,
the possible limitations created by the tax separation agreement would still
leave room for some additional equity financing or stock acquisitions, and it is
better to have possible limits on growth in the future than risk having present
growth stop due to lack of funding. In addition, if the growth generated by the
current proposed private placement results in an increase in stock value, the
increase in value would allow KNOLOGY to increase the amount of additional
equity financing it could raise without violating the 50% cumulative change
limitation discussed below under the caption "Material Federal Income Tax
Consequences of the Distribution -- Tax Separation Agreement." The intercompany
loans and other favorable arrangements with ITC Holding are expected to be not
as important if we obtain significant outside funding, such as that offered by
the proposed private placement.
The boards believe that so far their decision to proceed with the
distribution is supported by the progress to date of the proposed private
placement of the Series B preferred stock. This private placement, which is
contingent upon our completing the distribution, would raise approximately $100
million in equity funding. It is possible that this proposed offering would not
be consummated.
The decision to proceed with the distribution was made in consultation with
ITC Holding. As the principal stockholder of KNOLOGY, ITC Holding strongly
supported KNOLOGY's plan for growth and plan for raising additional funding in a
private placement. ITC Holding has been a principal source of funding for
KNOLOGY Holdings to date, and favored KNOLOGY raising funds from third parties
at this stage. ITC Holding concurred with the determination that the
distribution would improve our ability to complete a private placement of stock
and improve the terms of that offering.
ITC Holding was willing to pursue the distribution if ITC Holding could
obtain a ruling from the Internal Revenue Service that the distribution would
qualify as a tax-free spin-off, as discussed below. ITC Holding applied for a
ruling in September 1998, and tax rulings ultimately were obtained.
ITC Holding did consider the tax risks to option holders in connection with
the distribution. However, ITC Holding decided to proceed with the distribution
notwithstanding these risks since
- ITC Holding believed that the importance to KNOLOGY, and to ITC Holding
and its stockholders and option holders, of KNOLOGY raising funding in
the private placement and continuing its growth and development
outweighed the tax risks to ITC Holding option holders.
24
<PAGE> 28
- ITC Holding believed, and a tax opinion was subsequently obtained
stating, that the distribution should not be taxable to ITC Holding
option holders.
- if holders of ITC Holding options did not receive KNOLOGY options in the
distribution, they would not have the same economic value after the
distribution as they had before.
- ITC Holding determined that holders of ITC Holding options would be
better off economically receiving the distribution, despite the tax
risks, than not receiving the distribution, since any tax would be less
than 100% of the value of the distribution.
In connection with the IRS ruling request submitted by ITC Holding in
September 1998, ITC Holding obtained and submitted to the IRS a letter from
Morgan Stanley & Co. Incorporated as support for the conclusions of the boards
of directors of KNOLOGY Holdings, KNOLOGY and ITC Holding that the distribution
would improve KNOLOGY's ability to complete a private placement of stock and
improve the terms of that offering, as described earlier in this section. Morgan
Stanley was selected to provide this letter since it was then serving as KNOLOGY
Holdings' financial advisor.
The Morgan Stanley letter was obtained by ITC Holding solely for support of
its application to the IRS for a ruling regarding tax treatment. It addressed
only the issue of whether a distribution, versus making a private offering of
the stock of KNOLOGY as a majority-owned subsidiary of ITC Holding, would, all
other things being equal, better position KNOLOGY to access capital in the
private equity markets. Morgan Stanley assumed and relied upon the conclusions
of the boards and the accuracy and completeness of the information received by
it, each without independent verification. Morgan Stanley's letter was based on
its experience in raising equity for corporations generally and in structuring
and executing capital markets transactions in the telecommunications sector
specifically. Morgan Stanley did not recommend or determine the distribution
ratio, nor did it address the fairness to any person or entity of any aspect of
the distribution.
The Morgan Stanley letter supported the boards' belief that the per-share
valuation of the KNOLOGY stock offered to the private equity markets to raise
capital following the distribution would be significantly higher than the per
share value of the stock offered by KNOLOGY as a majority-owned subsidiary of
ITC Holding without effecting the distribution. Morgan Stanley's letter was
based on its experience that in situations where a single party or a small
number of related parties own a large majority of the common stock of a company
or otherwise control a company, minority investors are typically concerned about
potential conflicts of interest with large stockholders and the potential
negative impact on per-share trading price of large blocks of stock being
offered for sale at a later date by large holders. These concerns, or any
uncertainty relating to these issues, can result in decreased demand or a lower
price per-share that investors are willing to pay for stock of companies with
large majority holders.
25
<PAGE> 29
In the past, Morgan Stanley and its affiliates have provided financial
advisory and investment banking services to KNOLOGY Holdings, KNOLOGY and ITC
Holding. Morgan Stanley did not receive any fees for preparing the letter
discussed above. Morgan Stanley or one of its affiliates expects to participate
in the intended proposed private placement of the Series B preferred stock as an
investor.
ITC Holding has agreed to indemnify Morgan Stanley and its affiliates,
their respective directors, officers, agents and employees and each person, if
any, controlling Morgan Stanley or any of its affiliates against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, related to or arising out of Morgan Stanley's engagement.
TERMS OF THE DISTRIBUTION
In the distribution, ITC Holding is distributing to its stockholders and
option holders all of its 43,211,531 shares of our Series A preferred stock and
options to purchase 6,258,036 shares of our Series A preferred stock.
Immediately after the distribution, ITC Holding will not own any shares of our
capital stock or options to purchase any of our stock.
In this distribution:
- You are not required to pay cash or any other consideration for the
securities you receive.
- You do not need to make any decisions or take any action to receive your
shares or options. You do not need to surrender your ITC Holding stock or
options.
- There are no conditions to the completion of the distribution. No further
board action is necessary and no stockholder vote is necessary.
- There are no proceeds to us or to ITC Holding.
- No recipients of the distribution or stockholders of KNOLOGY are entitled
to appraisal rights in connection with the distribution.
ITC Holding and InterCall, the ITC Holding subsidiary that held the Series
A preferred stock and options to purchase Series A preferred stock of KNOLOGY
prior to the distribution, may be deemed underwriters and distributing
stockholders under applicable law with respect to the securities being
distributed in the distribution. Neither of these companies is receiving any
compensation or undertaking any selling efforts in connection with the
distribution. InterCall, a wholly owned subsidiary of ITC Holding, operates a
separate operator-assisted conference call business. InterCall held the KNOLOGY
securities until shortly before the distribution. InterCall first distributed
the KNOLOGY securities to ITC Holding, which then distributed them to ITC
Holding stockholders and option holders.
STOCK DISTRIBUTION.
Terms of Stock Distribution. The stock portion of the distribution is
being effected by a dividend payable to the 359 holders of record of ITC
Holding's capital stock at the
26
<PAGE> 30
close of business on December 15, 1999. This dividend is pro rata to all ITC
Holding stockholders on an as-converted basis, which takes into account the fact
that each share of ITC Holding preferred stock will be convertible into ITC
Holding common stock at a 4:1 ratio after March 14, 2002. The dividend includes:
- 1.09153 shares of our Series A preferred stock for every share of ITC
Holding common stock and
- 4.36612 shares of our Series A preferred stock for every share of ITC
Holding preferred stock.
The distribution ratio for the ITC Holding common stock was determined by
dividing the number of shares of our Series A preferred stock held by ITC
Holding, which was 49,469,567 as of the December 15, 1999 record date, by the
number of shares of capital stock of ITC Holding outstanding on December 15,
1999, which was 45,322,031. The resulting common stock distribution ratio is
1.09153. In making this calculation, each share of ITC Holding preferred stock
was treated as four shares of ITC Holding common stock based on the 4:1
conversion ratio. The distribution ratio for the ITC Holding preferred stock was
then determined by multiplying the distribution ratio for the ITC Holding common
stock by four, which equals 4.36612.
ITC Holding will not issue any fractional interests in our capital stock as
part of the distribution. Cash in the amount of $4.75 per share is being paid in
lieu of fractional shares. The amount of cash payable per share was determined
by our board based upon the expected price of our stock in the proposed private
placement.
Effect on ITC Holding Stock Outstanding Prior to the Distribution. ITC
Holding stock certificates will continue to represent shares of ITC Holding's
capital stock after the distribution in the same amount as prior to the
distribution.
Example of Stock Distribution. As an example, suppose before the
distribution you hold 1,000 shares of ITC Holding common stock and that ITC
Holding determines that KNOLOGY's value as a company before the distribution is
20% of the value of ITC Holding. In the distribution, you would receive 1,091
shares of KNOLOGY common stock, determined by multiplying your 1,000 shares
times the common stock distribution ratio of 1.09153. You would also receive
$2.52 in cash, equal to 0.53 fractional shares of KNOLOGY times the cash value
for fractional shares of $4.75 per share.
The value of your ITC Holding common stock outstanding prior to the
distribution would decline as a result of the distribution because part of ITC
Holding, worth 20% of its value, would no longer belong to ITC Holding after the
distribution. However, after the distribution you would hold the same interest
in KNOLOGY directly, as KNOLOGY stock, that before the distribution you held
indirectly through your ITC Holding stock.
OPTION DISTRIBUTION.
Rationale of the Option Distribution. The ITC Holding options were all
issued to employees of ITC Holding or its subsidiaries and, in a few cases, to
nonemployee
27
<PAGE> 31
directors or consultants, in connection with the performance of services.
Pursuant to the terms of the ITC Holding options, adjustments are to be made to
maintain the value of the options if a transaction such as the distribution of
our stock by ITC Holding occurs.
ITC Holding has determined that, with respect to each option holder, the
adjustment should take the form of
- the distribution of an option to purchase 1.09153 shares of our Series A
preferred stock for each option to purchase one share of ITC Holding
common stock held prior to the distribution, and
- the adjustment of the exercise price of the options to purchase the ITC
Holding common stock held prior to the distribution such that the
aggregate spread in the options to purchase ITC Holding stock and the
options to purchase our stock is equal to the aggregate spread in the
options to purchase the ITC Holding stock immediately prior to the
distribution. The aggregate spread means the aggregate difference between
the exercise price and the fair market value of the stock underlying the
options at the time of the distribution.
This adjustment permits the option holders to participate directly through
KNOLOGY options in the potential appreciation of the value of our stock to the
same extent as they participated indirectly through their ITC Holding options
before the distribution.
The ITC Holding Option Holders. The holders of outstanding ITC Holding
options are generally current and former employees of ITC Holding, its various
subsidiaries or its former subsidiaries. A few options are held by current or
former nonemployee directors or consultants to ITC Holding, its subsidiaries or
its former subsidiaries.
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 is making a special
distribution of the KNOLOGY options to ITC Holding option holders and is
adjusting the exercise price of ITC Holding options held prior to the
distribution. Most ITC Holding option holders are not ITC Holding stockholders,
and if they are stockholders do not have stock holdings that reflect the
interests that they would have in ITC Holding if they exercised their options.
Terms of the Option Distribution. ITC Holding is distributing to each of
the 861 ITC option holders as of December 15, 1999 an option to purchase 1.09153
shares of our Series A preferred stock for each option to purchase one share of
ITC Holding common stock then outstanding. The exercise price of each of these
options will be determined by ITC Holding by multiplying the percentage of ITC
Holding's value attributed to us at the time of the distribution by the exercise
price of the ITC option to which the KNOLOGY option relates. This determination
is made under the ITC Holding option plan or option agreements under the
authority of the ITC Holding board of directors, and any authorized committee of
that board, to make appropriate adjustments under that plan or option
agreements. The option agreements evidencing the KNOLOGY options being
distributed in the distribution reflect this determination.
28
<PAGE> 32
The exact percentage of the value of ITC Holding attributable to us at the
time of the distribution will be determined by the ITC Holding board of
directors shortly after the distribution. If the ITC Holding board of directors
had made its determination as of January 11, 2000, the percentage of ITC Holding
attributed to KNOLOGY would have been 20.3%. Accordingly, the exercise price of
each KNOLOGY option would have been 20.3% of the exercise price of the holder's
ITC Holding option. The exercise price of the ITC Holding option would be
decreased by that amount to 79.7% of its original exercise option price. While
the percentages as of the time of distribution may differ slightly from these
numbers, ITC Holding and KNOLOGY expect that the final allocation as determined
by ITC Holding's board of directors will not be materially different from the
percentages presented here.
ITC Holding will not issue any fractional interests in our options as part
of the distribution. Cash in the amount of $4.75 per share is being paid in lieu
of fractional options. The amount of cash payable per share was determined by
our board based upon the expected price of our stock in the proposed private
placement.
Effect on ITC Holding Stock Options. ITC Holding stock options held
before the distribution will continue to represent options to purchase the same
number of shares of ITC Holding capital stock following the distribution. ITC
Holding is reducing the aggregate exercise price of your ITC Holding stock
options in an amount equal to the aggregate exercise price of the option to
purchase our stock that is being distributed to you. The sum of the aggregate
exercise prices of the ITC Holding stock options you hold following the
distribution, as adjusted, and the options to purchase our stock that you
receive in the distribution will be the same as the aggregate exercise price of
the ITC Holding stock options you held prior to the distribution.
Example of Option Distribution. As an example, suppose before the
distribution you hold options to buy 100 shares of ITC Holding common stock for
an aggregate exercise price of $500 and that ITC Holding determines that
KNOLOGY's value as a company before the distribution is 20% of the value of ITC
Holding.
In the distribution, you would receive options to purchase 109 shares of
KNOLOGY Series A preferred stock, determined by multiplying your options to
purchase 100 shares times the option distribution ratio of 1.09153. You would
also receive $0.73 in cash, equal to 0.153 fractional shares of KNOLOGY Series A
preferred stock times the cash value for fractional options of $4.75 per share.
The value of your ITC Holding options would have declined in the
distribution because part of ITC Holding, worth 20% of its value, would no
longer belong to ITC Holding after the distribution. ITC Holding would therefore
reduce the aggregate exercise price of your ITC Holding option by 20%, to $400.
The $100 difference would become the aggregate exercise price of your KNOLOGY
option.
Since the option distribution ratio is the same as the stock distribution
ratio, you would pay the same exercise price and you would own the same number
of shares whether (1) you exercised your ITC Holding option immediately before
the distribution
29
<PAGE> 33
and received stock in the distribution or (2) you exercised both your ITC
Holding option and your KNOLOGY option immediately after the distribution.
Provisions of KNOLOGY options and ITC Holding options. As shown in the
example above, from an economic point of view each ITC Holding option
outstanding before the distribution is essentially split into two parts, a
modified ITC Holding option and a KNOLOGY option that collectively have the same
terms as the old ITC Holding option had before the distribution. The aggregate
exercise price of the old ITC Holding option is allocated over the modified ITC
Holding option and a KNOLOGY option as discussed above under "Terms of the
Option Distribution."
Since many ITC Holding options have been outstanding for a substantial
period of time during which the value of ITC Holding stock has appreciated, ITC
Holding options have a range of exercise prices, from well below current fair
market value for older options to at or near current fair market value for newer
options. Because the aggregate exercise price of the old ITC Holding option is
allocated over the modified ITC Holding option and the KNOLOGY option on a fixed
percentage basis, as discussed above under "Terms of the Option Distribution"
and as shown in the example above, the KNOLOGY options being distributed also
have a range of exercise prices. The exercise prices of KNOLOGY options relating
to older ITC Holding options may be significantly lower than the exercise prices
of KNOLOGY options relating to more recently granted ITC Holding options.
Other than for the reduction in the option price, the provisions of the
modified ITC Holding options remain the same as before the distribution. Since
the option holder is 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
relates. 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 options are covered by a stock option plan, the KNOLOGY, Inc.
spin-off plan, created solely for the options covered by the distribution. The
KNOLOGY, Inc. spin-off plan is substantively the same as the ITC Holding stock
option plan under which the ITC Holding stock options were granted.
Acquisition of the KNOLOGY options by ITC Holding. As discussed above,
the economic effect of the option distribution is essentially to split the ITC
Holding options held prior to the distribution into two parts, a modified ITC
Holding option and a KNOLOGY option that collectively have the same value as the
ITC Holding option held prior to the distribution. However, ITC Holding does not
have the power to grant KNOLOGY options and had to obtain them from KNOLOGY to
carry out the option distribution.
30
<PAGE> 34
In many spin-offs, the parent company owns 100% of the subsidiary being
spun off and simply causes the subsidiary to issue options to the parent
company's option holders. In this case, since KNOLOGY has stockholders other
than ITC Holding, ITC Holding purchased the options from KNOLOGY for fair value.
ITC Holding, through its subsidiary InterCall, acquired the KNOLOGY options
that it is distributing to you by converting a loan to KNOLOGY into options. In
December 1999, InterCall, an ITC Holding subsidiary, entered into a loan
agreement with KNOLOGY under which InterCall loaned KNOLOGY approximately $29.7
million. The note issued under the loan agreement provided that InterCall could
elect, in lieu of repayment, to convert the amount outstanding under the note
into options to purchase shares of KNOLOGY Series A preferred stock. Prior to
the distribution the entire amount of the note was converted into options to
purchase 6,258,036 shares of KNOLOGY Series A preferred stock. InterCall
distributed the KNOLOGY options to ITC Holding, which is then distributing them
to ITC Holding option holders in the distribution.
As mentioned above, ITC Holding needed to set an appropriate exercise price
for each KNOLOGY option to effect the allocation of the aggregate exercise price
of the ITC Holding option held prior to the distribution over the modified ITC
Holding option and a KNOLOGY option. ITC Holding also needed to ensure that the
option terms for vesting and termination for each individual KNOLOGY option, and
all the other provisions of the option, matched the terms of ITC Holding options
held prior to the distribution to which they relate. The note therefore provides
that ITC Holding has the right to specify the terms of the KNOLOGY options,
including the exercise price and option terms for vesting and termination.
Prior to being converted, the note had a maturity date of March 31, 2000.
Amounts outstanding under the note bore interest at 11 7/8%.
Residual Note. When InterCall converted its loan into KNOLOGY options and
assigned them to ITC Holding, ITC Holding received a residual note which
provides that KNOLOGY will pay to ITC Holding any proceeds received by KNOLOGY
from 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 FOR THE DISTRIBUTION
For financial statement purposes, the distribution to the ITC Holding
shareholders will be recorded at historical cost. The stock options purchased by
ITC Holding (through its wholly owned subsidiary, InterCall) for its current
option holders will be
31
<PAGE> 35
accounted for as a capital contribution in our financial statements and the
amount of approximately $29.7 million recorded as additional paid in capital.
The number of options ITC Holding will receive for the conversion of the $29.7
million loan will be based on the current fair value of KNOLOGY common stock,
$4.75. As a result, ITC Holding will receive approximately 6.3 million options
which will be distributed to its option holders.
ITC Holding option holders are primarily employees and directors of ITC
Holding, its subsidiaries, or its affiliates. After the distribution of KNOLOGY
options to ITC Holding option holders, KNOLOGY's option holders, other than its
employees and directors, will include employees and directors of ITC Holding,
its subsidiaries and its affiliates (through common ownership). Compensation
expense will not be recorded by KNOLOGY when the options are distributed to the
ITC Holding option holders because all terms of the modified ITC Holding option
and the distributed KNOLOGY option will be equivalent to the ITC Holding options
prior to the distribution. These terms include the ratio of the exercise price
to the fair value of stock, the vesting provisions, the expiration dates, and
the amount by which the aggregate exercise price is less or greater than the
aggregate fair value of ITC Holding's and KNOLOGY's stock when compared to that
of the ITC Holding option prior to the distribution.
Since ITC Holding will have already paid the fair value per share when the
options are purchased, ITC Holding will be entitled to the proceeds when the
options are exercised. When the options are exercised, KNOLOGY will receive the
proceeds and will issue the shares to the option holder. KNOLOGY will then remit
the proceeds to ITC Holding simultaneous with the exercise of the option. If no
cash proceeds are received by KNOLOGY because the option holder elects a
cashless exercise, KNOLOGY will remit the exercise price of the options to ITC
Holding in cash.
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.
32
<PAGE> 36
The six month time period related to the KNOLOGY shares that may be
tendered as consideration for cashless exercises of the KNOLOGY options will
include periods prior to the reorganization and distribution in which the option
holder held ITC Holding shares because the shareholder's interest in KNOLOGY was
indirectly held through their ownership of ITC Holding.
EXPENSES
There is no underwriter compensation or commissions earned as a result of
the distribution. We estimate that the expenses of the distribution will be
approximately $600,000, of which we will pay approximately 26% and ITC Holding
will pay approximately 74%. This amount includes expenses for accounting and
legal services, printing and other miscellaneous expenses to be incurred in the
distribution.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION
The following discusses the material federal income tax consequences of the
distribution. The discussion is based on the Internal Revenue Code of 1986, as
amended, all applicable U.S. Treasury regulations under the Internal Revenue
Code, administrative rulings and judicial authority, all as of the date of this
registration statement. All of these authorities are subject to change, and any
change could affect the continuing validity of this discussion. This discussion
does not cover all federal income tax consequences that may apply to all
categories of stockholders and option holders. All stockholders and option
holders should consult their own tax advisors regarding the particular federal,
foreign, state and local tax consequences to them of the distribution.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING STOCKHOLDERS
Tax consequences to ITC Holding stockholders based on IRS rulings. ITC
Holding has received rulings from the IRS that the distribution of our stock to
ITC Holding stockholders as described to the IRS would qualify as a tax-free
spin-off under Section 355 of the Internal Revenue Code. Based on these rulings,
with respect to the ITC Holding stockholders receiving KNOLOGY stock in the
distribution:
- No gain or loss will be recognized by, and no amount will be included in
the income of, the holders of ITC Holding stock upon their receipt of our
stock.
- The holding period applicable to our stock for federal income tax
purposes in the hands of a holder of ITC Holding stock receiving the
distribution would include the stockholder's holding period for the ITC
Holding stock.
- The total of the basis of our stock plus the basis of the ITC Holding
stock held by each ITC Holding stockholder after the distribution will be
the same as the basis of the ITC Holding stock held by the stockholder
immediately before the distribution. The total basis will be allocated in
proportion to the relative fair market values of our stock and the ITC
Holding stock as of the date of the distribution, less the amount of
basis allocable to any fractional share interests in
33
<PAGE> 37
our stock for which ITC Holding stockholders receive cash. We have been
informed by ITC Holding management that it will notify each ITC Holding
stockholder in the near future, for the purpose of this basis allocation,
of ITC Holding management's estimate regarding the relative fair market
values of our stock and the ITC Holding stock as of the date of the
distribution.
- The receipt of cash in lieu of fractional share interests in our stock
will be treated as received in exchange for the fractional share and gain
or loss will be recognized to a recipient stockholder to the extent of
the difference between the stockholder's basis in the fractional share
and the amount received for the fractional share. If the fractional share
interest is held as a capital asset by the recipient stockholder, the
gain or loss will be capital gain or loss.
Tax consequences to ITC Holding stockholders if IRS rulings are or become
invalid. The IRS rulings are premised on the accuracy of factual representations
and assumptions. If those factual representations and assumptions made by ITC
Holding are or become incorrect in any material respect, the reliability of the
IRS rulings could be jeopardized. However, ITC Holding is not aware of any facts
and circumstances that would cause those representations and assumptions to be
untrue.
If the distribution were not to constitute a tax-free spin-off, then the
distribution could have the following tax consequences to you:
- Except as provided in the next paragraph, each holder of ITC Holding
stock who received shares of our stock in the distribution would
generally be treated as having received a taxable dividend from ITC
Holding in an amount equal to the fair market value of our stock received
at the time of the distribution. If the stockholder's allocable share for
tax purposes of ITC Holding's current-year and accumulated earnings and
profits is less than this amount, the amount taxable as a dividend will
be reduced by the difference.
- The difference would be treated first as a tax-free return of capital,
reducing the stockholder's adjusted basis in his ITC Holding stock (but
not below zero) and then, if the basis is reduced to zero, the remainder
would be treated as capital gain to the extent of the remaining excess if
the stockholder has held the ITC Holding stock as a capital asset.
- The holder of ITC Holding stock would have a basis in KNOLOGY stock
received in the distribution equal to the fair market value of the stock
at the time of the distribution, and his holding period would begin on
the day after the date of the distribution.
- Except as set forth above with respect to distributions in excess of ITC
Holding's earnings and profits, the basis of the stockholder's existing
ITC Holding stock would be unchanged.
- ITC Holding would be treated as recognizing a taxable gain equal to the
difference between the fair market value of the shares of KNOLOGY stock
distributed and its adjusted basis in these shares at the time of the
distribution.
34
<PAGE> 38
Tax consequences if the distribution is part of a plan in which a 50% or
greater interest is acquired. Even if the distribution is otherwise treated as
a tax-free spin-off to the ITC Holding stockholders, ITC Holding would recognize
a large taxable gain if the distribution were considered to be part of a plan or
series of related transactions in which a 50% or greater interest in KNOLOGY or
ITC Holding were acquired by one or more persons.
Although neither ITC Holding nor KNOLOGY believes the distribution is part
of a plan to effect a 50% ownership shift, any cumulative 50% change of
ownership within the four-year period beginning two years before the date of the
distribution, including any change in the ownership of shares distributed to ITC
Holding stockholders in the distribution, will be presumed by applicable tax
rules and regulations to be pursuant to such a plan. The Internal Revenue Code
states that this presumption may be rebutted by a showing that the distribution
and the 50% ownership shift are not part of such a plan. However, regulations
proposed by the U.S. Department of Treasury interpreting this provision could
make it extremely difficult for us to rebut this presumption with respect to the
distribution and any subsequent 50% ownership shift.
IRS regulations provide that each ITC Holding stockholder who receives
shares of our stock in the distribution must attach to his or her federal income
tax return for 1999 a detailed statement with respect to the applicability of
Code Section 355. ITC Holding will make available the required information to
each stockholder of record of ITC Holding as of the record date for the
distribution.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO ITC HOLDING OPTION
HOLDERS
OVERVIEW
Background of ITC Holding Stock Options. ITC Holding has 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 have been granted under ITC Holding's employee and director option
plans. All of the ITC Holding options are 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 have generally been
granted incentive stock options, whereas directors and other nonemployees of ITC
Holding have been 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
35
<PAGE> 39
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 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 will
receive options to acquire shares of KNOLOGY Series A preferred stock. As a
result, employees of ITC Holding will hold options to purchase stock of both ITC
Holding and KNOLOGY, and employees of KNOLOGY will 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 will change. Employees of
KNOLOGY will cease to be employees of a subsidiary of ITC Holding, since KNOLOGY
will no longer be an ITC Holding subsidiary. Additionally, employees of ITC
Holding or its subsidiaries other than KNOLOGY will remain employees of ITC
Holding and its subsidiaries, but will cease to be employees of the parent
company of KNOLOGY, since ITC Holding will no longer be the parent company of
KNOLOGY.
TAX TREATMENT OF OPTION DISTRIBUTION; TAX OPINION
No IRS Ruling Obtained Regarding Tax Treatment. ITC Holding has 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 have 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
36
<PAGE> 40
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.
Assumptions Underlying the Tax Opinion. Among other things, ITC Holding
has advised us, and the opinion assumes, that almost all ITC Holding options
were granted under ITC Holding's employee and director option plans and that all
ITC Holding options were granted in connection with the performance of services.
ITC Holding has advised us, and the tax opinion assumes, that ITC Holding will
make 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 has advised us, and the tax opinion assumes, that the
terms of the KNOLOGY options, other than with respect to exercise price, will 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 IS THE FEDERAL TAX EFFECT OF THE DISTRIBUTION OF KNOLOGY STOCK OPTIONS
TO ITC HOLDING EMPLOYEES WHO HOLD ITC HOLDING INCENTIVE STOCK OPTIONS?
More likely than not the KNOLOGY options distributed to ITC holding
employees holding ITC Holding incentive stock options are incentive stock
options until three months after the distribution of KNOLOGY. The issuance of
KNOLOGY options to ITC Holding employees is more likely than not treated as a
nontaxable substitution of KNOLOGY options for ITC Holding incentive stock
options and not treated as a taxable modification.
If the IRS were to recharacterize the KNOLOGY stock option as a
nonqualified option, the issuance of the KNOLOGY stock option should not be
taxable to the recipients at the time of the distribution.
2. WHAT IS THE FEDERAL TAX EFFECT OF THE DISTRIBUTION OF KNOLOGY STOCK OPTIONS
TO KNOLOGY EMPLOYEES WHO HOLD ITC HOLDING INCENTIVE STOCK OPTIONS?
The KNOLOGY options distributed to KNOLOGY employees holding ITC Holding
incentive stock options should be classified as incentive stock options after
the distribution of KNOLOGY. The issuance of KNOLOGY options to KNOLOGY
employees should be treated as a nontaxable substitution of KNOLOGY options for
ITC Holding incentive stock options and not treated as a taxable modification.
If the IRS were to recharacterize the KNOLOGY stock option as a
nonqualified option, the issuance of the KNOLOGY stock option should not be
taxable to the recipients at the time of the distribution.
37
<PAGE> 41
3. WHAT IS 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 options to nonemployees and employees holding
nonqualified stock options of ITC Holding should not result in any current
taxation at the time of distribution.
4. WHAT IS THE FEDERAL TAX EFFECT OF THE ADJUSTMENT IN EXERCISE PRICE OF ITC
HOLDING INCENTIVE STOCK OPTIONS FOR ITC HOLDING EMPLOYEES?
ITC Holding incentive stock options with the adjusted exercise prices that
are held by ITC Holding employees should remain incentive stock options after
the distribution of KNOLOGY. The adjustment of the exercise price of ITC Holding
incentive stock options currently held by ITC Holding employees should not be
treated as a taxable modification for the employees of ITC Holding.
If the IRS were to recharacterize the ITC Holding stock option as a
nonqualified option, the adjustment in the exercise price should not result in
any current taxation at the time of distribution.
5. WHAT IS THE FEDERAL TAX EFFECT OF THE ADJUSTMENT IN EXERCISE PRICE OF ITC
HOLDING INCENTIVE STOCK OPTIONS FOR KNOLOGY EMPLOYEES?
ITC Holding incentive stock options with the adjusted exercise prices that
are held by KNOLOGY employees should remain incentive stock options until three
months after the distribution. The adjustment of the exercise price of ITC
Holding incentive stock options currently held by KNOLOGY employees should not
be treated as a taxable modification for the employees of KNOLOGY.
If the IRS were to recharacterize the ITC Holding stock option as a
nonqualified option, the adjustment in the exercise price should not result in
any current taxation at the time of distribution.
6. WHAT IS THE FEDERAL TAX EFFECT OF THE ADJUSTMENT IN EXERCISE PRICE OF ITC
HOLDING NONQUALIFIED STOCK OPTIONS FOR NONEMPLOYEES AND EMPLOYEES OF ITC
HOLDING AND KNOLOGY HOLDING NONQUALIFIED STOCK OPTIONS?
The adjustment in exercise price of ITC Holding nonqualified stock options
held by nonemployees or employees of ITC Holding or KNOLOGY should not result in
any current taxation at the time of distribution and should continue to be
treated as nonqualified stock options.
Based on the existing Internal Revenue Code and Treasury Regulations,
Arthur Andersen LLP has issued a "more likely than not" opinion on the first
issue identified above and a "should" opinion on the remaining issues identified
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
38
<PAGE> 42
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 one
of the issues addressed by the opinion.
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 stockholders. All stockholders
and option holders should consult their own tax advisors regarding the
particular federal, foreign, state and local tax consequences of the
distribution to such stockholders and option holders.
TAX SEPARATION AGREEMENT
ITC Holding and KNOLOGY have entered into a tax separation agreement to
reflect KNOLOGY ceasing to be included in ITC Holding's consolidated tax return
and to allocate the risk of potential adverse tax consequences stemming from the
distribution.
In the tax separation agreement ITC Holding and KNOLOGY have made
representations to each other regarding the distribution and covenants regarding
future actions. Under the tax separation agreement KNOLOGY represents as of the
date of the distribution that:
(1) KNOLOGY has no plan or intention to purchase any of its outstanding
stock after the distribution,
(2) KNOLOGY has no plan or intention to liquidate KNOLOGY, merge KNOLOGY
with any other corporation, or sell or otherwise dispose of the assets
of KNOLOGY other than in the ordinary course of business,
(3) immediately after the distribution, at least 90% of the fair market
value of the gross assets of KNOLOGY will consist of the stock and
securities of members of the KNOLOGY group of companies that are
engaged in the active conduct of a trade or business,
(4) payments made in connection with all continuing transactions between
either ITC Holding or KNOLOGY and entities in their respective groups
will be at fair market value based on the terms and conditions arrived
at by the parties bargaining at arm's length,
39
<PAGE> 43
(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 covenants in the tax separation agreement that it will not take any
action or fail to take any action that would cause any of the representations
listed as (1) through (6) above to be untrue.
KNOLOGY also covenants in the tax separation agreement that:
- during the two-year period following the spin-off, KNOLOGY will not cease
to be engaged in the active trade or business relied upon for purposes of
satisfying the requirements of the spin-off ruling request, and
- during the applicable period provided in the Internal Revenue Code with
respect to the distribution, KNOLOGY will not enter into any transaction
or make any change in equity structure, including stock issuances
pursuant to the exercise of options, option grants or otherwise, capital
contributions, or acquisitions, but not including the distribution, that
may cause the distribution to be treated as part of a plan in which one
or more persons acquire directly or indirectly KNOLOGY's stock
representing a 50% or greater interest within the meaning of Section
355(e) of the Internal Revenue Code.
The tax separation agreement permits KNOLOGY to take actions inconsistent
with its representations and covenants if it either obtains a ruling from the
IRS or an opinion of expert tax counsel that the actions should not result in
the distribution being taxable, or if the proposed actions are approved by
holders of at least two-thirds of KNOLOGY's voting stock. If KNOLOGY breaches
its representations and covenants by taking actions not permitted in the tax
separation agreement and the breach causes the distribution not to be treated as
tax-free, KNOLOGY could be subject to significant damages. KNOLOGY's maximum
liability for breach of its representations and covenants in the tax separation
agreement is limited by agreement to $50 million.
40
<PAGE> 44
ITC Holding made similar representations and covenants under the tax
separation agreement. Stockholders of ITC Holding who will hold 20,000 shares or
more of ITC Holding's capital stock have entered into agreements with ITC
Holding generally agreeing not to transfer any of their KNOLOGY stock for two
years following the distribution.
41
<PAGE> 45
NO MARKET FOR OUR STOCK
Our stock is not traded on any exchange or listed on the Nasdaq market
system. No market makers currently make a market in our stock and we do not plan
to engage a market maker. Therefore, there is no established public trading
market and no high and low bid information or quotations available. We do not
expect that an active trading market will develop after the distribution.
In addition, all shares of our stock are subject to transfer restrictions,
including the shares you will receive in the distribution. If you decide to sell
your shares of stock of our company, you will first have to offer those shares
to us to purchase, before you can sell to a third party. This, along with the
lack of a public market, limits your ability to sell your shares.
Following the distribution, we expect to have 2,476 shares of common stock
outstanding held of record by three stockholders and 48,035,531 Series A
preferred stock outstanding held of record by 347 stockholders. Prior to the
distribution our common stock was held by three stockholders and our Series A
preferred stock was held by 14 stockholders, including ITC Holding. We intend to
issue in a private placement approximately 21,052,631 shares of Series B
preferred stock to approximately 20 stockholders. The Series B preferred stock
would represent approximately 25% of our total outstanding shares on a fully
diluted basis. The terms of this private offering could change and it is
possible that the offering will not be consummated. The private offering is
contingent upon the completion of the distribution described by this prospectus.
DIVIDEND POLICY
As we are a holding company, our ability to pay cash dividends depends on
us receiving cash dividends, advances and other payments from our subsidiaries.
The ability of our subsidiary KNOLOGY Holdings to pay dividends is restricted
under the terms of its credit facility, as discussed in more detail under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources." While two of our
subsidiaries, Interstate Telephone and Valley Telephone, have declared dividends
to their former parent company, ITC Holding, in the past, we plan to retain
earnings to finance the expansion of our operations. Future declaration and
payment of dividends, if any, will be determined based on the then-current
conditions, including our earnings, operations, capital requirements, financial
condition, and other factors the board of directors deems relevant. In addition,
our ability to pay dividends is limited by the terms of the indenture governing
our outstanding notes and by the terms of our credit facility.
42
<PAGE> 46
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999,
and as adjusted to give effect to:
- the purchase by SCANA of 753 shares of preferred stock of KNOLOGY
Holdings pursuant to its exercise in November 1999 of warrants associated
with previous borrowings whose terms were agreed to in October 1999,
including a charge of $0.8 million associated with SCANA warrants, equal
to their fair market value as determined by the Black-Scholes model;
- the exchange in November 1999 of the remaining 15% of KNOLOGY Holdings
preferred stock held by minority stockholders for our Series A preferred
stock, equal to the fair market value of $22.4 million;
- the exchange in November 1999 of ITC Holding's approximate 6% interest in
ClearSource, cash of $5.7 million, and subscription rights to purchase
additional shares of ClearSource, for 2,280,702 shares of our Series A
preferred stock. The ClearSource investment was valued for purposes of
the exchange at fair market value of $10.8 million and reflected on our
books as an investment at ITC Holding's historical cost of assets
contributed of $7.5 million;
- the exchange as part of the November 1999 transaction of our warrants for
KNOLOGY Holdings warrants which had been issued in connection with senior
discount notes in 1997. Such transaction is reflected at the current fair
market value, resulting in an increase in the value assigned to the
warrants of $2.2 million and a corresponding decrease in additional paid
in capital;
- $39.4 million of loans from ITC Holding, of which approximately $9.6
million were exchanged in November 1999 for 2,029,724 shares of our
Series A preferred stock and of which approximately $29.7 million were
exchanged in January 2000 for options to purchase 6,258,036 shares of our
Series A preferred stock;
- reversal of the $8.3 million net income tax benefit previously recognized
when we were included in the consolidated tax return of ITC Holding.
Assuming we were a stand alone entity, we would not have been able to
realize any income tax benefit as we would not have had any taxable
income to offset our taxable loss in the current or prior periods; and
- $100 million in firm commitments from the private placement of Series B
preferred stock.
43
<PAGE> 47
To better understand this table, you should review "Management's Discussion and
Analysis of Financial Condition and Results of Operations" our consolidated
financial statements and pro forma financial information, including the
accompanying notes, included in this prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
---------------------------
AS ADJUSTED
FOR THIS
ACTUAL DISTRIBUTION
------------ ------------
<S> <C> <C>
Advances from affiliates.......................... $ 1,171,252 $ 1,171,252
Long-term debt, including current maturities:
Senior Discount Notes including accrued
interest payable............................ 302,510,795 302,510,795
Senior secured credit facility................. 19,000,000 19,000,000
Other.......................................... 128,670 128,670
------------ ------------
Total long-term debt, including
current maturities................. $321,639,465 $321,639,465
------------ ------------
Warrants.......................................... $ 2,486,960 $ 4,726,065
------------ ------------
Stockholders' equity:
Series A preferred stock, $.01 par value,
75,000,000 authorized; 0 and 48,035,531
shares issued and outstanding at September
30, 1999 and as adjusted, respectively...... $ -- $ 480,355
Series B preferred stock, $.01 par value,
50,000,000 authorized; 0 and 21,052,631
shares issued and outstanding at September
30, 1999 and as adjusted, respectively...... -- 210,526
Common Stock, $.01 par value, 200,000,000
shares authorized; 100 and 2,476 shares
issued and outstanding at September 30, 1999
and as adjusted, respectively............... 1 25
Additional paid-in-capital..................... 75,312,104 243,599,680
Accumulated deficit............................ (64,526,921) (73,637,280)
Unrealized losses.............................. (23,650) (23,650)
------------ ------------
Total stockholders' equity............ $ 10,761,534 $170,621,696
============ ============
Total capitalization.................. $336,059,211 $498,158,478
============ ============
</TABLE>
44
<PAGE> 48
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The selected financial data as of and for the years ended December 31, 1996,
1997 and 1998 have been derived from our audited financial statements. The
selected financial data as of and for the nine months ended September 30, 1998
and 1999 have been derived from our unaudited consolidated financial statements
and, in our opinion, include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of such information. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results that we may expect for the entire year. The selected
financial data set forth below should be read in conjunction with our section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations", our financial statements and related notes, and other
financial data included elsewhere in this prospectus. See note 1 to our
financial statements regarding the reorganization.
<TABLE>
<CAPTION>
Nine
Months
YEAR YEAR YEAR YEAR Year Ended
ENDED ENDED ENDED ENDED Ended September
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, December 31, 30,
1994 1995 1996 1997 1998(a) 1998
------------ ------------ ------------ ------------ ------------ -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..................... $17,679,873 $18,929,279 $ 17,527,208 $ 17,633,313 $ 45,132,522 $ 30,285,049
Operating expenses:
Cost of services...................... 5,253,503 5,593,083 2,991,412 3,121,108 12,739,540 9,010,401
Selling, operations and
administrative...................... 7,664,748 8,740,090 8,331,795 9,498,461 37,323,345 24,256,479
Depreciation and amortization......... 1,965,874 3,185,901 3,022,056 2,781,800 17,326,895 9,013,477
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses............... 14,884,125 17,519,074 14,345,263 15,401,369 67,389,780 42,280,357
----------- ----------- ------------ ------------ ------------ ------------
Operating income (loss)................ 2,795,748 1,410,205 3,181,945 2,231,944 (22,257,258) (11,995,308)
----------- ----------- ------------ ------------ ------------ ------------
Other expense, net..................... 603,847 (362,331) (379,889) (2,048,506) (18,645,199) (12,389,198)
----------- ----------- ------------ ------------ ------------ ------------
Income (loss) before minority interest,
income tax (provision) benefit and
cumulative effect of a change in
accounting principle.................. 3,399,595 1,047,874 2,802,056 183,438 (40,902,457) (24,384,506)
Minority interest...................... -- 667,038 -- -- 13,294,079 11,292,126
Income tax (provision) benefit......... (1,208,939) (573,327) (1,371,865) (1,010,779) 5,631,618 1,704,350
Cumulative effect of a change in
accounting principle.................. -- -- -- -- (582,541) (582,541)
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss)...................... 2,190,656 1,141,585 1,430,191 (827,341) (22,559,301) (11,970,571)
Subsidiary preferred stock dividends... -- -- -- (4,193,276) (1,424,222) (63,907)
----------- ----------- ------------ ------------ ------------ ------------
Net income (loss) attributable to
common stockholders................... $ 2,190,656 $ 1,141,585 $ 1,430,191 $ (5,020,617) $(23,983,523) $(12,034,478)
=========== =========== ============ ============ ============ ============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common stockholders... $ 21,906.56 $ 11,415.85 $ 14,301.91 $ (50,206.17) $(239,835.23) $(120,344.78)
Basic and diluted weighted average
number of common shares outstanding... 100 100 100 100 100 100
OTHER FINANCIAL DATA:
Capital expenditures................... $ 3,686,035 $ 3,079,108 $ 995,320 $ 1,727,079 $120,227,057 $ 80,913,266
Cash provided by (used in) operating
activities............................ 5,230,950 94,418 4,770,730 3,680,116 23,035,488 9,515,039
Cash (used in) provided by investing
activities............................ (2,753,862) (3,544,192) (197,362) (22,223,940) (34,586,803) (22,997,766)
Cash (used in) provided by financing
activities............................ (248,942) 1,535,595 (4,457,176) 18,726,407 16,083,187 15,176,704
EBITDA(b).............................. 5,515,186 5,565,993 5,640,550 2,509,854 8,564,129 8,475,265
Ratio of earnings to fixed
charges(c)............................ 23.71 2.89 3.57 1.03 -- --
Insufficient earnings to cover fixed
charges............................... -- -- -- -- $ 27,608,378 $ 13,092,380
<CAPTION>
Nine
Months
Ended
September
30,
1999
-------------
(Unaudited)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..................... $ 48,824,228
Operating expenses:
Cost of services...................... 18,573,719
Selling, operations and
administrative...................... 35,760,116
Depreciation and amortization......... 29,526,358
------------
Total operating expenses............... 83,860,193
------------
Operating income (loss)................ (35,035,965)
------------
Other expense, net..................... (22,967,976)
------------
Income (loss) before minority interest,
income tax (provision) benefit and
cumulative effect of a change in
accounting principle.................. (58,003,941)
Minority interest...................... 3,267,653
Income tax (provision) benefit......... 11,011,711
Cumulative effect of a change in
accounting principle.................. --
------------
Net income (loss)...................... (43,724,577)
Subsidiary preferred stock dividends... --
------------
Net income (loss) attributable to
common stockholders................... $(43,724,577)
============
PER SHARE DATA:
Basic and diluted net income (loss)
attributable to common stockholders... $(437,245.77)
Basic and diluted weighted average
number of common shares outstanding... 100
OTHER FINANCIAL DATA:
Capital expenditures................... $ 64,290,709
Cash provided by (used in) operating
activities............................ (3,069,133)
Cash (used in) provided by investing
activities............................ 1,021,783
Cash (used in) provided by financing
activities............................ 18,088,543
EBITDA(b).............................. (2,067,832)
Ratio of earnings to fixed
charges(c)............................ --
Insufficient earnings to cover fixed
charges............................... $ 54,736,288
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 4,073,761 $ 832,057 $ 2,977,835 $(1,240,180) $49,965,918 $ 12,646,729
Property and equipment, net............ 14,847,334 20,406,060 11,374,950 11,260,846 211,885,668 258,655,902
Total assets........................... 29,521,533 38,544,328 22,883,276 30,196,492 374,680,811 363,667,403
Long-term debt, including accrued
interest.............................. 1,440,569 11,075,698 -- -- 276,165,900 321,627,291
Total liabilities...................... 12,688,392 22,034,469 7,235,555 6,656,317 314,414,049 350,418,909
Minority interest...................... -- 2,981,968 -- -- 3,267,653 --
Retained earnings (accumulated
deficit).............................. 15,658,238 8,168,034 9,598,225 3,181,179 (20,802,344) (64,526,921)
Total stockholders' equity............. 16,833,141 13,527,891 15,647,721 23,540,175 54,512,149 10,761,534
</TABLE>
45
<PAGE> 49
- ---------------
(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 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.
46
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our "Selected
Consolidated Financial Data" section and our financial statements and related
notes elsewhere in this prospectus. The following discussion contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. Our actual results may differ significantly from the
results discussed in the forward-looking statements.
Our historical financial statements include the assets, liabilities and
results of operations of our subsidiaries which have been majority-owned by ITC
Holding during each year. Accordingly, our financial statements include the
assets, liabilities and results of operations of all of our subsidiaries for the
years 1995, 1998 and the first nine months of 1998 and 1999, but do not include
the assets, liabilities and results of operations of KNOLOGY Holdings for 1996
and 1997, when it was not majority-owned by ITC Holding.
OVERVIEW
We are a newly formed holding company that owns 100% of KNOLOGY Holdings,
Inc., Interstate Telephone Company, Valley Telephone Company, Globe
Telecommunications, Inc. and ITC Globe, Inc.
We acquired these interests in November 1999 from ITC Holding Company,
Inc., and other stockholders of KNOLOGY Holdings. Our structure is as follows:
- Interstate Telephone, Valley Telephone and Globe Telecommunications are
our direct subsidiaries.
- KNOLOGY Holdings is a direct subsidiary of Valley Telephone.
- ITC Globe is a direct subsidiary of Globe Telecommunications.
In November 1999, InterCall, Inc., a subsidiary of ITC Holding, contributed to
us:
- stock representing 85% of the outstanding equity of KNOLOGY Holdings;
- stock representing 100% of each of Interstate Telephone, Valley
Telephone, Globe Telecommunications and ITC Globe, which together provide
telephone, cable and Internet access services in western Georgia and
eastern Alabama;
- a note of KNOLOGY Holdings in the principal amount of up to $13 million;
and
- 272,832 shares of preferred stock of ClearSource, Inc., and subscription
rights to purchase an additional 810,501 shares of preferred stock of
ClearSource in future ClearSource financings, together with cash in the
amount of $5.6 million to be used to make the subscription payments.
ClearSource is a company planning to operate broadband systems in Texas
and other southern or mid-western states similar to our services in the
southeast. Currently, our investment in ClearSource represents
approximately 17% ownership interest in this company.
47
<PAGE> 51
We also completed the exchange of warrants to purchase shares of KNOLOGY
Holdings preferred stock for 994,961 shares of our Series A preferred stock.
Concurrent with this contribution, we completed the exchange of other KNOLOGY
Holdings common stock and preferred stock for our common stock and Series A
preferred stock. We now hold 100% of the outstanding stock of KNOLOGY Holdings.
The November 1999 transactions were effected primarily to combine the
businesses of KNOLOGY Holdings, Interstate Telephone, Valley Telephone, Globe
Telecommunications and ITC Globe. Together with ITC Holding, we determined that
KNOLOGY Holdings and these other companies have parallel growth in the broadband
market, and that combining the businesses would enhance their ability to take
advantage of the opportunities in that market. Although Interstate Telephone and
Valley Telephone primarily have been telephone companies, they have recently
through ITC Globe begun offering cable television and Internet access services
in the same geographic area in which they provide telephone service. Combining
these businesses under KNOLOGY is expected to allow all of the companies to
benefit from KNOLOGY Holdings' experience as a provider of cable television
services and as a provider of a bundle of broadband services. It also permits
KNOLOGY Holdings to take advantage of the more than 100 years of experience of
Interstate Telephone and Valley Telephone as telephone companies.
Since ClearSource proposes to conduct a similar broadband business in
southern or mid-western states, ITC Holding and we determined that the
ClearSource investments also should be under KNOLOGY. The KNOLOGY Holdings note
was contributed to KNOLOGY to terminate the lender-borrower relationship between
ITC Holding and KNOLOGY Holdings.
In December 1999, after the contribution and exchange discussed above, we
entered into a loan agreement and a promissory note with InterCall, Inc., a
subsidiary of ITC Holding. This subsidiary loaned us approximately $29.7
million. The proceeds of this loan are to be used for construction of the
network by KNOLOGY Holdings and for working capital. This loan accrued interest
at a rate of 11 7/8% per year and had a maturity date of March 31, 2000. The
note issued under the loan agreement provided that ITC Holding subsidiary could
elect, in lieu of repayment, to convert the amount outstanding under the note
into options to purchase shares of our Series A preferred stock. Prior to the
distribution the entire amount of the note was converted into options to
purchase 6,258,036 shares of our Series A preferred stock. These options, which
were transferred to ITC Holding, are the ones being distributed to ITC Holding
option holders. Under a residual note, ITC Holding has the right to specify the
terms of those options, including the exercise price and vesting and termination
provisions.
In connection with the conversion we issued to ITC Holding a residual note
which provides that KNOLOGY will pay to ITC Holding any proceeds of option
exercises received by KNOLOGY. In the event of a cashless exercise of any of the
KNOLOGY options, KNOLOGY must pay to ITC Holding in cash an amount equal to the
exercise price. A fuller description of the option conversion and the residual
note is set forth under the caption "The Distribution -- Option Distribution."
48
<PAGE> 52
THE DISTRIBUTION
Concurrently with the circulation of this prospectus ITC Holding is
distributing approximately 90% of the capital stock of KNOLOGY to ITC Holding
stockholders and options to purchase stock of KNOLOGY to ITC Holding option
holders. ITC Holding is distributing 43,211,531 shares of our Series A preferred
stock to its stockholders, pro rata based upon the percentages of ITC Holding's
capital stock that they hold. ITC Holding also is distributing options to
purchase 6,258,036 shares of our Series A preferred stock to its option holders,
pro rata based upon the percentages of ITC Holding's common stock options that
they hold. Cash in the amount of $4.75 per share is being paid in lieu of
fractional shares or options. The distribution is intended to enhance our
ability to complete a private placement at a higher per-share value. A fuller
description of the distribution is set forth under the caption "The
Distribution."
In connection with the distribution ITC Holding and KNOLOGY entered into a
tax separation agreement in which they have made representations and covenants
that impose limitations on the future actions of KNOLOGY. Because we could have
substantial liability of up to $50 million if we breach our representations and
covenants, KNOLOGY could be discouraged from entering into transactions that
might result in a breach. KNOLOGY might not pursue any transaction that would be
presumed to be part of a plan or series of related transactions which results in
any cumulative 50% change of ownership within the four-year period beginning two
years before the date of the distribution. Transactions that could involve a
possible breach include an actual or constructive change of control of KNOLOGY,
and exceeding limits on the raising of equity capital or the use of our stock to
acquire other companies. Although we believe we can complete our intended
private placement and some additional capital raising or stock acquisition
transactions without violating the tax separation agreement, we may have to
forgo some growth opportunities that may occur during the two years subsequent
to the distribution. The tax separation agreement is discussed more fully under
the caption "The Distribution -- Tax Sharing Agreement."
HISTORY
Interstate Telephone began as West Point Telephone and Electric Company,
founded in 1896 by J. Smith Lanier. Interstate Telephone has been a provider of
local telephone service in western Georgia and a small part of eastern Alabama
since 1896. In 1961, the Lanier Company bought Valley Telephone from West Point
Manufacturing Co. Globe Telecommunications was formed in 1983 to be a
deregulated provider of services for Valley Telephone. Globe Telecommunications
has been providing deregulated services to Interstate Telephone since 1996. ITC
Holding was formed in 1989 as a holding company for the combined Interstate
Telephone, Valley Telephone and Globe Telecommunications companies. ITC Holding
Company formed ITC Globe in 1997 to be a provider of local broadband services in
the West Point, Georgia and Alabama/Georgia border area.
49
<PAGE> 53
ITC Holding formed KNOLOGY Holdings in 1995, but its percentage ownership
fell below 50% during 1996. ITC Holding acquired additional stock in KNOLOGY
Holdings in 1998, becoming the holder of approximately 85% of KNOLOGY Holdings.
KNOLOGY Holdings, which is now our wholly-owned subsidiary, has been
providing cable television service since 1995, telephone and high-speed Internet
access services since 1997 and broadband carrier services since 1998. KNOLOGY
Holdings owns, operates and manages interactive broadband networks in the five
metropolitan areas of Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida and Charleston, South Carolina; and it plans to expand to
additional mid-sized cities in the southeastern United States. In addition,
KNOLOGY Holdings provides traditional analog and digital cable television
services in Huntsville, Alabama. The Huntsville facilities are being upgraded to
provide local and long distance telephone and high-speed Internet access
services.
KNOLOGY Holdings began providing cable television service by acquiring
cable television systems in Montgomery, Alabama and Columbus, Georgia in 1995
and using those systems as a base for constructing new interactive broadband
networks. Since acquiring the Montgomery and Columbus systems, we have
significantly expanded these networks and upgraded the acquired networks to
offer additional broadband communications services.
In December 1997, KNOLOGY Holdings acquired a cable television system in
Panama City Beach, Florida. We are currently upgrading this cable system and
extending the network into the Panama City metro area. We expect to complete
this upgrade in 2000.
In early 1998, KNOLOGY Holdings began expanding into Augusta, Georgia and
Charleston, South Carolina by obtaining new franchise agreements with the local
governments and by constructing new interactive broadband networks. We expect to
complete construction of these networks by 2003.
In June 1998, KNOLOGY Holdings acquired TTE Inc., a non-facilities based
reseller of local, long distance and operator services to small and medium-sized
business customers throughout South Carolina.
In October 1998, KNOLOGY Holdings acquired the Cable Alabama cable
television system serving the Huntsville, Alabama area. The existing Cable
Alabama plant is being upgraded to an interactive broadband network which will
be completed by 2001.
Interstate Telephone and Valley Telephone provide local exchange services
throughout the Georgia/Alabama border area known as the valley, which includes
the towns of West Point, Georgia, Lanett, Alabama and Valley, Alabama and
unincorporated portions of counties in both states. Globe Telecommunications
provides local long distance services to residential and small business
customers. Globe Telecommunications also has been providing competitive local
exchange carrier services to residential and business customers located in the
Newnan, Georgia area since April 1998 and likely will begin providing these
services to Fairburn and Union City, Georgia in the second quarter
50
<PAGE> 54
of 2000. ITC Globe, under the trade name "KNOLOGY Connecting The Valley," also
provides analog cable television, digital cable television and high-speed
Internet access to customers within the local exchange territory of Interstate
Telephone and Valley Telephone.
REVENUES AND EXPENSES
We can group our revenues into four categories: video revenues, telephone
revenues, Internet revenues and other revenues.
- Video revenues. Our video revenues consist of fixed monthly fees for
basic, premium and digital cable television services, as well as fees
from pay-per-view movies and events such as boxing matches and concerts,
that involve a charge for each viewing. Video revenues accounted for
approximately 50% and 53% of our consolidated revenues for the year ended
December 31, 1998 and the nine months ended September 30, 1999,
respectively.
- Telephone revenues. Our telephone revenues consist primarily of fixed
monthly fees for local service, enhanced services such as call waiting
and voice mail and usage fees for long distance service. Telephone
revenues accounted for approximately 49% and 43% of our consolidated
revenues for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively.
- Internet revenues and other revenues. Our Internet revenues consist
primarily of fixed monthly fees for Internet access service and rental of
cable modems. Other revenues resulted principally from broadband carrier
services and video production services. These combined revenues accounted
for approximately 1% and 4% of our consolidated revenues for the year
ended December 31, 1998 and the nine months ended September 30, 1999,
respectively.
Our operating expenses include cost of services expenses, selling,
operations and administrative expenses and depreciation and amortization
expenses.
Cost of services expenses include:
- Video cost of services. Video cost of services consist primarily of
monthly fees to the National Cable Television Cooperative and other
programming providers, and are generally based on the average number of
subscribers to each program. Programming costs accounted for
approximately 12.5% and 11.9% of our operating expenses for the year
ended December 31, 1998 and the nine months ended September 30, 1999.
Programming costs is our largest single cost and we expect this to
continue. Since this cost is based on numbers of subscribers, it will
increase as we add more subscribers.
- Telephone and Internet access services. Cost of services related to our
telephone and Internet access services include costs of Internet
transport and telephone switching, and interconnection and transport
charges payable to local and long distance carriers.
51
<PAGE> 55
Selling, operations and administrative expenses include:
- Sales and marketing costs. Sales and marketing costs include the cost
of sales and marketing personnel and advertising and promotional
expenses.
- Network operations and maintenance expenses. Network operations and
maintenance expenses include payroll and departmental costs incurred for
network design and maintenance monitoring.
- Customer service expenses. Customer service expenses include payroll
and departmental costs incurred for customer service representatives and
management.
- General and administrative expenses. General and administrative
expenses consist of corporate and subsidiary general management and
administrative costs.
Depreciation and amortization expenses include:
- Depreciation and amortization expenses. Depreciation and amortization
expenses include depreciation of our interactive broadband networks and
equipment, and amortization of cost in excess of net assets and other
intangible assets related to acquisitions.
52
<PAGE> 56
RESULTS OF OPERATIONS
The following table sets forth financial data as a percentage of operating
revenues for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues............................ 100% 100% 100% 100% 100%
--- --- --- --- ----
Operating expenses:
Cost of services........................... 17 18 28 30 38
Selling, operating and administrative...... 48 54 83 80 74
Depreciation and amortization.............. 17 16 38 30 61
--- --- --- --- ----
Total............................. 82 88 149 140 173
--- --- --- --- ----
Operating income (loss)....................... 18 12 (49) (40) (73)
Other income and expenses..................... (2) (12) (41) (41) (47)
--- --- --- --- ----
Income (loss) before minority interest, income
tax (provision) benefit and cumulative
effect of a change in accounting
principle.................................. 16 0 (90) (81) (120)
Minority interest............................. 0 0 29 37 7
Income tax (provision) benefit................ (8) (6) 12 6 23
Cumulative effect of change in accounting
principle.................................. 0 0 (1) (2) 0
--- --- --- --- ----
Net income (loss)............................. 8 (6) (50) (40) (90)
Subsidiary preferred stock dividends.......... 0 (24) (3) 0 0
--- --- --- --- ----
Net income (loss) attributable to
stockholders............................... 8% (30)% (53)% (40)% (90)%
=== === === === ====
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Operating revenues increased 61.1% from $30.3 million for the
nine months ended September 30, 1998 to $48.8 million for the nine months ended
September 30, 1999. Our increased revenues are primarily due to a higher number
of connections during the nine months ended September 30, 1999 compared to the
same period in 1998. The additional connections resulted primarily from:
- the extension of our broadband networks in the Montgomery, Columbus and
Panama City markets;
- the continued growth of broadband services in the Augusta and Charleston
markets; and
- the acquisition of the TTE and Cable Alabama systems in June 1998 and
October 1998, respectively.
Particularly in the cable industry, there is a trend towards consolidation,
exclusivity arrangements and other forms of competition. If the level of
competition continues to
53
<PAGE> 57
increase, due to consolidation, exclusivity arrangements or otherwise, our
ability to attract and retain customers and to increase revenues could suffer.
Expenses. Our operating expenses, excluding depreciation and
amortization, increased 63.1%, from $33.3 million for the nine months ended
September 30, 1998 to $54.3 million for the nine months ended September 30,
1999. The cost of services component of operating expenses increased 106.7%,
from $9.0 million for the 1998 period to $18.6 million for the 1999 period. Our
selling, operations, and administration expenses increased 47.3%, from $24.3
million for the 1998 period to $35.8 million for the 1999 period. The increase
in our cost of services and other operating expenses is consistent with the
growth in revenues and is a result of the expansion of our operations and the
increase in the number of employees associated with such expansion and growth
into new markets. We expect our cost of services to continue to increase as we
add more revenue generating units. Our selling, operations and administration
expenses will increase as we expand into additional markets. Programming costs,
which are our largest single expense item, have been increasing over the last
several years, and we expect this trend to continue. We may not be able to pass
these higher costs on to customers, which would adversely affect our cash flow
and operating margins.
Our depreciation and amortization expenses increased from $9.0 million for
the nine months ended September 30, 1998 to $29.5 million for the nine months
ended September 30, 1999. Approximately $9.0 million of the increase in
depreciation and amortization is due to the amortization of the excess of the
purchase price of Cable Alabama over the fair value of net assets acquired.
Approximately $7.8 million of the increase is due to depreciation expense
related to network capital expenditures, with the remainder of the increase
primarily due to depreciation expense related to the purchase of buildings,
computers and office equipment at the corporate and subsidiary locations. We
expect our depreciation and amortization expense to continue to increase as we
make capital expenditures to extend our existing networks and build additional
networks.
Our interest expense increased from $21.5 million for the nine months ended
September 30, 1998 to $24.3 million for the nine months ended September 30,
1999. The increase in interest expense reflects the accrual of the interest
attributable to the senior discount notes issued in October 1997.
Our interest income was $8.4 million for the nine months ended September
30, 1998, compared to $1.3 million for the same period in 1999. The interest
income reflects the interest earned from the investment of certain proceeds
received from the issuance of the senior discount notes in October 1997. The
decrease in interest income is due to the draw down of marketable securities to
fund planned expansion and acquisitions.
Income Tax (Provision) Benefit. We recorded an income tax benefit of $1.7
million for the nine months ended September 30, 1998 compared to an income tax
benefit of $11.0 million for the nine months ended September 30, 1999. The
income tax benefit in 1999 resulted from our utilizing net tax losses under a
tax sharing agreement with ITC Holding. The tax sharing agreement was effective
August 1998 upon the acquisition by ITC Holding of its majority-owned interest
of KNOLOGY Holdings, Inc. Upon the completion of the distribution, we will no
longer participate in the tax sharing
54
<PAGE> 58
agreement. Therefore, we will not receive any payments from ITC Holding related
to income tax benefits for periods subsequent to the distribution. As a stand
alone entity after the distribution, we will record a full valuation allowance
against any income tax benefit until taxable income is generated, at which time
a tax benefit will be realized.
Net Loss. We incurred a net loss of $12.0 million for the nine months
ended September 30, 1998 compared to a net loss of $43.7 million for the nine
months ended September 30, 1999. The increase in net loss is a result of the
expansion of our operations and the increase in the number of employees
associated with such expansion and growth into new markets. We expect net losses
to continue to increase as we proceed with the expansion of our business.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
As explained above, our results for the year ended December 31, 1998
include the results of all of our current subsidiaries. However, our 1997
results do not include the results of KNOLOGY Holdings, which was not
majority-owned by ITC Holding during 1997 and therefore, was accounted for as an
equity method investment in 1997.
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 expense and interest income increased $9.6 million and $29.0
million, respectively, from 1997 to 1998, primarily due to the inclusion of
KNOLOGY Holdings' results in the 1998 period. The interest expense and interest
income reported in the 1998 period reflects the accrual of the interest
attributable to the senior discount notes issued in October 1997 and the
interest income from the investment of the proceeds of the notes into marketable
securities.
Equity in losses of subsidiary decreased $2.4 million from the year ended
December 31, 1997 compared to the same period in 1998. The decrease represents
the acquisition of the majority of KNOLOGY Holdings stock in 1998 which
acquisition required us to consolidate the operations of KNOLOGY Holdings in
1998.
55
<PAGE> 59
Other income (expense) changed from $(59,000) for the year ended December
31, 1997 to $783,000 for the year ended December 31, 1998 and is primarily due
to the 1997 period reflecting a gain on the sale of an investment.
Minority Interests. Minority interests in losses of subsidiary increased
from $0 in 1997 to $13.3 million in 1998. Minority interests in 1998 reflects
the minority stockholders' share of the losses and the pre-acquisition losses in
connection with the acquisition of KNOLOGY Holdings in 1998. In accordance with
Accounting Principles Board Opinion No. 16, the reorganization of KNOLOGY
Holdings was recorded at ITC Holding's historical cost for the 85% controlling
interest obtained. The remainder was treated as an acquisition of minority
interest at fair value.
Income Tax (Provision) Benefit. We recorded an income tax benefit of $5.6
million for the year ended December 31, 1998 compared to a provision of $1.0
million for the year ended December 31, 1997. The income tax benefit in 1998
results from our utilizing net tax losses under a tax sharing agreement with ITC
Holding. The provision in 1997 reflects tax expense of all of our subsidiaries.
The change in the amount of $6.6 million results from the consolidation of
KNOLOGY Holdings due to the acquisition of the majority interest by ITC Holding
in 1998, in which period KNOLOGY Holdings' taxable losses result in a tax
benefit. As a stand alone entity after the distribution, we will record a full
valuation allowance against any income tax benefit until taxable income is
generated, at which time a tax benefit will be realized.
Preferred Dividends. Preferred dividends in the amount of $4.2 million in
1997 and $1.4 million in 1998 represent profits of Interstate Telephone and
Valley Telephone distributed to ITC Holding Company. The decrease in 1998 as
compared to 1997 relates to the increased capital deployed to launch operations
of Globe Telecommunications and ITC Globe in 1998.
Net Loss. 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
As explained above, our results for the years ended December 31, 1997 and
1996 do not include the results of KNOLOGY Holdings, which was not
majority-owned by ITC Holding during the 1997 and 1996 periods.
Revenues. Our operating revenues increased $106,000, or 0.6%, from the
year ended December 31, 1996 compared to the same period in 1997.
Expenses. Our operating expenses, excluding depreciation and
amortization, increased 11.5%, from $11.3 million for the year ended December
31, 1996 to $12.6 million for the year ended December 31, 1997. The cost of
services component of operating expenses increased $130,000, or 3.3%, from $3.0
million for the year ended
56
<PAGE> 60
December 31, 1996 to $3.1 million for the same period in 1997. Our selling,
operations, and administration expenses increased 14.5%, from $8.3 million for
1996 to $9.5 million for 1997. The increase in selling, operations and
administration expense was primarily due to a credit (reduction of expense) of
approximately $700,000 recorded in 1996 related to a settled dispute with
carriers. Excluding this credit, selling, operations and administration expense
increased approximately 5.6% from 1997 to 1996.
Our depreciation and amortization expenses decreased $240,000, or 8.0%,
from 1996 to 1997 due to certain assets being fully depreciated in 1996.
Our other expenses increased from $380,000 for the year ended December 31,
1996 to $2.0 million for the year ended December 31, 1997. The increase was
primarily due to the reporting of our share of KNOLOGY Holding's loss, accounted
for as equity losses in subsidiaries, based on our minority-owned interest for
the 1996 and 1997 periods. KNOLOGY Holdings increased losses reflect the
development of the company's infrastructure to expand its business.
Preferred Dividends. Preferred dividends in the amount of $0 in 1996 and
$4.2 million in 1997 represent certain profits of the Interstate Telephone,
Valley Telephone, Globe Telecommunications and ITC Globe distributed to ITC
Holding Company. In 1996 we invested profits into our businesses.
Net Loss. We incurred net income of $1.4 million for the year ended
December 31, 1996 compared to a net loss of $827,000 for the year ended December
31, 1997.
The following table sets forth certain operating data as of the dates
indicated 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 various revenue generating service
connections for local telephone, cable programming and Internet access, rather
than the total number of customers.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Connections(1)
Video.......................... 18,169 37,716 80,600 78,203 87,609
Telephone
On-net(2)................... 18,607 19,518 24,343 23,296 33,005
Off-net(3).................. 0 0 5,982 5,911 6,568
Internet....................... 0 0 908 632 3,718
------- ------- ------- ------- -------
Total Connections................. 36,776 57,234 111,833 108,042 130,900
======= ======= ======= ======= =======
Marketable Homes Passed(4)........ N/A 124,773 256,271 246,307 301,470
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Connections represent revenue-generating connections. For video and
high-speed Internet, connections represent the number of customers
subscribing to the service. For telephone, connections represent the number
of lines connected. For example, a telephone customer that has two lines
would be counted as two connections.
57
<PAGE> 61
(2) On-net refers to lines provided over our broadband networks. It includes
20,526, 21,978, 18,607, 19,518 and 21,369 lines as of September 30, 1998 and
1999 and December 31, 1996, 1997 and 1998, respectively, provided using
traditional copper telephone lines.
(3) Off-net consists of all telephone connections provided within our broadband
network area over telephone lines leased from third parties.
(4) Marketable homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by our cable
television distribution network.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had net working capital of $12.6 million,
compared to $50.0 million and ($1.2) million at December 31, 1998 and 1997,
respectively.
Net cash provided by operations totaled $4.8 million, $3.7 million and
$23.0 million for 1996, 1997 and 1998, respectively, and net cash used by
operations totaled $3.1 million for the nine months ended September 30, 1999.
The net cash flow activity related to operations consists primarily of changes
in operating assets and liabilities and adjustments to net income for non-cash
transactions including:
- depreciation and amortization;
- loss on disposition of assets;
- cumulative effect of an accounting change;
- deferred income taxes;
- deferred investment tax credit;
- equity in net loss of subsidiary; and
- minority interest in subsidiaries' net loss.
Net cash used for investing activities was $0.2 million, $22.2 million and
$34.6 million for the years ended December 31, 1996, 1997 and 1998,
respectively, and net cash provided by investing activities totaled $1.0 million
for the nine months ended September 30, 1999. The net cash flow from investing
activities in 1996 represented $1.0 million of capital expenditures funded in
part by $0.8 million in proceeds from sales of investments. Our investing
activities in 1997 consisted primarily of $1.7 million of capital expenditures,
$14.3 million for the purchase of the Panama City cable system, $4.2 million of
dividends paid by Interstate Telephone and Valley Telephone to ITC Holding and a
$2.1 million increase in construction related payables. In 1998, our investing
activities consisted primarily of $120.2 million of capital expenditures, $67.7
million for the acquisition of the Huntsville, Alabama cable system, $6.2
million for the purchase of equity interests in KNOLOGY Holdings, net of cash
acquired of $6.1 million, $1.4 million of dividends paid by Interstate Telephone
to ITC Holding and $0.8 million for an investment in ClearSource, Inc. These
investing activities are offset by $162.3 million in proceeds from the sale of
short-term investments. Our investing activities for the nine months ended
September 30, 1999 consisted of $64.3 million of capital expenditures
principally funded by $66.2 million in proceeds from the sale of short-term
investments.
58
<PAGE> 62
Net cash flow from financing activities was cash used of $4.5 million, cash
provided of $18.7 million, cash provided of $16.1 million and cash provided by
$18.1 million for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999, respectively. Net cash used in financing
activities in 1996 included $0.9 million payments on debt and short term
borrowings and $4.4 million of advances to affiliates offset by $0.9 million of
additional infusion of equity. Cash flow from financing activity in 1997
consisted of $14.3 million of additional infusion of equity and $4.4 million of
reimbursement of advances previously made to an affiliate. Financing activities
in the 1998 period primarily consisted of $15.6 million of additional infusion
of equity and $2.0 million repayment from an affiliate, offset by $1.5 million
in expenditures related to the issuance of debt. These numbers do not include
$242.4 million raised by KNOLOGY Holdings in 1997, as KNOLOGY Holdings was not
majority-owned by ITC Holding during 1997.
FUNDING TO DATE
We have required equity infusions and debt proceeds to finance a
significant portion of our operating, investing and financing activities in the
development of our business. On October 22, 1997, KNOLOGY Holdings received net
proceeds of approximately $242.4 million from the offering of units consisting
of senior discount notes due 2007 and warrants to purchase preferred stock. The
notes were sold at a substantial discount from their principal amount at
maturity and there will not be any payment of interest on the notes prior to
April 15, 2003. The notes will fully accrete to face value of $444.1 million on
October 15, 2002. From and after October 15, 2002, the notes will bear interest,
which will be payable in cash, at a rate of 11 7/8% per annum on April 15 and
October 15 of each year, commencing April 15, 2003. The indenture contains
covenants that affect, and in certain cases significantly limit or prohibit, the
ability of KNOLOGY Holdings to:
- incur indebtedness;
- pay dividends;
- prepay subordinated indebtedness;
- redeem capital stock;
- make investments;
- engage in transactions with stockholders and affiliates;
- create liens;
- sell assets; and
- engage in mergers and consolidations.
If KNOLOGY Holdings fails to comply with these covenants, KNOLOGY Holdings'
obligation to repay the notes may be accelerated. However, these limitations are
subject to a number of important qualifications and exceptions. In particular,
while the indenture restricts KNOLOGY Holdings' ability to incur additional
indebtedness by requiring
59
<PAGE> 63
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
distribution does not constitute a change of control under the Indenture.
Each unit in the offering also consisted of a warrant to purchase 0.003734
shares of preferred stock of KNOLOGY Holdings at an exercise price of $0.01 per
share. In December 1999, we completed an exchange in which we received the
KNOLOGY Holdings warrants, issued in connection with the senior discount notes
in 1997 in exchange for warrants to purchase shares of our Series A preferred
stock, which new warrants contain substantially identical terms as the KNOLOGY
Holdings' warrants.
In connection with the units offering, KNOLOGY Holdings completed an equity
private placement, in which KNOLOGY Holdings issued approximately 21,400
additional shares of preferred stock at $1,500 per share to ITC Holding, Century
Telephone Enterprises, Inc., SCANA Communications, Inc., South Atlantic Venture
Fund III, Limited Partnership and AT&T venture funds for aggregate proceeds of
approximately $32.2 million. ITC Holding, Century Telephone, South Atlantic,
AT&T venture funds and SCANA Communications, Inc. purchased approximately $10.0
million, $2.5 million, $5.5 million, $5.0 million and $5.0 million of preferred
stock, respectively, in this private placement. A portion of the proceeds from
this private placement were used to repay approximately $11.0 million in
borrowings from SCANA and an additional $11.0 million of debt incurred by
KNOLOGY Holdings to finance the purchase of its cable television systems in
Montgomery, Alabama and Columbus, Georgia in 1995. ITC Holding subsequently
repurchased all shares of KNOLOGY Holdings' preferred stock owned by Century
Telephone, South Atlantic and SCANA during 1998.
On December 22, 1998, KNOLOGY Holdings entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp. The credit facility allows KNOLOGY Holdings to borrow up
to five times a certain individual subsidiary's annualized consolidated adjusted
cash flow, as defined in the credit facility agreement. The credit facility may
be used for working capital and other purposes, including capital expenditures
and permitted acquisitions. At KNOLOGY Holdings' option, interest will accrue
based on either the prime or federal funds rate plus applicable margin or the
LIBOR rate plus applicable margin. The applicable margin may vary from .50% to
2.50% based on the leverage ratio of KNOLOGY Holdings. The credit facility
contains a number of covenants including, among others, covenants limiting the
ability of KNOLOGY Holdings and its subsidiaries to:
- incur debt;
- create liens;
60
<PAGE> 64
- 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 through the end of the year.
Should KNOLOGY Holdings not be in compliance with the covenants, KNOLOGY
Holdings would be in default and would require a waiver from the lender. In the
event the lender would not provide a waiver, amounts outstanding against the
facility could be payable to the lender on demand. A change of control of
KNOLOGY Holdings, as defined in the credit facility agreement, would constitute
a default under the covenants. The distribution does not constitute a change of
control of KNOLOGY Holdings under the credit facility agreement.
The maximum amount currently available under the credit facility at
September 30, 1999 was approximately $23 million, assuming compliance with all
of the operating and financial covenants. As of September 30, 1999, $19 million
of the $23 million currently available had been drawn against the credit
facility.
We obtained an aggregate of approximately $39.4 million from ITC Holding
and its subsidiary InterCall during November 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
was converted into options to purchase up to 6,258,036 shares of our common
stock immediately prior to the distribution. The loan bore interest at an annual
rate of 11.875% and had a maturity date of March 31, 2000.
After the distribution we will not be able to rely on ITC Holding for
equity infusions and intercompany loans. However, we believe that the
distribution will provide us with greater ability to raise capital in the
private equity market. Nevertheless, our ability to raise additional equity
financing or conduct stock acquisitions may be limited by the provisions in our
tax separation agreement with ITC Holding, as discussed more fully under the
caption "The Distribution -- Tax Sharing Agreement" and under the caption "Risk
Factors -- 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." We may have to forego some
growth opportunities which would require us to issue stock during the two years
subsequent to the distribution because of our representations and covenants in
the tax separation agreement.
61
<PAGE> 65
FUTURE FUNDING
Our business requires substantial investment to finance capital
expenditures and related expenses, to expand and/or upgrade the interactive
broadband networks, to fund subscriber equipment and to maintain the quality of
our networks. We currently expect to spend approximately $94 million for capital
expenditures during 1999, which includes $64.3 million spent in the first nine
months of 1999, including the planned expansion and/or upgrade of the
Montgomery, Columbus, Panama City, Augusta, Charleston and Huntsville networks
and approximately $5 million to fund operating losses in 1999. We currently
expect to spend approximately $9 million to fund operating losses and
approximately $131 million for capital expenditures during 2000. The $131
million includes approximately $70 million related to the construction of
networks in our existing markets. The remainder primarily relates to the
purchase of equipment for customer premises, such as cable boxes, information
systems and the commencement of the construction of networks in additional
markets. Failure to have access to additional funds during 2000 could require us
to delay some of our construction plans, delay preliminary efforts in new
markets and possibly require us to restrict or reduce the level of operations in
some markets.
We presently estimate the cost to complete construction of the networks in
our existing markets to be approximately $170 million, of which approximately
$70 million would be expended during 2000. We currently expect that if
sufficient funds are raised, the construction of our networks in our existing
markets would be substantially completed during 2002.
We presently expect that present cash reserves, cash flow from operations,
funding obtained through the existing KNOLOGY Holdings credit facility and the
private offering discussed below will be sufficient to fund our 2000 capital
expenditures. We will need additional capital to complete construction of our
networks through 2002. We expect to raise this capital through private and
public debt offerings and private and public equity offerings, although there is
no assurance that this financing will be available on terms favorable to us. If
we are not successful in raising additional capital, we may not be able to
complete the construction of our networks throughout our current markets. This
may cause us to violate our franchises agreements, which could adversely affect
us, or may just limit our growth within these markets.
We plan to expand to additional mid-sized cities in the southeastern United
States. We estimate the cost of constructing networks and funding initial
subscriber equipment in additional new cities at approximately $50 to $75
million per city, though our costs could be as much as $85 million to $90
million per city for larger markets. The actual costs of each new market may
vary significantly from this range and will depend on the number of miles of
network to be constructed, the geographic and demographic characteristics of the
city, costs associated with the cable franchise in each city, the number of
subscribers in each city, the mix of services purchased, the cost of subscriber
equipment we pay for or finance and other factors. We will need additional
financing to expand into additional cities, for new business activities or in
the event we decide to make additional acquisitions. We expect to raise this
capital through private and public
62
<PAGE> 66
debt offerings and private and public equity offerings, although there is no
assurance that this financing will be available on terms favorable to us. If we
are not successful in raising additional capital, we will not be able to expand
to additional cities as planned. The schedule for our planned expansion will
depend upon the availability of sufficient capital. Definitive decisions on
which cities will be chosen for expansion are not expected to be made until this
capital has been raised.
Shortly following the distribution we intend to make a private offering of
shares of Series B preferred stock. This offering is expected to be made to a
small group of institutional investors unaffiliated with us for approximately
$100 million. The proceeds are expected to be used for construction of networks
in our existing markets and to fund start-up costs with respect to possible new
markets. We expect that each share of our Series B preferred stock will have
rights and preferences substantially similar to those of our Series A preferred
stock, including being convertible initially into one share of our common stock.
In the event of any dissolution, liquidation or winding up of our company, the
Series B preferred stock would be entitled to receive payment in full of the
Series B preferred stock liquidation distribution before any distribution or
payment is made to any other class or series of our capital stock, including the
Series A preferred stock. The terms of the Series B preferred stock are
discussed in more detail below under the caption "Description of
Securities -- Series B preferred stock." The terms of this private offering
could change and it is possible that the offering will not be consummated. The
private offering is contingent upon the completion of the distribution described
by this prospectus.
THE YEAR 2000 ISSUE
General
The year 2000 issue is a general term used to describe the various problems
that may result or may have resulted in computers and other machinery as a
result of the arrival of year 2000. These problems generally arise from the fact
that most of the world's computers have historically used only two digits to
identify the year in a date, often meaning that the computer will fail to
distinguish dates in the 2000's from dates in the 1900's. This issue impacts our
owned or licensed computer systems and equipment used in connection with
internal operations.
Third Parties
We also rely directly and indirectly, in the regular course of business, on
the proper operation and compatibility of third party systems. The year 2000
problem could cause these systems to fail, err, or become incompatible with our
systems.
Certain of our suppliers and vendors could have a material affect on our
business if they are not year 2000 ready. In these cases, we are relying on the
determination by an outside testing company that these vendors and suppliers are
ready for the year 2000. Also, we have conducted our own testing of certain
major components of the systems provided to us by third parties. Nonetheless, if
we or a significant third party on which we rely is not year 2000 ready, or if
the year 2000 problem causes our systems to
63
<PAGE> 67
become internally incompatible or incompatible with such third party systems,
our business could suffer from material disruptions, including the inability to
process transactions, send invoices, accept customer orders or provide customers
with our services. We could also face similar disruptions if the year 2000
problem causes general widespread problems or an economic crisis. We cannot now
estimate the extent of these potential disruptions.
Our State of Readiness
We established a year 2000 program office to coordinate activity and report
to our executive management and board of directors with regard to the year 2000
issue. Our year 2000 program office developed a plan for us to become year 2000
ready. This plan covered:
- our technology and operating systems;
- billing of our cable, telephone and Internet services;
- customer service;
- financial operations and reporting;
- network monitoring; and
- the systems of our major vendors, third party service providers and other
material service and content providers.
We addressed our year 2000 plan with respect to our internal operations in
six phases:
- an awareness phase, in which we inventoried and evaluated our systems,
components and other significant infrastructure;
- an assessment phase, in which we identified those elements that
reasonably could be expected to be affected by year 2000 problems;
- a remediation phase, in which we remediated or replaced equipment that we
believed would fail to operate properly in the year 2000;
- a testing and validation phase, in which we tested the remediation and
replacement conducted and validated its ability;
- an implementation phase, in which we added our new or updated equipment
to our current systems; and
- a contingency phase, in which we developed contingency plans for our
at-risk business functions.
We have completed all phases of our plan for all of our services and systems.
Certain actions in the remediation phase have been conducted by the third
parties who provide hardware, software, or services that comprise our systems.
We have polled all the third parties who provide material hardware, software, or
services as part of our information technology and operating systems with regard
to each of such third party's
64
<PAGE> 68
year 2000 compliance plan and state of readiness. We have actively sought
responses from all vendors and third parties as to year 2000 compliance, status
of plans and readiness. All key vendors have responded and most of the third
parties have assured us that their hardware and/or software is currently year
2000 compliant.
Costs
To date, we have incurred approximately $500,000 of costs in connection
with our year 2000 plan, and we do not anticipate spending additional funds. We
expense all costs associated with our Year 2000 plan as we incur them and
anticipate funding the costs of our plan from cash flows. To date, we have not
deferred any specific information technology projects because of the costs of
our plan.
Risks
The failure to correct a material year 2000 problem or to implement a
contingency plan could result in system failures leading to a disruption in, or
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect our business, profitability and operating
results.
Contingency Plans
We have a year 2000 contingency planning committee, which has developed
year 2000 contingency plans for all of our information technology and operating
systems and for each of our locations. This committee identified key business
risks which were used to drive the development of these plans. Additionally, we
use an outside consulting service to assist in our year 2000 readiness, project
coordination and execution of the year 2000 plan.
Contingency planning to maintain and restore service in the event of
natural disasters, power failures and systems-related problems is a routine part
of our operations. We believe that such contingency plans will assist us in
responding to any failure by outside service providers to successfully address
year 2000 issues. In addition, we have developed complete contingency plans that
address our most reasonably likely worst case year 2000 scenarios including
identification of alternate vendors and service providers and manual
alternatives to system operations.
Our contingency plans for the components of our operations that are
provided by third parties and are of greatest concern to us in the event of a
year 2000 problem are:
- Network. To prepare for potential year 2000 problems affecting our
network, we have leased more facilities to provide greater redundancy. We
have also received vendor assurances with regard to our network.
- Billing. We have conducted our own testing of our billing systems. In
addition, we are relying on third-party verification that these systems
will properly function in the year 2000.
- Switching. A switch is a device that directs voice and data traffic
over a network. Switching is the process of connecting the calling party
with the called
65
<PAGE> 69
party through one or more switches. We have only one switch, through
which we route all of our telephone data transmissions. A team of
specialists from an outside consulting service will be on call to provide
backup support in the event of any year 2000 problems. The switching
functions have also been tested by us and by third-parties for year 2000
readiness.
Results Since January 1, 2000
To date, year 2000 problems have had a minimal effect on our business.
However, we may not have identified and remediated all significant year 2000
problems.
Further remediation efforts may involve significant time and expense, and
unremediated problems may have a material adverse effect on our business. Also,
we sell telecommunications products to companies in a variety of industries,
each of which is experiencing different year 2000 issues. Customer difficulties
with year 2000 issues might require us to devote additional resources to resolve
underlying problems. Finally, although we have not been made a party to any
litigation or arbitration proceeding to date involving our products or services
and related to year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability for year 2000 related damages, including consequential damages, would
negatively affect our business, results of operations, financial condition and
liquidity, perhaps materially.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. We manage our
exposure to this market risk through our regular operating and financing
activities. Derivative instruments are not currently used and, if utilized, are
employed as risk management tools and not for trading purposes.
We have no derivative financial instruments outstanding to hedge interest
rate risk. Our only borrowings subject to market conditions are our borrowings
under our credit facility which are based on either a prime or federal funds
rate plus applicable margin or LIBOR plus applicable margin. Any changes in
these rates would affect the rate at which we could borrow funds under our bank
credit facility. A hypothetical 10% increase in interest rates on our variable
rate bank debt for a duration of one year would increase interest expense by an
immaterial amount.
66
<PAGE> 70
OUR BUSINESS
GENERAL
OUR STRUCTURE.
We were formed in September 1998. We own 100% of KNOLOGY Holdings,
Interstate Telephone Company, Valley Telephone Company, Globe Telecommunications
and ITC Globe. We acquired these companies in November 1999 from ITC Holding and
other stockholders of KNOLOGY Holdings. This transaction is described in more
detail under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Interstate Telephone and Valley Telephone
Interstate Telephone began as West Point Telephone and Electric Company,
founded in 1896 by J. Smith Lanier. Interstate Telephone has been a provider of
local telephone service in western Georgia and a small part of eastern Alabama
since 1896. In 1961, the Lanier Company bought Valley Telephone from West Point
Manufacturing Co.
Interstate Telephone and Valley Telephone provide local telephone services
throughout the Georgia/Alabama border area known as the valley, which includes
the towns of West Point, Georgia, Lanett, Alabama and Valley, Alabama and
unincorporated portions of counties in both states.
KNOLOGY Holdings
ITC Holding formed KNOLOGY Holdings in 1995, but its percentage ownership
fell below 50% during 1996. ITC Holding acquired additional stock in KNOLOGY
Holdings in 1998, becoming the holder of approximately 85% of KNOLOGY Holdings.
KNOLOGY Holdings, which is now our wholly-owned subsidiary, has been
providing cable television service since 1995, telephone and high-speed Internet
access services since 1997 and broadband carrier services since 1998. KNOLOGY
Holdings owns, operates and manages interactive broadband networks in the five
metropolitan areas of Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida and Charleston, South Carolina; and it plans to expand to
additional mid-sized cities in the southeastern United States. In addition,
KNOLOGY Holdings provides traditional analog and digital cable television
services in Huntsville, Alabama. The Huntsville facilities are being upgraded to
provide local and long distance telephone and high-speed Internet access
services.
KNOLOGY Holdings began providing cable television service by acquiring
cable television systems in Montgomery, Alabama and Columbus, Georgia in 1995
and using those systems as a base for constructing new interactive broadband
networks. Since acquiring the Montgomery and Columbus systems, we have
significantly expanded these networks and upgraded the acquired networks to
offer additional broadband communications services.
67
<PAGE> 71
In December 1997, KNOLOGY Holdings acquired a cable television system in
Panama City Beach, Florida. We are currently upgrading this cable system and
extending the network into the Panama City metro area. We expect to complete
this upgrade in 2000.
In early 1998, KNOLOGY Holdings began expanding into Augusta, Georgia and
Charleston, South Carolina by obtaining new franchise agreements with the local
governments and by constructing new interactive broadband networks. We expect to
complete construction of these networks by 2003.
In June 1998, KNOLOGY Holdings acquired TTE Inc., a reseller of local, long
distance and operator services to small and medium-sized business customers
throughout South Carolina.
In October 1998, KNOLOGY Holdings acquired the Cable Alabama cable
television system serving the Huntsville, Alabama area. The existing Cable
Alabama plant is being upgraded to an interactive broadband network which will
be completed by 2001.
Globe Telecommunications
Globe Telecommunications was formed in 1983 to be a deregulated provider of
services for Valley Telephone. Globe Telecommunications has been providing
deregulated services to Interstate Telephone since 1996. Globe
Telecommunications provides local and long distance services to residential and
business customers. Globe Telecommunications also has been providing competitive
local telephone services to residential and business customers located in the
Newman, Georgia area since April 1998 and likely will begin providing these
services to Fairburn and Union City, Georgia in the second quarter of 2000.
ITC Globe
ITC Holding Company formed ITC Globe in 1997 to be a provider of local
broadband services in West Point, Georgia and the Alabama/Georgia border area.
ITC Globe, under the trade name "KNOLOGY Connecting The Valley," also provides
analog cable television, digital cable television and high-speed Internet access
to customers within the local telephone territory of Interstate Telephone and
Valley Telephone.
RELATIONSHIPS WITH AFFILIATES.
ITC Holding, a diversified telecommunications company, currently owns 90%
of our stock, which it is distributing to its stockholders. We receive services
from and/or provide services to various companies that may be deemed related
parties, including MindSpring and ITC*DeltaCom. These relationships and services
are described in detail under the caption "Certain Transactions and
Relationships." We believe that the transactions with MindSpring, ITC*DeltaCom
and other companies that may be deemed related parties, are representative of
arms-length transactions and we expect that our existing contracts with these
companies will continue after the distribution.
68
<PAGE> 72
One of our principal stockholders, SCANA Communications, is also a
stockholder of ITC Holding. In addition to investing in us, SCANA Communications
loaned us money in the past. We lease pole space from SCANA Corporation, the
parent company of SCANA Communications, which owns and operates public utilities
in South Carolina. See "Certain Transactions and Relationships" for a
description of our relationship with SCANA Communications and SCANA Corporation.
OVERVIEW OF OUR SERVICES.
We offer our customers broadband communications services, including:
- traditional and digital cable television;
- local and long distance telephone; and
- high-speed Internet access service.
Our customers have the choice of receiving these services individually or as
part of a bundle of services. In addition, we sell access to our network and
provide various network-related services to other telecommunications companies,
such as long distance telephone companies and Internet service providers.
We provide all of these services using high-speed broadband networks that
are two-way interactive. Broadband networks are high-capacity, which means they
can handle large volumes of voice, video and data. Two-way interactive networks
give customers the ability to send and receive signals at the same time. Two-way
interactive networks are required for telephone service and provide for higher
speed Internet connections than traditional one-way networks. It is important to
our strategy to provide bundled high-speed communications services that our
networks are broadband and two-way interactive.
For the nine months ended September 30, 1999, video, telephone and
high-speed Internet services and other revenue accounted for 53%, 43%, and 4%,
respectively, of consolidated revenue. Other revenue consisted principally of
revenue from broadband carrier services and video production services.
We own, operate and manage interactive broadband networks in five
metropolitan areas: Montgomery, Alabama; Columbus and Augusta, Georgia; Panama
City, Florida and Charleston, South Carolina. In addition, we provide
traditional and digital cable television services in Huntsville, Alabama. Our
Huntsville facilities are being upgraded to provide local and long distance
telephone and high-speed Internet access services. We also provide local
telephone services throughout the Georgia/Alabama border area known as the
valley, which includes the towns of West Point, Georgia, Lanett, Alabama and
Valley, Alabama and unincorporated portions of counties in both states. Our
local telephone service in the valley area is provided over a traditional copper
wire network while our cable and Internet services in that area are provided
over our broadband network. We also provide local telephone service in Newnan,
Georgia over a leased broadband network. We plan to expand to additional
mid-sized cities in the southeastern United States.
69
<PAGE> 73
Because we deliver multiple services to our customers, we report the total
number of our various revenue generating service connections for local
telephone, cable programming and Internet access, rather than the total number
of customers. As of September, 1999, we had approximately 130,900 revenue
generating service connections, including approximately 102,354 connections to
customers through our high-speed broadband networks and the remainder over
leased facilities or traditional copper telephone lines.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Connections(1)
Video......................................... 78,203 87,609
Telephone.....................................
On-Net(2).................................. 23,296 33,005
Off-Net(3)................................. 5,911 6,568
Internet...................................... 632 3,718
------- -------
Total Connections................................ 108,042 130,900
======= =======
Marketable Homes Passed(4)....................... 246,307 301,470
======= =======
Video Penetration(5)............................. 29.1% 31.8%
======= =======
Premium Units(6)................................. 55,139 60,273
Premium Penetration(7)........................... 70.5% 68.8%
</TABLE>
- ---------------
(1) Connections represent revenue generating connections. For video and
high-speed internet, connections represent the number of customers
subscribing to the service. For telephone, connections represent the number
of lines connected. For example, a telephone customer that has two lines
would be counted as two connections.
(2) On-net refers to line provided over our broadband networks. It includes
20,526 and 21,978 lines as of September 30, 1998 and 1999, respectively
provided using traditional copper wire telephone lines.
(3) Off-net consists of all telephone connections provided within our network
area over telephone lines leased from third parties.
(4) Marketable homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by our cable
television distribution network.
(5) Video penetration represents video connections as a percentage of marketable
home passed.
(6) Premium units represent the total number of subscriptions to premium
channels.
(7) Premium penetration represents premium units as a percentage of video
connections (which represents the number of video customers).
All of our network has the ability to provide broadband communications
services except for our network located in Huntsville, Alabama, which is
currently being upgraded. We expect that the Huntsville upgrade will be complete
in 2001.
70
<PAGE> 74
OUR STRATEGY
We have developed the following strategy for the implementation and
operation of business:
- Build and Operate Reliable Interactive Broadband Networks. By
designing, constructing and operating our own high-capacity, interactive
broadband networks, we can provide our residential and business customers
a wide range of high-quality broadband communications services. We
believe that this gives us a competitive advantage over cable, telephone
and wireless systems that do not have the capability to provide a wide
range of communication services.
We also believe that our high-capacity networks, which are substantially
protected by redundant paths, give us a quality and reliability
advantage over other and lower-capacity cable systems that do not have
significant redundant paths. Redundant paths increase reliability by
providing an alternate route for signals to travel if network problems
arise. In addition, we use a specially designed powering system, which
is backed up at various points along our network by a generator and a
backup power source. This allows service to continue in case of a power
outage. We can monitor our network 24 hours per day, seven days per
week, at our network operations center.
- Provide Bundled Offerings. We believe that by bundling video, voice and
data communications services we can distinguish ourselves from our
competition. We believe that the cost savings on a bundle of services and
the advantages of one-stop shopping will be attractive to new customers,
particularly since most of our prospective customers presently buy
services from multiple sources. We also believe that customers will be
less likely to switch should competitors offer lower prices on individual
services because of the cost savings associated with purchasing a bundle
of services from us. The ability to realize an overall profit on a bundle
of services should give us greater pricing flexibility.
- Be First To Market Multiple Broadband Communications Services. We
believe that we are the first providers of a bundled video, voice and
data broadband services package in Montgomery, Columbus, Panama City,
Augusta, Charleston and Huntsville. We intend to be the first to offer a
similar services package in each new market that we enter. We want to
capitalize on our position as a new communications company that brings
competition and choice to cities. We believe that many companies may seek
to provide bundled communications services over the next several years.
We expect that later entrants in a market will have greater difficulty
making a profit. In addition, constructing networks uses space on various
rights of way, which may be limited or more expensive for later entrants.
- Expand To Additional Markets. We intend to expand to additional
mid-sized cities in the southeastern United States. Although we have not
definitively decided upon particular cities for expansion, we plan to
target cities:
- that have an average of 70 homes per mile;
71
<PAGE> 75
- that generally have populations of at least 100,000; and
- in which we believe we can capture a substantial number of cable
television customers and can be the leading provider of bundled
communications services.
We believe that such cities will support a broadband communications
services business and that most of the large cable companies and other
service providers currently are focusing primarily on larger
metropolitan areas.
- Focus On The Customer. We believe the quality and responsiveness of our
customer service differentiates us from our competitors. Our customer
service representatives in each market handle customer-related functions
24 hours a day. We also monitor our networks 24 hours a day, seven days a
week.
- Broadband Carrier Services Strategy. We use extra, unused capacity on
our networks to develop and offer wholesale services to local and long
distance telephone companies, Internet services providers and other
integrated services providers. Our entry into a local market with a newly
constructed high-capacity network offers other service providers a
reliable and cost competitive alternative to telephone services provided
by the incumbent local phone company. We believe that we have a
competitive advantage due to the high-quality of our networks and the
fact that it passes substantially every home and business in our service
area.
INDUSTRY STRUCTURE AND TECHNOLOGY
General
As a result of the Telecommunications Act of 1996, cable television
companies may provide telephone service and vice versa, local telephone
companies may provide long distance service and vice versa, and all may provide
numerous ancillary services. Municipalities must grant cable television
franchises to qualified applicants. This change in the regulatory landscape,
along with the substantial growth in use of the Internet, has led to a rush by
communications companies and others such as power companies to provide a full
range of voice, video and data communications services to consumers. Although
the process of building broadband networks and expanding to other services has
begun, we believe that most of the large cable companies and other service
providers will initially focus primarily on major metropolitan areas.
Communications Technologies And Services
We have set forth below a brief description of the current communications
industry structure and the technology generally used by each system, including
hurdles that providers face in offering new services.
Cable Television. Cable television systems generally consist of coaxial
cable, which carries signals via radio frequency, and/or fiber optic cable,
which carries signals via light waves generated by a laser. The cable runs
through the air attached to poles or underground past the homes in a service
area, connecting to each house individually through a cable connection box
located outside of the house. Subscriber homes have
72
<PAGE> 76
internal wiring running from the cable connection box to one or more boxes into
which users connect television sets and set-top terminals used for special
services, descrambling, pay-per-view and other features. Traditional coaxial
cable networks have numerous amplifiers located along the network to restore the
strength of the signal, which diminishes as it travels. Amplifiers produce
interference or noise which increases as the number of amplifiers increases.
Fiber optic networks do not use amplifiers since their larger lasers send
signals further so they do not need amplifying.
The number of channels or features that a cable system can offer varies
with the capacity of the cable network and the electronic equipment that
compresses and amplifies the signal. Additional equipment may compensate for a
lower-capacity network, but too much equipment results in noise or interference,
leading to a lower-quality signal. Many traditional cable companies have sought
to increase capacity through the use of additional equipment, and customers have
experienced increased interference.
Many cable television systems use one-way noninteractive cable, and
accordingly do not have the ability to provide telephone service, which requires
a two-way interactive cable. Several cable companies, including large cable
companies, offer high-speed data transmission and provide Internet access using
cable modems which are one-way noninteractive. However, such service generally
cannot deliver high-speed performance until the cable has been upgraded to
increase capacity and add two-way interactivity.
Wireless Cable. Wireless cable technology allows the transmission of
television, high-speed computer data, and facsimile transmissions via microwave
frequencies. Wireless cable has been used to serve primarily rural areas where
laying traditional cable is not economically feasible. The wireless cable system
sends signals from a centrally located facility equipped with transmitters,
antennas, satellite dishes and scrambling and descrambling equipment to
subscribers with rooftop antennas and the necessary converters. Because wireless
cable signals use microwaves, they require line-of-sight transmission from the
central source to the subscribers. Obstructions such as large buildings, trees
and uneven terrain can interfere with reception, although signal repeaters that
receive and re-transmit signals to avoid obstructions alleviate these
shortcomings.
Other Satellite Technologies. Satellite television companies provide
satellite transmission of video and audio services directly to the customer's
home. Such satellite transmission requires hardware and software to receive and
decrypt satellite television programming. Satellite broadcasting does not
require ground construction to install, maintain or upgrade services. Rather,
the programming is transmitted from a ground station to the subscriber using a
communications satellite. A subscriber must purchase or lease a satellite dish
to receive signals and a receiver system to process and descramble signals for
television viewing. Echostar and DirecTV provide direct broadcast satellite
services using high-power communications satellites and small dish receivers.
These systems generally offer more channels than cable systems.
Congress recently passed the Intellectual Property and Communications
Omnibus Reform Act of 1999 which expands the statutory copyright license for
satellite carriers to include local signals. Under this new act, satellite
carriers may carry a local television broadcast station in the station's local
market subject to the availability of channel
73
<PAGE> 77
capacity and compliance with many of the same signal carriage rules that apply
to cable television systems. For example, satellite carriers that choose to
retransmit a local signal in a television market must carry all of the local
television stations in the market that demand carriage. Satellite carriers may
not carry a local television station without the station's consent. The act
required the FCC to develop other rules relating to signal carriage, such as
rules
- to permit a network affiliate to preserve its right to be the exclusive
network station in a market;
- to permit stations to be the exclusive distributors of syndicated
programming in their markets; and
- to protect the rights of sports teams to control distribution of their
games in the area where the games are played, known as "sports blackout"
rules.
Currently small satellite dishes are not two-way interactive, and therefore
are not suitable for telephone or Internet services. Residential systems use
telephone lines to transmit to the Internet and satellite transmission for
reception from the Internet. This approach still has dial-up delays, but it has
many of the same advantages as Internet access over a broadband network.
However, satellite transmission may cause an echo during voice transmissions due
to the long distance to and from the satellite.
Traditional Telephone. Traditional telephone service is provided by local
telephone systems consisting of a network of switches, transmission facilities
between switches, and connections between customer premises and a local switch.
Switches are devices that direct voice and data traffic. A switch looks at
incoming voice or data to determine its destination and routes the traffic
accordingly. A call can be routed by the local switch directly to the called
party if that party is served by the same switch, to another local or toll
switch for delivery to the called party, or through one or more switches of a
long distance carrier to a more distant local switch for ultimate delivery to
the called party. The transmission facilities connecting switches are comprised
primarily of high-capacity fiber optic cables. Customer premises usually consist
of copper wire lines that run through the air or underground to each of the
premises served. They generally carry analog transmissions and have relatively
low transmission capacity, sufficient to carry only one two-way voice
conversation.
Capacity can be expanded by advanced techniques such as integrated services
digital network or ISDN, which permits voice and data transmissions to occur
simultaneously and can support some level of video teleconferencing. However,
local connections, even with integrated services digital network, generally do
not have sufficient capacity for large-scale provision of video services.
Digital subscriber line or DSL uses transmission equipment placed at the
customer premises and at the location where most of the network switches and
equipment are located to increase transmission speeds on copper wire local
connections. Widespread deployment of digital subscriber line technology is
limited by the length and gauge of the copper wire connections plus the use of
extenders.
74
<PAGE> 78
Wireless Telephones. Wireless telephone technology, which includes
cellular and a technology commonly called PCS, is based upon the division of a
given market area into a number of smaller geographic areas, or cells. Each cell
has a base station or cell site, which is a physical location equipped with
transmitter-receivers and other equipment that communicate by radio signal with
wireless telephones located within range of the cell. Cells generally have an
operating range from two to 25 miles. Each cell site connects to a switch, which
in turn connects to the local telephone network. The switch directs the voice
and data traffic from and to the wireless telephone customer. When a subscriber
in a particular cell dials a number, the wireless telephone sends the call by
radio signal to the cell site, which then sends it to the switch. The switch
completes the call by connecting it with the landline telephone network or
another wireless telephone unit. Incoming calls are received by the mobile
switch, which instructs the appropriate cell to complete the communications link
by radio signal between the cell site and the wireless telephone. Like local
landline telephone networks, wireless telephony technologies generally do not
have sufficient capacity for large scale provision of video and data services,
although some new higher-capacity technologies may become available in the near
future that support a wider range of services.
Internet Access. Most Internet access takes place over telephone lines
using computer modems. This form of transmission works well for smaller amounts
of data, but telephone lines generally cannot handle large volumes of
information, multimedia applications or high-speed data transmissions. This
often results in lengthy delays. Also, Internet service providers have limited
numbers of ports available for customers to dial in to the Internet, and their
customers may experience difficulties obtaining access to the Internet or may be
disconnected if activity is too limited. High-speed cable modems used over
traditional one-way noninteractive cable networks permit high-speed broadband
reception from the Internet, but require communications from the user to the
Internet to be over telephone lines.
OUR INTERACTIVE BROADBAND NETWORKS
Our interactive broadband networks are:
- high-speed,
- high-capacity,
- two-way interactive, which means that the customers have the ability to
send and receive signals at the same time; and
- hybrid fiber-coaxial networks, which means that the network is made up
of a combination of high-capacity fiber-optic cables and traditional
coaxial cables.
Our hybrid fiber-coaxial network is designed using redundant fiber-optic
cables. Redundant cables increase reliability by providing an alternate route
for signals to travel if network problems arise. By comparison, most traditional
cable television systems do not have significant redundant cables. In addition,
we provide power to our system from locations along the network called hub
sites, each of which is equipped with a generator and battery back-up power
source to allow service to continue in a power outage.
75
<PAGE> 79
Our interactive broadband networks can support numerous channels of basic
and premium cable television services, telephone services, Internet access and
other broadband communications services. Our networks have extra capacity, so we
can add new services as content and technology become available.
We offer local telephone service over these networks in much the same way
local phone companies provide service. We provide dial tone service and install
a network interface box outside a customer's home. We may add wiring inside the
premises as well. We can offer multiple lines of telephone service. Our networks
interconnect with those of other local phone companies through a nine-state
interconnection agreement with BellSouth Telecommunications, Inc. We provide
long distance service using leased facilities from other telecommunications
service providers. We have entered into an agreement with Business Telecom under
which:
- we lease a portion of Business Telecom's 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 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.
ITC*DeltaCom provides us with the technical Internet services that allow us
to offer Internet access to our customers. ITC*DeltaCom is an affiliate of our
company and of ITC Holding. We believe that the terms of our agreements with
ITC*DeltaCom are comparable to what we could obtain for similar services from an
unaffiliated company.
Since the cable equipment industry is a consolidated industry, there are
relatively few manufacturers of cable equipment. We purchase digital cable
equipment from one supplier. This supplier has informed us that it may decide
not to sell equipment to us in some new markets because of their existing
relationship with a large competitor. We are
76
<PAGE> 80
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 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.
77
<PAGE> 81
We began offering digital video service in November 1998. Digital cable
uses compression technology to significantly increase the number of television
channels. Digital technology converts signals into a digital format and
compresses many such signals into the space normally occupied by one signal. At
the home, a set-top video terminal converts the digital signal back into
channels that can be viewed on a normal television set. We added digital video
as an additional service without reducing the current number of basic channels.
Digital technology also permits us to offer near video-on-demand, which include
movies or other programs that commence in frequent intervals, to customers for a
fee per viewing basis.
Telephone. Our telephone service includes residential and small business
local and long distance telephone services. Our customers pay a fixed monthly
rate for all local calling. Customers may elect to receive call waiting, call
forwarding, voice mail and other value-added services, which generally involve
an additional fixed charge per month per telephone line. We generally price our
services at rates comparable to those of our competitors, although typically our
value-added services are less expensive than those of our competition. We offer
all of our cable television services customers a discount on telephone service.
Our long distance service offers features and prices comparable to those of our
competitors.
Internet Services. Our high-speed data service offers customers
high-speed connections to the Internet using cable modems. The Internet
connection using a cable modem is always active, so our customers do not have to
dial in and wait for access. Since a customer's service is offered over the
existing connection in the home, no second phone line is required and there is
no disruption of service when the phone rings or when the television is on. We
charge a fixed monthly fee for connection to the Internet. We offer discounts on
our high-speed Internet service to customers who also purchase our cable
television service or telephone service.
Broadband Carrier Services. We use extra, unused capacity on our networks
to offer wholesale services to other local and long distance telephone
companies, Internet services providers and other integrated services providers.
We call these services our "broadband carrier services." We believe our newly
constructed interactive broadband networks offer other service providers a
reliable and cost competitive alternative to telephone services provided by the
incumbent local telephone company.
We sell access to our network to long distance telephone companies for
interstate and intrastate long distance phone calls to and from our customers.
We sell access to our network to connect local telephone companies to small
business customers. We offer traditional special access and local private line
services through our network by providing high capacity connections to medium
and large commercial users, local telephone companies and other carriers
throughout a metropolitan service area. Special access lines are dedicated lines
that connect customers directly to a long distance carrier. Private lines are
dedicated lines linking a customer location to one or more other customer
locations.
We provide services to Internet service providers which allows them to
expand into areas where our network is located. In August 1998, we entered into
an agreement with
78
<PAGE> 82
MindSpring Enterprises, Inc., a large Internet service provider in which ITC
Holding is a large stockholder, which allows MindSpring to offer high-speed
Internet access to its customers in Montgomery, Alabama using our network. We
entered into a similar agreement with A World of Difference, Inc., in August
1999 for the Charleston area.
Future Broadband Communications Services. We believe that our interactive
broadband networks may enable us to provide additional broadband services in the
future, including:
- Interactive energy management services in partnership with power
companies, which allow customers to monitor energy usage and cost online;
- Security services, including closed-circuit television security
monitoring and alarm systems;
- Voice transmission using the Internet, which integrates traditional
telephone functions with Internet-based technology; and
- High-speed, high-capacity transmission of data using advanced transfer
protocols, such as the asynchronous transfer mode method of transmission.
MARKETS AND SUBSCRIBERS
Current Markets
Our interactive broadband networks currently serve:
- Montgomery, Alabama;
- Columbus, Georgia;
- Augusta, Georgia;
- Charleston, South Carolina;
- Panama City, Florida; and
- a rural area on the Georgia/Alabama border known as the valley.
We provide video, telephone and Internet services over a broadband network in
Montgomery, Columbus, Augusta, Charleston and Panama City. In the valley area,
we provide telephone service over a traditional copper wire telephone network
and video and Internet services over a broadband network. We also provide cable
television services in the Huntsville, Alabama area, and we are in the process
of upgrading the Huntsville network to an interactive broadband network to
provide telephone and Internet services.
We believe that our ability to increase and maintain our subscribers has
been due largely to:
- our commitment to customer service;
- the number of channels we offer; and
- our reliability and quality of the picture and sound over our networks.
79
<PAGE> 83
New Markets
We plan to expand to additional mid-sized cities in the southeastern United
States. Although we have not definitively decided upon particular cities for
expansion, we plan to target cities:
- that have an average of 70 homes per mile;
- with populations generally of at least 100,000; and
- in which we believe we can attract a significant portion of the cable
television customers and can become the leading provider of bundled
communications services.
NETWORK CONSTRUCTION AND OPERATIONS
Network Construction
With the exception of the Georgia/Alabama border area where we maintain our
own construction crews, we use contractors for the construction of our networks,
including both the laying of underground cable and attaching aerial cable to
utility poles. We serve as the manager of the construction process, directing
and supervising the various construction crews. We have 59 employees dedicated
to monitoring and facilitating the construction of our networks, including a
Vice President of Construction. Our approach to construction reflects our
commitment to customer service. We notify potential customers before commencing
underground construction and restore any damaged property. Based on past
experience, we believe the construction of a new network in a new market will
take approximately three years.
Network Operations and Maintenance
Technicians in each of our service areas schedule and perform installations
and repairs and monitor the performance of our interactive broadband networks.
We operate a network operations center in West Point, Georgia, and we monitor
our networks 24 hours a day, seven days a week. Our technicians perform
maintenance and repair of the network on an ongoing basis. We maintain the
quality of our networks to minimize service interruptions and extend the
networks' operational life.
Franchises
Cable television systems and local telephone systems generally are
constructed and operated under the authority of nonexclusive franchises, granted
by local and/or state governmental authorities. Franchises typically contain
many conditions, such as:
- time limitations on commencement and completion of system construction;
- customer service standards;
- minimum number of channels; and
- the provision of free service to schools and certain other public
institutions.
80
<PAGE> 84
We believe that the conditions in our franchises are fairly typical. Our
franchises generally provide for the payment of fees to the municipality ranging
from 3% to 5% of revenues from telephone and cable television service,
respectively. Our franchises generally have ten to fifteen year terms, and we
expect our franchises to be renewed before or upon expiration by the relevant
franchising authority.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the government agencies. The Cable Communications Policy Act of
1984 provides for an orderly franchise renewal process in which the franchising
authorities may not unreasonably deny renewals. If a renewal is withheld and the
franchising authority takes over operation of the affected cable system or
awards the franchise to another party, the franchising authority must pay the
cable operator the "fair market value" of the system. The Cable Communications
Policy Act of 1984 also established comprehensive renewal procedures requiring
that the renewal application be evaluated on its own merit and not as part of a
comparative process with other proposals. The following table lists our
franchises by location, term and expiration date.
<TABLE>
<CAPTION>
LOCATION TERM EXPIRATION DATE
-------- ---- ---------------
<S> <C> <C>
SOUTH CAROLINA
Charleston............................................... 15 4/28/2013
North Charleston......................................... 15 6/12/2013
Charleston County........................................ 15 12/15/2013
Mount Pleasant........................................... 15 12/15/2013
Hanahan.................................................. 15 12/8/2013
Summerville.............................................. 15 2/10/2014
Lincolnville............................................. 15 12/2/2013
Goose Creek.............................................. 15 11/11/2013
Berkeley County.......................................... 15 7/20/2013
GEORGIA
Augusta/Richmond County.................................. 15 1/20/2013
Columbia County.......................................... 11 11/1/2009
Columbus Renewal......................................... 10 3/16/2009
West Point............................................... 15 1/19/2013
FLORIDA
Panama City.............................................. 18 3/10/2016
Bay County............................................... 8 1/5/2006
Lynn Haven............................................... 18 5/12/2016
City of Callaway......................................... 10 9/28/2009
Cedar Grove.............................................. 15 6/9/2013
</TABLE>
81
<PAGE> 85
<TABLE>
<CAPTION>
LOCATION TERM EXPIRATION DATE
-------- ---- ---------------
<S> <C> <C>
ALABAMA
Prattville............................................... 15 7/7/2013
Maxwell AFB.............................................. 4 9/30/2003
Autauga County........................................... 15 10/15/2013
Montgomery............................................... 10 3/6/2005
Huntsville............................................... 2 (1) 3/7/2001
Madison.................................................. 8 (1) 10/22/2006
Madison County........................................... 11(1) 11/20/2009
Redstone Arsenal......................................... * *
Limestone County......................................... 6 5/7/2005
Chambers County.......................................... 15 12/15/2012
Lanett................................................... 15 1/20/2013
Valley................................................... 15 1/12/2013
</TABLE>
- ---------------
(1) This number represents the number of years left under the franchise when we
acquired the franchise in the 1998 Cable Alabama acquisition.
* We are operating in this market under a letter agreement while our franchise
application is pending.
The Cable Communications Policy Act of 1984 also prohibits franchising
authorities from granting exclusive franchises or unreasonably refusing to award
additional franchises covering an existing cable system's service area. This
simplifies the application process for our obtaining a new franchise. This
process usually takes about 6-9 months. While this makes it easier for us to
enter new markets, it also makes it easier for competitors to enter the markets
in which we currently have franchises.
SWITCHING
Switches are devices located along the network that direct voice and data
traffic. Our switching equipment allows us to provide enhanced custom calling
services including call waiting, call forwarding and three-way-calling.
Residences and businesses are connected to the switches primarily with copper
lines. We believe our network equipment and infrastructure is in good condition.
Much of our network equipment and infrastructure has been replaced within the
past three years.
Interconnection
We rely on local telephone companies and other companies to connect calls
to users who are not our customers. We have access to BellSouth's telephone
network under a nine-state interconnection agreement. The Telecommunications Act
of 1996 established certain requirements and standards for interconnection
arrangements, and our interconnection agreement with BellSouth is based on these
requirements. However, these requirements and standards are still being
developed and implemented by the FCC in conjunction with the states through a
process of negotiation and arbitration, as discussed below under the caption
"Our Business -- Legislation and Regulation -- Federal Regulation of
Telecommunications Services."
82
<PAGE> 86
The key terms of our interconnection agreement with BellSouth are:
- the right to connect to each others facilities;
- the rates we pay each other for handling and delivery of one another's
telephone traffic; and
- the right to attach network facilities to each other's telephone poles
and rights of way.
This agreement with BellSouth expires in April 2000. Under the
Telecommunications Act of 1996, BellSouth is required to allow us to
interconnect to their network. Pursuant to the Telecommunications Act and the
terms of our existing agreement, we can either:
- automatically renew our existing interconnection agreement by notifying
BellSouth of our intention to renew within the applicable timeframe:
- negotiate the terms of a new agreement with BellSouth;
- choose another interconnection agreement that BellSouth has with another
telephone company and enter into an interconnection agreement on those
same terms and conditions; or
- accept the default pricing and terms and conditions offered by BellSouth.
We do not plan to renew our current interconnection agreement. Because of recent
FCC regulations we expect to be able to enter into an new interconnection
agreement with better rates. We plan to negotiate our own terms with BellSouth.
BellSouth may not agree to favorable terms since BellSouth is our competitor.
However, if we are not able to negotiate favorable terms, we will select another
interconnection agreement that BellSouth has entered into with another telephone
company and enter into an interconnection agreement with BellSouth using those
terms and conditions.
The terms of our interconnection agreement have also been approved by the
Georgia, Alabama, Florida and South Carolina state public utility commissions.
Our new agreement will be subject to approval by the Georgia, Alabama, Florida
and South Carolina state public utility commissions. Approvals of other state
public utility commissions will be required in connection with the provision of
telephone service in other states.
It is generally expected that the Telecommunications Act of 1996 will
continue to undergo considerable interpretation and implementation over the next
several years, which could have a negative impact on our interconnection
agreement with BellSouth. Our ability to compete successfully in the provision
of services will depend on the timing of such implementing regulations and
whether they are favorable to us.
83
<PAGE> 87
SALES AND MARKETING
Marketing Strategy
We believe that we are the first provider of a bundled video, voice and
data broadband communications services package in our current markets, and we
intend to be first to market a similar services package in new cities. We
believe that cost savings on a bundle of services and the advantages of one-stop
shopping will be attractive to new customers, particularly since most of our
prospective customers now buy services from multiple sources. We intend to
emphasize our position as a new communications company that brings competition
and choice to cities where we provide service. We also work to attract new cable
television subscribers in areas in which our network has expanded. Our focus
includes multiple dwelling units, many of which are subject to exclusivity
arrangements with other cable providers that have not yet expired or which
involve more complex arrangements with the property owner.
Cable Television. To attract cable television subscribers in new areas,
we mount extensive marketing campaigns prior to initiation of service with
door-to-door solicitations and flyers followed by direct mail and telemarketing.
We also use these solicitation efforts in our existing markets to encourage
people who previously have not chosen any cable service to use our cable service
or to encourage people who use another cable service to switch to our service.
We have a sales staff in each of our markets, including residential and business
sales managers, sales representatives and customer service representatives. We
use our own installation and repair crews and those of outside contractors to
install new service quickly.
Telephone and Internet. For our telephone and Internet marketing, we have
focused on subscribers of our cable television services through direct mail,
door-to-door solicitations, flyers and telemarketing. We offer our cable
television customers discounted rates for telephone service and high-speed
Internet service. We emphasize the cost savings of a bundle of services. We also
provide high-speed Internet access to certain Internet service providers who in
turn resell the service to their customers. We have sales managers for our
telephone and Internet services, and sales representatives focusing on bundled
services.
Customer Service. Customer service is an essential element of our
operations and marketing, and we believe our quality and responsiveness
differentiates us from our competitors. A significant number of our employees
are dedicated to customer service activities, including
- order taking;
- customer activations;
- billing inquiries and collections;
- service upgrades;
- provision of customer premises equipment; and
- administration of our customer satisfaction program.
84
<PAGE> 88
In addition, we provide 24-hour customer service, operate customer phone centers
in each of our service areas, and operate a back-up customer phone center in
West Point, Georgia. We monitor our networks 24 hours a day, seven days a week
and strive to resolve problems prior to a customer being aware of any service
interruptions.
COMPETITION
Other Cable Systems
Other cable television operations exist in each of our current markets. Our
competitors include AT&T Cable Services, Comcast Cable Communications, Time
Warner Cable, Mediacom and Charter Communications. We compete with these
competitors on terms of pricing and programming content, including the number of
channels and the availability of local programming. We obtain our programming by
entering into contracts or arrangements with cable programming vendors. A cable
programming vendor may enter into an exclusive arrangement with one of our cable
television competitors. This would create a competitive advantage for the cable
television competitor by restricting our access to programming. Each of AT&T
Cable Services, Comcast Cable Communications and Time Warner Cable have entered
into exclusivity arrangements with the WeB channel, which is the distribution
channel for WB programming, in different markets. We provide programming in each
of these markets as well, and these exclusivity arrangements restrict our access
to programming.
We expect that we will have competition with other cable television
providers in each of our future markets. In addition, Federal law prohibits
cities from granting exclusive cable franchises and from unreasonably refusing
to grant additional, competitive franchises. This makes it easier for
competitors to enter our markets. In addition, an increasing number of cities
are considering the feasibility of owning their own cable systems in a manner
similar to city-provided utility services.
A continuing trend toward business combinations and alliances in the cable
television area and the telecommunications industry as a whole may create
significant new competitors for us. This trend toward business combinations may
be shrinking the number of attractive acquisition targets.
Other Television Providers
Cable television distributors may, in certain markets, compete for
customers with other video programming distributors and other providers of
entertainment, news and information. The competitors in these markets include:
- broadcast television; and
- satellite and wireless cable systems; and
We compete with these competitors on terms of pricing and programming content,
including the number of channels and the availability of local programming. We
often are not the first provider of video programming in our market, and we have
to compete with other companies that have long-standing customer relationships
with the residents in these areas. The Telecommunications Act of 1996 may create
more competition for
85
<PAGE> 89
current cable television distributors, as it allows local telephone companies to
provide video services in their local service areas.
Alternative methods of distributing the same or similar video programming
offered by cable television systems exist. Congress and the FCC have encouraged
these alternative methods and technologies in order to offer services in direct
competition with existing cable systems. In addition to broadcast television
stations, we compete with other multichannel program service providers.
We encounter competition from direct broadcast satellites systems that
transmit signals to small dish antennas owned by the end-user. DirecTV and
Echostar offer multichannel programming through high power communications
satellites to a dish antenna with a diameter of only approximately 18 inches.
Although satellite television providers presently serve a relatively small
percentage of pay television subscribers, their share has been growing steadily.
Competition from direct broadcast satellites could become substantial as
developments in technology increase satellite transmitter power and decrease the
cost and size of equipment. The Intellectual Property and Communications Omnibus
Reform Act of 1999 permits satellite carriers to carry local television
broadcast stations, is expected to enhance satellite carriers' ability to
compete with us for subscribers. As a result, competition from these companies
may increase.
Wireless cable represents another type of video distribution service. These
systems deliver programming services over microwave channels to subscribers who
have a special antenna. Wireless cable systems are less capital intensive, are
not required to obtain local franchises or pay franchise fees, and are subject
to fewer regulatory requirements than cable television systems. Although there
are relatively few systems in the United States right now, many markets have
been licensed or tentatively licensed. The FCC has granted the use of certain
frequencies to these services and expanded the channels reserved for educational
purposes. The FCC's actions enable a single entity to develop a wireless cable
system with up to 35 channels and thus could compete more effectively with cable
television.
We also compete with systems that provide multichannel program services
directly to hotel, motel, apartment, condominium and other multiunit complexes
through a satellite master antenna, which is a single satellite dish for an
entire building or complex. These systems are generally free of any regulation
by state and local governmental authorities. Pursuant to the Telecommunications
Act of 1996, these systems called satellite master antenna television systems,
are not commonly owned or managed and do not cross public rights-of-way do not
need a franchise to operate.
The Telecommunications Act of 1996 eliminated many restrictions on local
telephone companies offering video programming, and we may face increased
competition from them. Several major local telephone companies, including
BellSouth, have announced plans to provide video services to homes.
Telephone
In providing local and long distance telephone services, we compete with
the incumbent local phone company in each of our markets. We are not the first
provider of
86
<PAGE> 90
telephone services in most of our markets, and we have to convince people in our
markets to switch from other telephone companies to us. BellSouth is the
incumbent local phone company and is a particularly strong competitor in our
current markets and throughout the southeastern United States where we hope to
expand. We also compete with long distance phone companies such as AT&T, MCI
WorldCom and Sprint.
We continue to expect to face intense competition in providing our
telephone and related telecommunications services. The Telecommunications Act of
1996 allows service providers to enter markets that were previously closed to
them. Incumbent local telephone carriers are no longer protected from
significant competition in local service markets. In addition, under certain
circumstances regional Bell operating companies may enter the long distance
market. These provisions blur the distinctions that previously existed between
local and long distance services.
One major impact of the Telecommunications Act of 1996 may be a trend
toward the use and acceptance of bundled service packages. As a result, we will
be competing with:
- incumbent local telephone companies such as BellSouth as well as other
competitive local telephone companies;
- traditional providers of long distance services such as AT&T, MCI
WorldCom and Sprint; and
- other providers of cable television service such as AT&T Cable Services,
Comcast Cable Communications, Time Warner Cable, Mediacom and Charter
Communications, Inc.
Our ability to compete successfully will depend on the attributes of the overall
bundle of services we are able to offer, including our price, features, and
customer service.
We compete with Business Telecom and ITC*DeltaCom in the providing
telephone services to business customers. We purchase services from Business
Telecom and ITC*DeltaCom. Our agreements with Business Telecom and ITC*DeltaCom
are described above under the heading "-- Our Broadband Network."
Wireless telephone service such as cellular and PCS currently is viewed by
consumers as a supplement to, not a replacement for, traditional telephone
service. Wireless service generally is more expensive than traditional local
telephone service and is priced on a usage-sensitive basis. In addition, the
transmission quality of wireless service is not comparable to wireline service.
However, in the future the rate and quality differential between wireless and
traditional telephone service may decrease and lead to more competition between
providers of these two types of services.
Internet Services
Providing Internet access services is a rapidly growing business and
competition is increasing in each of our markets. Some of our competitors have
competitive advantages over us, such as greater experience, resources, marketing
capabilities and stronger name recognition.
87
<PAGE> 91
In providing Internet access services, we compete with:
- Internet service providers;
- providers of satellite-based Internet services;
- other long distance telephone companies; and
- cable television companies.
Other technologies also offer high-speed, high capacity connections to the
Internet. We compete with companies offering broadband connections such as
DirecPC, one of the principal providers of satellite-based Internet services in
the United States; long distance telephone companies such as AT&T and MCI
WorldCom; traditional dial-up Internet service providers; and cable modem
services such as Excite@Home, a joint venture among a number of major cable
companies.
A large number of companies provide businesses and individuals with direct
access to the Internet and a variety of supporting services. In addition, many
companies such as America Online, CompuServe, MSN, Prodigy and WebTV offer
online services consisting of access to closed, proprietary information networks
with services similar to those available on the Internet, in addition to direct
access to the Internet. These companies generally offer Internet services over
telephone lines using computer modems. A few Internet service providers also
offer high-speed integrated services digital network connections to the
Internet.
MindSpring Enterprises, a large Internet service provider that purchases
Internet related services from us, is also a competitor. Our agreement with
MindSpring is described in more detail above under the heading "-- Our Broadband
Network."
A few satellite companies provide broadband access to the Internet from
desktop PCs using a small dish antenna and receiver kit comparable to that used
for satellite television reception. DirecPC is one of the largest providers of
satellite-based Internet services in the United States.
Long distance companies are aggressively entering the Internet access
markets. Long distance carriers have substantial transmission capabilities and
have an established billing system that permits them easily to add new services.
We expect competition from such companies to be vigorous due to their greater
resources, operating history and name recognition.
Other cable television companies may enter the Internet services market. We
believe that some of the existing cable television providers are beginning to
provide such services in some of their major markets or clusters, including
major metropolitan areas in the southeast. The joint venture, Excite@Home, is
offering high-speed Internet service using cable modems in areas where its
affiliates have high-capacity networks. We believe that high-speed Internet
services ultimately will be offered by other cable providers and companies in
most of our present and future service areas.
88
<PAGE> 92
LEGISLATION AND REGULATION
The cable television industry currently is regulated by the FCC, some state
governments and most local governments. Telecommunications services are
regulated by the FCC and state public utility commissions. Internet services
generally are not subject to regulation. Legislative and regulatory proposals
under consideration by Congress and federal agencies may materially affect the
cable television and telecommunications industries. The following is a summary
of federal laws and regulations affecting the growth and operation of the cable
television and telecommunications industries and a description of certain state
and local laws.
Cable Communications Policy Act Of 1984
The Cable Communications Policy Act of 1984 established comprehensive
national standards and guidelines for the regulation of cable television systems
and identified the boundaries of permissible federal, state and local government
regulation. The FCC has responsibility for adopting rules to implement this.
Among other things, the Cable Communications Policy Act of 1984 affirmed the
right of franchising authorities to award one or more franchises within their
jurisdictions. It also prohibited non-grandfathered cable television systems
from operating without a franchise in such jurisdictions. The Cable
Communications Policy Act of 1984 provides that in granting or renewing
franchises, franchising authorities may establish requirements for cable-related
facilities and equipment, but may not establish or enforce requirements for
video programming or information services other than in broad categories.
Cable Television Consumer Protection And Competition Act Of 1992
The Cable Television Consumer Protection and Competition Act of 1992
permitted a greater degree of regulation of the cable industry with respect to,
among other things:
- rates for cable programming services;
- program access and exclusivity arrangements;
- access to cable channels by unaffiliated programming services;
- terms and conditions for the lease of channel space for commercial use by
parties unaffiliated with the cable operator;
- ownership of cable systems;
- customer service requirements;
- requiring cable companies to carry certain television broadcast stations
or to permit television stations to withhold consent for cable systems to
carry their stations;
- technical standards; and
- cable equipment compatibility.
89
<PAGE> 93
Additionally, the legislation encouraged competition with existing cable
television systems by:
- allowing municipalities to own and operate their own cable television
systems without a franchise;
- preventing franchising authorities from granting exclusive franchises or
unreasonably refusing to award additional franchises covering an existing
cable system's service area; and
- prohibiting the common ownership of cable systems and other types of
multichannel video distribution systems.
The Cable Television Consumer Protection and Competition Act of 1992 also
precluded video programmers affiliated with cable television companies from
favoring cable operators over competitors and required such programmers to sell
their programming to other multichannel video distributors. The FCC has
responsibility for adopting rules to implement this Act.
Telecommunications Act Of 1996
On February 8, 1996, the Telecommunications Act of 1996 was enacted. The
Telecommunications Act of 1996 and the FCC rules implementing this Act radically
altered the regulatory structure of telecommunications markets by mandating that
states permit competition for local telephone services. The Telecommunications
Act of 1996 permitted regional Bell operating companies to apply to the FCC for
authority to provide long distance services. The Telecommunications Act of 1996
also included significant changes in the regulation of cable operators. For
example, the FCC's authority to regulate the cable programming service tier
rates of all cable operators expired on March 31, 1999. The legislation also:
- repeals the anti-trafficking provisions of the Cable Television Consumer
Protection and Competition Act of 1992, which required cable systems to
be owned by the same person or company for at least three years before
they could be sold to a third party;
- limits the rights of franchising authorities to require certain
technology or to prohibit or condition the provision of
telecommunications services by the cable operator;
- requires cable operators to fully block or scramble both the audio and
video on sexually-explicit or indecent programming on channels primarily
dedicated to sexually-oriented programming;
- adjusts the favorable pole attachment rates afforded cable operators
under federal law such that they may be increased, beginning in 2001, if
the cable operator also provides telecommunications services over its
network;
- allows cable operators to enter telecommunications markets which
historically have been closed to them; and
90
<PAGE> 94
- allows some telecommunications providers to begin providing competitive
cable service in their local service areas.
Federal Regulation Of Cable Services
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations covering many aspects of cable
television operations. The FCC may enforce its regulations through the
imposition of fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses. A brief summary of certain federal regulations follows.
Rate Regulation. The Cable Television Consumer Protection and Competition
Act of 1992 authorized rate regulation for certain cable communications services
and equipment in communities where the cable operator is not subject to
effective competition. The Cable Television Consumer Protection and Competition
Act of 1992 requires the FCC to resolve complaints about rates for cable
programming service tier services and to reduce any such rates found to be
unreasonable. It also limits the ability of many cable systems to raise rates
for basic services. Cable services offered on a per channel or on a per program
basis are not subject to rate regulation by either franchising authorities or
the FCC. Notwithstanding the above, the Telecommunications Act of 1996
deregulated cable programming service rates as of March 31, 1999. After March
31, 1999, only the basic tier of service, which does not include the expanded
basic tier of service, and equipment used to receive the basic tier of service
remains subject to rate regulation.
The Cable Television Consumer Protection and Competition Act of 1992
requires communities to certify with the FCC before regulating basic cable
rates. The FCC's rate regulations do not apply where a cable operator
demonstrates that it is subject to effective competition. We meet the FCC
definition of effective competition in the areas that we currently serve. To the
extent that any municipality attempts to regulate our basic rates or equipment,
we believe we could demonstrate to the FCC that our systems all face effective
competition and, therefore, are not subject to rate regulation.
Carriage Of Broadcast Television Signals. The Cable Television Consumer
Protection and Competition Act of 1992 established signal carriage requirements.
These requirements allow commercial television broadcast stations that are local
to a cable system to elect every three years whether to require the cable system
to carry the station or whether to require the cable system to negotiate for
consent to carry the station. The third must-carry elections were made in
October 1999. Stations are generally considered local to a cable system where
the system is located in the station's Nielsen designated market area. Cable
systems must obtain retransmission consent for the carriage of all distant
commercial broadcast stations, except for certain superstations, which are
commercial satellite-delivered independent stations such as WGN. We carry some
stations pursuant to retransmission consents and pay fees for such consents or
have agreed to carry additional services pursuant to retransmission consent
agreements.
91
<PAGE> 95
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within a certain limited radius.
Non-commercial stations are not given the option to negotiate for retransmission
consent.
Nonduplication Of Network Programming. Cable television systems that have
1,000 or more subscribers must, upon the appropriate request of a local
television station, delete or "black out" the simultaneous or nonsimultaneous
network programming of a distant same-network station when the local station has
contracted for such programming on an exclusive basis.
Deletion Of Syndicated Programming. Cable television systems that have
1,000 or more subscribers must, upon the appropriate request of a local
television station, delete or "black out" the simultaneous or nonsimultaneous
syndicated programming of a distant station when the local station has
contracted for such programming on an exclusive basis.
Registration Procedures And Reporting Requirements. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators periodically
are required to file various informational reports with the FCC. Cable operators
that operate in certain frequency bands, including our company, are required on
an annual basis to file the results of their periodic cumulative leakage testing
measurements. Operators that fail to make this filing or who exceed the FCC's
allowable cumulative leakage index risk being prohibited from operating in those
frequency bands in addition to other sanctions.
Technical Requirements. Historically, the FCC has imposed technical
standards applicable to the cable channels on which broadcast stations are
carried, and has prohibited franchising authorities from adopting standards
which were in conflict with or more restrictive than those established by the
FCC. The FCC has applied its standards to all classes of channels which carry
downstream National Television System Committee video programming. The FCC also
has adopted standards applicable to cable television systems using frequencies
in certain bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. The Cable Television Consumer Protection and Competition
Act of 1992 requires the FCC to update periodically its technical standards.
Pursuant to the Telecommunications Act of 1996, the FCC adopted regulations to
assure compatibility among televisions, VCRs and cable systems, leaving all
features, functions, protocols and other product and service options for
selection through open competition in the market. The Telecommunications Act of
1996 also prohibits states or franchising authorities from prohibiting,
conditioning or restricting a cable system's use of any type of subscriber
equipment or transmission technology.
Franchise Authority. The Cable Communications Policy Act of 1984 affirmed
the right of franchising authorities, which are the cities, counties or
political subdivisions in which a cable operator provides cable service, to
award franchises within their jurisdictions and prohibited non-grandfathered
cable systems from operating without a franchise in such jurisdictions. We hold
cable franchises in all of the franchise areas in
92
<PAGE> 96
which we provide service. The Cable Television Consumer Protection and
Competition Act of 1992 encouraged competition with existing cable systems by:
- allowing municipalities to operate their own cable systems without
franchises;
- preventing franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises covering an
existing cable system's service area; and
- prohibiting, with limited exceptions, the common ownership of cable
systems and co-located multichannel multipoint distribution or satellite
master antenna television systems, which prohibition is limited by the
Telecommunications Act of 1996 to cases in which the cable operator is
not subject to effective competition.
The Telecommunications Act of 1996 exempts those telecommunications
services provided by a cable operator or its affiliate from cable franchise
requirements although municipalities retain authority to regulate the manner in
which a cable operator uses the public rights-of-way to provide
telecommunications services. Franchise authorities may not require a cable
operator to provide telecommunications service or facilities, other than
institutional networks, as a condition of franchise grant, renewal, or transfer.
Similarly, franchise authorities may not impose any conditions on the provision
of such service.
Franchise Fees. Although franchising authorities may impose franchise
fees under the Cable Communications Policy Act of 1984, as modified by the
Telecommunications Act of 1996, such payments cannot exceed 5% of a cable
system's annual gross revenues derived from the operation of the cable system to
provide cable services. In some areas, cable services are defined to include
Internet services. Franchise fees apply only to revenues for cable services.
Franchising authorities are permitted to charge a fee for any telecommunications
providers' use of public rights-of-way on a competitively neutral and
nondiscriminatory basis.
Franchise Renewal. The Cable Communications Policy Act of 1984
established renewal procedures and criteria designed to protect incumbent
franchisees against arbitrary denials of renewal. These formal procedures are
mandatory only if timely invoked by either the cable operator or the franchising
authority. Even after the formal renewal procedures are invoked, franchising
authorities and cable operators remain free to negotiate a renewal outside the
formal process. Although the procedures provide substantial protection to
incumbent franchisees, renewal is by no means assured, as the franchisee must
meet certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account the
cost of meeting such requirements.
The Cable Television Consumer Protection and Competition Act of 1992 made
several changes to the process which may make it easier in some cases for a
franchising authority to deny renewal. The cable operator's timely request to
commence renewal proceedings must be in writing and the franchising authority
must commence renewal proceedings not later than six months after receipt of
such notice. Within a four-month
93
<PAGE> 97
period beginning with the submission of the renewal proposal, the franchising
authority must grant or deny the renewal. Franchising authorities may consider
the "level" of programming service provided by a cable operator in deciding
whether to renew. Franchising authorities currently may deny renewal based on
failure to substantially comply with the material terms of the franchise, even
if the franchising authority has "effectively acquiesced" to such past
violations. The franchising authority is estopped only if, after giving the
cable operator notice and opportunity to cure, the authority fails to respond to
a written notice from the cable operator of its failure or inability to cure.
Courts may not reverse a denial of renewal based on procedural violations found
to be harmless error.
Channel Set-Asides. The Cable Communications Policy Act of 1984 permits
local franchising authorities to require cable operators to set aside certain
channels for public, educational and governmental access programming. The Cable
Communications Policy Act of 1984 further requires cable television systems with
36 or more activated channels to designate a portion of their channel capacity
for commercial leased access by unaffiliated third parties. The Cable Television
Consumer Protection and Competition Act of 1992 requires leased access rates to
be set according to a FCC-prescribed formula.
Ownership. The Telecommunications Act of 1996 eliminates the Cable
Communications Policy Act of 1984 provisions prohibiting local exchange carriers
from providing video programming directly to customers within their local
exchange telephone service areas, except in rural areas or by specific waiver.
Under the Telecommunications Act of 1996, local exchange carriers may provide
video programming by radio-based systems, common carrier systems, open video
systems, or cable systems. Local telephone companies that elect to provide open
video systems must allow others to use up to two-thirds of their activated
channel capacity. These local telephone companies are relieved of regulation as
common carriers, and are not required to obtain local franchises, but are still
subject to many other regulations applicable to cable systems. Local telephone
companies operating as cable systems are subject to all rules governing cable
systems, including franchising requirements.
The Telecommunications Act of 1996 prohibits local telephone companies or
its affiliate from acquiring more than a 10% financial or management interest in
any cable operator providing cable service in its telephone service area. It
also prohibits a cable operator or its affiliate from acquiring more than a 10%
financial or management interest in any local telephone companies providing
telephone service in its franchise area. A local telephone companies and cable
operator whose telephone service area and cable franchise area are in the same
market may not enter into a joint venture to provide telecommunications services
or video programming. There are exceptions to these limitations for rural
facilities, very small cable systems, and small local telephone companies in
non-urban areas, and such restrictions do not apply to local exchange carriers
that were not providing local telephone service prior to January 1, 1993.
Pole Attachments. The Telecommunications Act of 1996 requires utilities,
defined as all local telephone companies and electric utilities except those
owned by
94
<PAGE> 98
municipalities and co-ops, to provide cable operators and telecommunications
carriers with nondiscriminatory access to poles, ducts, conduit and
right-of-way. The right to mandatory access is beneficial to facilities-based
providers such as our company. The Telecommunications Act of 1996 also
establishes principles to govern the pricing of such access. Presently, the
rates charged to cable and telecommunications providers are the same. Starting
in 2001, telecommunications providers will be charged a higher rate than cable
operators for pole attachments. Companies that provide both cable and
telecommunications services over the same facilities, such as us, may be
required to pay the higher telecommunications rate.
Inside Wiring Of Multifamily Dwelling Units. The FCC has adopted rules to
promote competition among multichannel video program distributors in multifamily
dwelling units. The rules provide generally that, in cases where the program
distributor owns the wiring inside a multifamily dwelling unit but has no right
of access to the premises, the multifamily dwelling unit owner may give the
cable operator notice that it intends to permit another program distributor to
provide service there. A program distributor then must elect whether to remove
the inside wiring, sell the inside wiring to the multifamily dwelling unit owner
at a price not to exceed the replacement cost of the wire on a per-foot basis,
or abandon the inside wiring.
Privacy. The Cable Communications Policy Act of 1984 imposes a number of
restrictions on the manner in which cable system operators can collect and
disclose data about individual system customers. The statute also requires that
the system operator periodically provide all customers with written information
about its policies regarding the collection and handling of data about
customers, their privacy rights under federal law and their enforcement rights.
In the event that a cable operator is found to have violated the customer
privacy provisions of the Cable Communications Policy Act of 1984, it could be
required to pay damages, attorneys' fees and other costs. Under the Cable
Television Consumer Protection and Competition Act of 1992, the privacy
requirements are strengthened to require that cable operators take such actions
as are necessary to prevent unauthorized access to personally identifiable
information.
Franchise Transfer. The Telecommunications Act of 1996 repeals most of
the anti-trafficking restrictions imposed by the Cable Television Consumer
Protection and Competition Act of 1992, which prevented a cable operator from
selling or transferring ownership of a cable system within 36 months of
acquisition. However, a local franchise may still require prior approval of a
transfer or sale. The Cable Television Consumer Protection and Competition Act
of 1992 requires franchising authorities to act on a franchise transfer request
within 120 days after receipt of all information required by FCC regulations and
the franchising authority. Approval is deemed granted if the franchising
authority fails to act within such period.
Copyright. Cable television systems are subject to federal compulsory
copyright licensing covering carriage of broadcast signals. In exchange for
making semi-annual payments to a federal copyright royalty pool and meeting
certain other obligations, cable operators obtain a statutory license to
retransmit broadcast signals. The amount of the royalty payment varies,
depending on the amount of system revenues from certain
95
<PAGE> 99
sources, the number of distant signals carried, and the location of the cable
system with respect to over-the-air television stations. Adjustments in
copyright royalty rates are made through an arbitration process supervised by
the U.S. Copyright Office.
Various bills have been introduced in Congress in the past several years
that would eliminate or modify the cable television compulsory license. Without
the compulsory license, cable operators might need to negotiate rights from the
copyright owners for each program carried on each broadcast station
retransmitted by the cable system.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks, such as HBO, and cable programming networks, such
as USA Network, has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers and BMI, Inc.,
the two major performing rights organizations in the United States. The American
Society of Composers and Publishers and BMI, Inc. offer "through to the viewer"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable television systems to their subscribers.
Internet Service Providers. A number of Internet service providers have
requested that the FCC and state and local officials adopt rules requiring cable
operators to provide unaffiliated Internet service providers with direct access
to the operators' broadband facilities on the same terms as the operator makes
those facilities available to affiliated Internet service providers. To date the
FCC has rejected these unbundling proposals, but a number of local franchising
authorities have imposed this type of requirement on cable operators. Litigation
regarding these unbundling requirements is pending. AT&T recently announced that
it would open its systems to competing Internet service providers, including
MindSpring, with which it already has entered into an agreement. At this time it
is uncertain whether these requirements lawfully may be imposed on cable
operators, or how pervasive they ultimately may be if upheld in court.
Regulatory Fees And Other Matters. The FCC requires payment of annual
regulatory fees by the various industries it regulates, including the cable
television industry. In 1997, cable television systems were required to pay
regulatory fees of $0.54 per subscriber. In 1998, the fee was $0.44 per
subscriber. In 1999, the fee was $0.48 per subscriber. Per-subscriber regulatory
fees may be passed on to subscribers as external cost adjustments to rates for
basic cable service. Fees are also assessed for other FCC licenses, including
licenses for business radio, cable television relay systems and earth stations.
These fees, however, may not be collected directly from subscribers as long as
the FCC's rate regulations remain applicable to the cable system.
In December 1994, the FCC adopted new cable television and broadcast
technical standards to support a new emergency alert system. Cable system
operators were required to install and activate equipment necessary to implement
the new emergency broadcast system by December 31, 1998 or October 1, 2002,
depending on the size of the system.
FCC regulations also address the carriage of:
- local sports programming;
96
<PAGE> 100
- restrictions on origination and cablecasting by cable system operators;
- application of the rules governing political broadcasts;
- customer service standards; and
- limitations on advertising contained in nonbroadcast children's
programming.
Regulation Of Telecommunications Services
Our telecommunications services are subject to varying degrees of federal,
state and local regulation. Pursuant to the Communications Act of 1934, as
amended by the Telecommunications Act of 1996, the FCC generally exercises
jurisdiction over the facilities of, and the services offered by,
telecommunications carriers that provide interstate or international
communications services. State regulatory authorities retain jurisdiction over
the same facilities to the extent that they are used to provide intrastate
communications services. Various international authorities may also seek to
regulate the provision of certain services.
Federal Regulation of Telecommunications Services
Tariffs And Detariffing. We are classified by the Federal Communications
Commission as a non-dominant carrier with respect to both our domestic
interstate and international long distance carrier services and our competitive
local exchange carrier services. As a non-dominant carrier, our rates presently
are not regulated by the FCC. All telecommunications carriers that provide
domestic interstate and international long distance services must file tariffs
with the FCC prescribing rates, terms and conditions of service. Carriers must
also file so-called informational tariffs with the FCC describing their operator
services. We have filed tariffs with the FCC for our domestic interstate and
international long distance services, interstate access services and interstate
operator services.
Valley Telephone and Interstate Telephone are regulated by the FCC as
dominant, rather than non-dominant carriers. As dominant carriers, Valley
Telephone and Interstate Telephone must file tariffs with the FCC and must
provide the FCC with notice prior to changing their rates, terms or conditions
of interstate services. Valley Telephone concurs in tariffs filed by the
National Exchange Carrier Association, while Interstate Telephone has its own
tariffs on file with the FCC.
Interconnection. The Telecommunications Act of 1996 establishes local
telephone competition as a national policy. This Act preempts laws that prohibit
competition for local telephone services and establishes uniform requirements
and standards for local network interconnection, local network unbundling and
local service resale. The Telecommunications Act of 1996 also requires incumbent
local telephone carriers to enter into mutual compensation arrangements with new
local telephone companies for transport and termination of local calls on each
others' networks. Most state public utility commissions have ruled that traffic
to Internet service providers is covered by this requirement. The FCC recently
decided that calls to Internet service providers could be jurisdictionally
interstate, although the FCC did not preempt these state decisions. The
97
<PAGE> 101
Telecommunications Act of 1996's interconnection, unbundling and resale
standards have been developed initially by the FCC and have been, and will
continue to be, implemented by the states in numerous proceedings and through a
process of negotiation and arbitration.
In August 1996, the FCC adopted a wide-ranging decision regarding the
statutory interconnection obligations of the local telephone carriers. Among
other things, the order established pricing principles, for use by the states to
determine rates for unbundled local network elements and to calculate discounts.
In July 1997, the United States Court of Appeals for the Eighth Circuit struck
down the pricing rules established by the FCC. The court ruled that the FCC did
not have jurisdiction under the Telecommunications Act of 1996 to establish
pricing rules to be applied by the states. In January 1999, the Supreme Court
reversed the Eighth Circuit decision, finding that the FCC had jurisdiction to
implement the pricing provisions of the Act. The Eighth Circuit is expected, on
remand, to rule on the merits of the FCC's pricing rules.
The Supreme Court also upheld the FCC's rule requiring local telephone
carriers to provide a platform that includes all of the network elements
required by a competitor to provide a retail telecommunications service.
Competitors using such platforms may be able to provide retail local services
entirely through the use of the local telephone carriers' facilities at lower
discounts than those available for local resale. The availability of such
platforms could benefit our local competitors who, unlike us, do not operate
their own facilities. The pricing of these platforms is still subject to a
pending FCC proceeding.
The Telecommunications Act of 1996 includes an exemption from
interconnection requirements for rural telephone companies. Under this
exemption, a competitor is not entitled to interconnect with a rural telephone
company absent a finding by the appropriate state commission that the request is
not unduly economically burdensome. Both Valley Telephone and Interstate
Telephone are considered rural telephone companies under the Telecommunications
Act of 1996, and the Alabama Public Service Commission has determined that these
companies should be exempt from the interconnection requirements of the
Telecommunications Act of 1996 at least through June 2001.
Number Portability. Another new federal statute requires that all local
telephone service carriers provide customers with the ability to retain, at the
same location, existing telephone numbers without impairment of quality,
reliability or convenience. This number portability will remove one barrier to
entry faced by new competitors, which would otherwise have to persuade customers
to switch local service providers despite having to change telephone numbers.
The FCC ordered permanent number portability to be made available in the 100
largest metropolitan areas by December 31, 1998. Number portability is available
in all of our required markets. While number portability benefits our
competitive local exchange carrier operations, it represents a burden to Valley
Telephone and Interstate Telephone. At this time, we are unable to predict the
impact, if any, of possible number portability delays or complications in our
service territories.
98
<PAGE> 102
Universal Service and Access Charge Reform. The FCC has adopted rules
implementing the universal service requirements of the Telecommunications Act of
1996. Pursuant to those rules, all telecommunications providers must contribute
a small percentage of their telecommunications revenues to a newly established
Universal Service Fund. There is an exemption for providers whose contribution
would be less than $10,000 in a particular year. Interstate Telephone and Valley
Telephone presently contribute to the fund, and we expect that KNOLOGY Holdings
will be required to start contributing in 2000. We can not be certain whether we
will be able to either recover the costs of fund contributions from our
customers or to receive offsetting fund disbursements.
The FCC presently is in the process of reducing access charges imposed by
telephone companies for origination and termination of long distance traffic. In
those areas where we use our own or our affiliated cable facilities for our
comprehensive local telephone operations, we are largely unaffected by local
telephone carriers' access charge fluctuations. However, overall decreases in
local telephone carriers' access charges as contemplated by the FCC's access
reform policies would likely put downward pricing pressure on our charges to
domestic interstate and international long distance carriers for comparable
access. Over time, statutory universal service funding obligations, coupled with
the FCC's new access charge regime, could adversely affect us by limiting our
ability to offset our fund contributions through higher charges to domestic
interstate and international long distance carriers for originating and
terminating interstate traffic over our cable facilities.
Regional Bell Operating Company Entry into Long Distance. The
Telecommunications Act of 1996 also establishes standards for regional Bell
operating companies and their affiliates to provide long distance
telecommunications services between a local access and transport area, or LATA,
and points outside that area. Local access and transport areas are geographical
regions in the United States within which a local telephone company may offer
local telephone service. In 1997, BellSouth filed applications with the FCC for
authority to offer in-region, or interLATA services in South Carolina and
Louisiana; in 1998, BellSouth filed a second application with the FCC for
authority to offer such services in Louisiana. In December 1997, the FCC
rejected the South Carolina application. The Louisiana applications were
rejected in February 1998 and October 1998, respectively. Notwithstanding these
decisions, BellSouth likely will file additional applications to offer interLATA
services for other states in its territory, including states in which we provide
these services. Because of its existing base of local telephone service
customers and its extensive telecommunications network, we anticipate that
BellSouth will be a significant competitor in each of the states in which it
obtains in-region, interLATA authority from the FCC.
Additional Requirements. The FCC imposes additional obligations on all
telecommunications carriers, including obligations to:
- interconnect with other carriers and not to install equipment that cannot
be connected with the facilities of other carriers;
- ensure that their services are accessible and usable by persons with
disabilities;
99
<PAGE> 103
- provide telecommunications relay service either directly or through
arrangements with other carriers or service providers, which service
enables hearing impaired individuals to communicate by telephone with
hearing individuals through an operator at a relay center;
- comply with verification procedures in connection with changing a
customer's carrier;
- protect the confidentiality of proprietary information obtained from
other carriers, manufacturers and customers;
- pay annual regulatory fees to the FCC; and
- contribute to the Telecommunications Relay Services Fund.
Forbearance. The Telecommunications Act of 1996 permits the FCC to
forbear from requiring telecommunications carriers to comply with certain
regulations. Specifically, the Act permits the FCC to forbear from applying
statutory provisions or regulations if the FCC determines that:
- enforcement is not necessary to protect consumers;
- a carrier's terms are reasonable and nondiscriminatory;
- forbearance is in the public interest; and
- forbearance will promote competition.
The FCC has exempted certain carriers from tariffing and reporting requirements
pursuant to this provision of the Telecommunications Act of 1996. The FCC may
take similar action in the future to reduce or eliminate other requirements.
Such actions could free us from regulatory burdens, but also might increase the
pricing flexibility of our competitors.
Advanced Services and Collocation. Section 706 of the Telecommunications
Act of 1996 requires the FCC to encourage the deployment of advanced
telecommunications capabilities to all Americans through the promotion of local
telecommunications competition. Recently, the FCC adopted rules designed to
improve competitor access to incumbent local telephone carriers collocation
space and to reduce the delays and costs associated with collocation.
Collocation is the placement of equipment by another telephone company alongside
another telephone company's equipment along a network. The FCC has taken future
steps to facilitate competitors' access to lines connecting customer premises to
the operator for purposes of digital subscriber line deployment. Specifically,
the FCC required incumbent local exchange carriers like Bell South, to permit
unaffiliated providers of digital subscriber line services to use a portion of
the lines connecting customer premises to the operator used for basic telephone
service rather that purchasing new lines. Having better collocation arrangements
at incumbent local exchange carriers' main facilities housing telephone network
equipment benefits our competitive local exchange operations. However, the FCC's
advanced services proceeding, inasmuch as it primarily benefits digital
subscriber line providers who compete
100
<PAGE> 104
directly with our broadband communications service offerings, may prove on
balance to have an adverse competitive effect on us.
State Regulation of Telecommunications Services
The Telecommunications Act of 1996 contains provisions that prohibit states
and localities from adopting or imposing any legal requirement that may
prohibit, or have the effect of prohibiting, market entry by new providers of
interstate or intrastate telecommunications services. The FCC is required to
preempt any such state or local requirement to the extent necessary to enforce
the Telecommunications Act of 1996's open market entry requirements. State and
localities may, however, continue to regulate the provision of intrastate
telecommunications services and require carriers to obtain certificates or
licenses before providing service.
Alabama, Georgia, Florida, and South Carolina each have adopted statutory
and regulatory schemes that require us to comply with telecommunications
certification and other regulatory requirements. To date, we are authorized to
provide intrastate local telephone, long distance telephone and operator
services in Alabama, Georgia, Florida and South Carolina. In addition, we have
executed local network interconnection agreements with BellSouth for the
transport and termination of local telephone traffic. These agreements have been
filed with, and approved by, the applicable regulatory authority in each state
in which we conduct our operations. As a condition of providing intrastate
telecommunications services, we are required, among other things:
- to file and maintain intrastate tariffs or price lists describing the
rates, terms and conditions of our services;
- to comply with state regulatory reporting, tax and fee obligations; and
- to comply with, and to submit to, state regulatory jurisdiction over
consumer protection policies, complaints, transfers of control and
certain financing transactions.
Generally, state regulatory authorities can condition, modify, cancel, terminate
or revoke certificates of authority to operate in a state for failure to comply
with state laws or the rules, regulations and policies of the state regulatory
authority. Fines and other penalties may also be imposed for such violations.
Valley Telephone and Interstate Telephone are subject to additional
requirements under state law, including rate regulation and quality of service
requirements. In Alabama, both Valley Telephone and Interstate Telephone are
subject to a price cap form of rate regulation. Under price caps, the companies
have limited ability to raise rates for intrastate telephone services, but the
Alabama Public Service Commission does not regulate the rate of return earned by
the companies.
By order dated April 8, 1998, all local exchange carriers were required to
file intraLATA toll dialing parity plans, which outline how the local telephone
company will provide long distance telephone companies the ability to compete
with the local telephone company for local long distance services. Initially the
plans were to become
101
<PAGE> 105
effective on or before February 1999. By order dated June 25, 1998, the Alabama
Public Service Commission suspended certain requirements of Section 251(b) and
(c) of the Telecommunications Act of 1996, including dialing parity, for rural
incumbent local telephone carriers operating in Alabama, including Interstate
Telephone and Valley Telephone. The suspension extends through June 2001. Rural
local telephone carriers subject to the suspension were required to update the
Alabama Public Service Commission regarding their dialing parity plans by
October 1, 1999. Interstate Telephone and Valley Telephone have notified the
Alabama Public Service Commission that they intend to implement dialing parity
on or before the June 1, 2001 deadline; however, the actual implementation date
has not yet been determined.
On May 26, 1999, the Alabama Public Service Commission approved the dialing
parity plan of KNOLOGY of Alabama, Inc., a subsidiary of KNOLOGY Holdings. Under
the plan, KNOLOGY of Alabama will allow long distance carriers the ability to
provide long distance services in all local access areas within Alabama in which
it provides local telephone service using its own facilities. Any carrier
authorized by the Alabama Public Service Commission to carry local long distance
calls may request that KNOLOGY of Alabama allow it to provide long distance
services to its customers in Alabama provided that the carrier:
- has established, or has submitted firm, non-cancelable orders to
establish, direct interconnection of its network with KNOLOGY of Alabama;
- has ordered access services from KNOLOGY of Alabama that will permit the
carrier to receive long distance calls from KNOLOGY of Alabama; and
- has identified the local access and transport areas in which it desires
to receive local long distance calls.
A reasonable time for implementation will be necessary to allow KNOLOGY of
Alabama to make the necessary network, system and billing modifications to
implement the request. As of October 1, 1999, no long distance carrier had
requested the ability to provide long distance services from KNOLOGY of Alabama
in Alabama under its dialing parity plan.
Local Regulation
Occasionally we are required to obtain street use and construction permits
and franchises to install and expand our interactive broadband network using
state, city, county or municipal rights-of-way. Some municipalities where we
have installed or anticipate constructing networks require the payment of
license or franchise fees which are based upon a percentage of gross revenues or
on a per linear foot basis. The Telecommunications Act of 1996 requires
municipalities to manage public rights-of-way in a competitively neutral and
non-discriminatory manner.
EMPLOYEES
At September 30, 1999, we had 690 full-time employees. We consider our
relations with our employees to be good, and we structure our compensation and
benefit plans in
102
<PAGE> 106
order to attract and retain high caliber personnel. We will need to recruit
additional employees in order to implement our expansion plan, including general
managers for each new city and additional personnel for installation, sales,
customer service and network construction. We recruit from several major
industries for employees with skills in voice, video and data technologies. We
do not believe we will have problems retaining personnel with the necessary
qualifications.
PROPERTIES
We own or lease property in the following locations:
<TABLE>
<CAPTION>
LOCATION ADDRESS LEASE/OWN PRIMARY USE
- -------- ------- --------- -----------
<S> <C> <C> <C>
West Point, GA........ 1241 O.G. Skinner Drive Own Corporate Admin. Offices
West Point, GA........ 206 West 9th Street Lease Network Operations Center
Montgomery, AL........ 1450 Ann Street Lease Headend & Technical Offices
Columbus, GA.......... 1701 Boxwood Place Lease Admin. Offices & Headend
Panama City, FL....... 13200 P.C.B. Pkwy. Lease Admin. Offices & Headend
Augusta, GA........... 3714 Wheeler Road Own Admin. Offices & Headend
Charleston, SC........ 4506 Dorchester Road Own Admin. Offices and Headend
Huntsville, AL........ 2401 10th Street Own Admin. Offices and Headend
</TABLE>
In addition to these properties, we also hold operating leases for hub
sites along our network in each market. Our principal physical assets consist of
fiber optic and coaxial broadband network and equipment, located either at the
equipment site or along the network. Our distribution equipment along the
network is generally attached to utility poles we own or use under standard pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. Under our pole
attachment agreements, local public utilities and other pole owners rent us
space on utility poles to attach our network cables and equipment. The rate a
pole owner charges us for space varies, but the rate is generally based upon the
amount of space we rent. See "Business-Legislation and Regulation" for a
discussion of the FCC's regulation of pole attachment rates. Our franchises give
us rights of way for our network. The physical components of the networks
require maintenance and periodic upgrading to keep pace with technological
advances. We believe that our properties, taken as a whole, are in good
operating condition and are suitable for our business operations.
LEGAL PROCEEDINGS
In the normal course of business, we are subject to litigation. However, in
our opinion, there is no legal proceeding pending against us which would have a
material adverse effect on our financial position, results of operations, or
liquidity. We are also party to regulatory proceedings affecting the relevant
segments of the communications industry generally.
103
<PAGE> 107
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and
executive officers. These individuals include most of the members of management
of KNOLOGY Holdings who became our management when we became the holding company
for KNOLOGY Holdings and other companies. Our board will be divided into three
classes, with the initial members to serve for the periods indicated. We
anticipate that if the intended private offering of Series B preferred stock is
consummated, the holders of the Series B preferred stock will have the right to
elect two additional directors to our board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rodger L. Johnson.................................. 51 President, Chief Executive Officer
and Director (term on board
expiring 2002)
Robert K. Mills.................................... 36 Chief Financial Officer, Vice
President and Treasurer
Felix L. Boccucci, Jr. ............................ 42 Vice President of Business
Development
Anthony J. Palermo, Jr. ........................... 45 Vice President of Operations
Chad S. Wachter.................................... 33 Vice President, General Counsel and
Secretary
Thomas P. Barrett.................................. 53 Vice President of Information
Technology
Marcus R. Luke, Ph.D. ............................. 44 Chief Technology Officer
James T. Markle.................................... 40 Vice President of Network Operations
Bret T. McCants.................................... 40 Vice President of Network
Construction and Maintenance
Peggy B. Warner.................................... 48 Vice President of Marketing and
Carrier Sales
Campbell B. Lanier, III(1)......................... 49 Chairman of the Board
(term expiring 2002)
Richard Bodman..................................... 61 Director (term expiring 2000)
Alan A. Burgess(1)................................. 64 Director (term expiring 2001)
Donald W. Burton(2)................................ 55 Director (term expiring 2001)
L. Charles Hilton, Jr.(1).......................... 68 Director (term expiring 2000)
William H. Scott, III(2)........................... 52 Director (term expiring 2001)
Donald W. Weber(2)................................. 63 Director (term expiring 2002)
</TABLE>
- ---------------
(1) Member of the audit committee.
(2) Member of the compensation and stock option committee.
Rodger L. Johnson was named as our President and Chief Executive Officer
and as a director in October 1999. He has served as the President of KNOLOGY
Holdings since May 1999 and as its Chief Executive Officer and a director since
June 1999. Prior to joining KNOLOGY Holdings, Mr. Johnson had served as
President and Chief Executive Officer, as well as a Director, of Communications
Central Inc., a provider of
104
<PAGE> 108
coin-operated and inmate telephones, since November 1995. Prior to joining
Communications Central, Mr. Johnson served as the President and Chief Executive
Officer of JKC Holdings, Inc., a consulting company providing advice to the
information processing industry. In that capacity, Mr. Johnson also served as
the Chief Operating Officer of Infomed Systems, Inc., a publicly-held medical
software manufacturer. Mr. Johnson will retain his positions and continue to
serve both JKC Holdings, Inc. and Infomed Systems, Inc. in a more limited
management capacity for the immediately foreseeable future. Before founding JKC
Holdings, Inc., Mr. Johnson served for approximately eight years as the
President and Chief Operating Officer and as the President and Chief Executive
Officer of Brock Control Systems, Inc., a publicly-held sales and marketing
software provider.
Robert K. Mills has served as our Chief Financial Officer, Vice President
and Treasurer since November 1, 1999. He has worked for ITC Holding since
September 1999 as Vice President of Finance and Corporate Development. From 1994
to September 1999, Mr. Mills served as Vice President -- Treasurer and Strategic
Planning of Powertel, Inc., which provides wireless communications services. Mr.
Mills is a certified public accountant.
Felix L. Boccucci, Jr. has served as our Vice President of Business
Development since October 1999. He has served as Vice President of Business
Development of KNOLOGY Holdings since August 1997. He served as our Chief
Financial Officer, Treasurer and Secretary from November 1995 through August
1997. In addition, he currently serves as the Chief Financial Officer for
Interstate and Valley Telephone Companies. From October 1994 until December
1995, Mr. Boccucci served as Vice President Finance Broadband of ITC Holding.
Prior to such time, Mr. Boccucci worked for GTE Corporation, a
telecommunications company, which merged with Contel Corporation in March 1991.
From May 1993 to October 1994, he served as a Senior Financial Analyst for GTE.
From 1991 to 1993, Mr. Boccucci served as Financial Director for GTE's Central
Area Telephone Operations. From 1987 to 1991, he was the Assistant Vice
President controller in charge of Contel's Eastern Region Telephone Operations
comprising 13 companies in twelve states.
Anthony J. Palermo, Jr. has served as our Vice President of Operations
since July 1999. Prior to joining KNOLOGY, Mr. Palermo served as a consultant to
Nokia and Optima Technologies from November 1998 through July 1999. From
November 1995 to November 1998, Mr. Palermo was employed at Communications
Central, Inc., where he served as Vice President of Sales, Marketing, and
Operations. Prior to Communications Central, Inc. he spent six years at Brock
Control Systems as Vice President of Operations and Chief Operating Officer. Mr.
Palermo has also spent eleven years in the communications industry with AT&T
Long Lines and RCA-Cylix.
Chad S. Wachter has served as our Vice President, General Counsel and
Secretary since October 1999. He joined KNOLOGY Holdings as its General Counsel
and Secretary in August 1998. From April 1997 to August 1998, Mr. Wachter served
as Assistant General Counsel of Powertel, Inc., an affiliate of ITC that
operates cellular and
105
<PAGE> 109
PCS businesses. From May 1990 until April 1997, Mr. Wachter was an associate and
then a partner with Capell, Howard, Knabe & Cobbs, P.A. in Montgomery, Alabama.
Thomas P. Barrett has served as our Vice President of Information
Technology since October 1999. Prior to joining us, from July 1998 to September
1999, Mr. Barrett served as the President of Quintiles Americas. Quintiles
Americas is a division of Quintiles Inc., a pharmaceutical research company.
From January 1993 to June 1998, Mr. Barrett was employed by Perot Systems as an
account manager. He also served as the human resources director for a period of
time while at Perot Systems. From October 1992 to January 1993, Mr. Barrett
worked for General Research Corporation as an account manager for a software
development project. From August 1963 to September 1999, Mr. Barrett served in
the U.S. Army in a number of command and staff positions and achieved the rank
of Brigadier General.
Marcus R. Luke, Ph.D. has served as our Chief Technology Officer since
October 1999. He has served as the Chief Technology Officer of KNOLOGY Holdings
since August 1997. Prior to this he served as the Vice President of Network
Construction of KNOLOGY Holdings from November 1995 until August 1997, and
Director of Engineering of Cybernet Holding, L.L.C., from May 1995 until
November 1995. Prior to joining KNOLOGY Holdings, Dr. Luke served as Southeast
Division Construction Manager for TCI from July 1993 to May 1995. From July 1987
to June 1993, he served as Area Technical Manager for TCI's southeast area,
which included Montgomery. Dr. Luke worked for Storer Communications Inc. from
1985 to 1987 as Vice President of Engineering. Prior to 1985, he spent 12 years
in various engineering and management positions with Storer Communications Inc.
James T. Markle joined us in October 1999 as our Vice President of Network
Operations. He has served as Vice President of Network Operations for KNOLOGY
Holdings since March 1999. Prior to joining KNOLOGY Holdings, Mr. Markle was
employed by MindSpring Enterprises, Inc. where he served as the Executive Vice
President of Network Operations from March 1998 and as Vice President of Network
Operations from April 1995. Prior to joining MindSpring, from April 1994 until
April 1995, Mr. Markle served as the Director of Technical Support for Concert
Communications Co., a telecommunications company. From August 1990 to April
1994, Mr. Markle served as Senior Manager of Network Operations for MCI
Communications, a telecommunications company. Mr. Markle served in various
operation positions at SouthernNet/Telecom*USA, including Director of Operations
for a multistate region, from July 1985 until July 1990.
Bret T. McCants has served as our Vice President of Network Services since
October 1999. He has served as the Vice President of Network Services of KNOLOGY
Holdings since April 1997. Prior to joining KNOLOGY Holdings, Mr. McCants was a
co-founder of CSW Communications. From January 1996 to April 1997 he served as
CSW Communications, Director of Operations, and from 1994 to 1996, he
participated in the development and managed the deployment of voice, data and
interactive energy management equipment to homes in Laredo, Texas. Prior to
joining CSW Communications, Mr. McCants served in various capacities with
Central Power and Light Company
106
<PAGE> 110
including as Corporate Manager of Commercial and Small Industrial Marketing from
1992 to 1994, and as Business Manager from 1990 to 1992. From 1982 to 1990, Mr.
McCants held several positions in the Sales, Marketing and Engineering
departments at Central Power and Light Company.
Peggy B. Warner joined us as our Vice President of Marketing and Carrier
Sales in October 1999. She has been the Vice President of Marketing and Carrier
Sales of KNOLOGY Holdings since January 1998. Prior to joining KNOLOGY Holdings,
from February 1995 to December 1997, Ms. Warner held various positions at SCANA
Communications, Inc., including Manager Sales, Marketing and Customer Service
and General Manager. While at SCANA Communications, Inc., Ms. Warner was
responsible for the company's fiber optic carriers' carrier and 800 MHz trunked
radio lines of business. Prior to that time, from December 1993 to January 1994,
she was an Executive National Accounts Manager with MCI Telecommunications
Corporation where she developed and managed a nationwide Government Systems
regional sales organization. Ms. Warner also held various other sales and
marketing management positions with MCI between May 1986 and January 1995. She
was an Account Manager with AT&T Information Systems between January 1983 and
April 1986, and she held various sales positions with BellSouth prior to 1983.
Campbell B. Lanier, III has been one of our directors and our Chairman of
the Board since our inception. He has served as a director of KNOLOGY Holdings
since November 1995. Mr. Lanier serves as Chairman of the Board and Chief
Executive Officer of ITC Holding and has served as a director of ITC Holding
since the company's inception in 1989. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. Mr. Lanier also is Chairman of the
Board and a director of ITC*DeltaCom, Inc., which provides wholesale and retail
telecommunications services; Powertel, Inc., which provides wireless
communications services; MindSpring Enterprises, Inc., an Internet services
provider; and Vista Eyecare, Inc., a full service optical retailer. Mr. Lanier
has served as a Managing Director of South Atlantic Private Equity Fund, IV,
Limited Partnership since July 1997.
Richard Bodman has been one of our directors since December 1999. He has
been a director of KNOLOGY Holdings since June 1996. Mr. Bodman was elected to
KNOLOGY Holdings' board of directors pursuant to a stockholders' agreement under
which AT&T Venture Fund I, L.P. had the right to elect one director to KNOLOGY
Holdings' board. This stockholders' agreement terminated prior to the
distribution. Mr. Bodman is currently the Managing General Partner of AT&T
Venture Fund I L.P. From August 1990 to May 1996, Mr. Bodman served as Senior
Vice President of Corporate Strategy and Development for AT&T. Mr. Bodman also
is currently a director of the following public companies: Internet Security
Systems, Inc., Tyco International Inc. and Young and Rubicam Inc.
Alan A. Burgess has been one of our directors since December 1999. He has
served as a director of KNOLOGY Holdings since January 1999. From 1967 until his
retirement in 1997, Mr. Burgess was a partner with Andersen Consulting. Over his
thirty-year career he held a number of positions as Managing Partner, including
107
<PAGE> 111
Managing Partner of Regulated Industries from 1974 to 1989. In 1989 he assumed
the role of Managing Partner of the Communications Industry Group. In addition,
he served on Andersen Consulting's Global Management council and was a member of
the Partner Income Committee. Mr. Burgess is also the Chief Financial Officer of
Seventh Wave Technologies, Inc.
Donald W. Burton has been one of our directors since December 1999. He has
been a director of KNOLOGY Holdings since January 1996. Since January 1981, he
has served as Managing General Partner of South Atlantic Venture Fund I, II and
III, Limited Partnerships and Chairman of South Atlantic Private Equity Fund IV,
Limited Partnership. Mr. Burton has been the general partner of The Burton
Partnership, Limited Partnership since October 1979. Since January 1981, he has
served as President of South Atlantic Capital Corporation. Mr. Burton also
serves on the board of directors of several ITC companies, including ITC
Holding, ITC*DeltaCom, Inc. and Powertel, Inc. He is a director of the Heritage
Group of Mutual Funds and several private companies. Mr. Burton also serves as a
director of the National Venture Capital Association.
L. Charles Hilton, Jr. has been one of our directors since December 1999.
He has served as a director of KNOLOGY Holdings since KNOLOGY Holdings acquired
the beach cable system in Panama City, Florida in December 1997. Mr. Hilton was
the founder and sole stockholder of Beach Cable, Inc., and served as its Chief
Executive Officer from 1991 to December 1997. Since 1958, Mr. Hilton has served
as Chairman and Chief Executive Officer of Gulf Asphalt Corporation, a general
construction firm. Mr. Hilton has been a partner in the law firm of Hilton,
Hilton, Kolk & Roesch since 1984, and currently serves as Chief Executive
Officer of Hilton, Inc., a family corporation which owns and operates various
commercial buildings in Bay County, Florida. He also is a member of the board of
directors of several private companies.
William H. Scott, III has been one of our directors since our inception,
and he has served as a director of KNOLOGY Holdings since November 1995. He has
served as President of ITC Holding since December 1991 and has been a director
of ITC since May 1989. He also is an officer and director of several other ITC
Holding subsidiaries. In addition, Mr. Scott is a director of Powertel Inc.,
ITC*DeltaCom, Inc., MindSpring Enterprises, Inc., Innotrac Corporation, which
provides customized technology-based marketing support services, HeadHunter.NET,
Inc., a company providing online recruiting services to employers, recruiters,
and job-seekers, and nFront, Inc., a provider of full-service Internet banking
solutions for community banks.
Donald W. Weber has been one of our directors since December 1999. He has
served as a director of KNOLOGY Holdings since August 1998. Since 1997, Mr.
Weber has been a consultant and private investor. Since 1995, Mr. Weber served
as President and Chief Executive Officer of ViewStar Entertainment Services,
Inc., a digital satellite services company. From 1987 to 1991, Mr. Weber held
various executive positions, including President and Chief Executive Officer,
and served as a director of Contel Corporation, a telecommunications company.
Currently, Mr. Weber serves as director of
108
<PAGE> 112
Powertel, Inc., HeadHunter.NET, Inc., Pegasus Communications Corporation, a
media and communications company and HIE, Inc., a health care software provider.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board currently has two committees, the audit committee and the
compensation and stock option committee.
The audit committee, among other things:
- recommends the firm to be appointed as independent accountants to audit
our financial statements;
- discusses the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants our
interim and year-end operating results;
- considers the adequacy of our internal accounting controls and audit
procedures; and
- reviews the non-audit services to be performed by the independent
accountants.
The members of the audit committee are Messrs. Hilton, Burgess and Lanier.
The compensation and stock option committee reviews and recommends the
compensation arrangements for management and administers our stock option plans.
The members of the compensation and stock option committee are Messrs. Scott,
Weber, and Burton.
109
<PAGE> 113
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 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 7,050
President & 1998 -- -- -- --
Chief Executive
Officer(4)
William E. Morrow........ 1999 $160,577 $36,877 600,000 $ 2,400
Former President & 1998 134,539 76,800 420,000 8,014
Chief Executive 1997 102,462(5) 22,602 180,000 24,526
Officer
Felix L. Boccucci, Jr.... 1999 $111,252 23,949 34,120 4,800
Vice President of 1998 98,250 33,385 30,000 --
Business 1997 92,430 9,473 -- 36,159(7)
Development(6)
Bret T. McCants.......... 1999 $115,962 $25,198 94,824 $ 4,800
Vice President of 1998 101,494 29,926 120,000 5,041
Network Construction 1997 58,847(8) 21,177 42,000 35,535
and Maintenance
Marcus R. Luke........... 1999 107,309 23,925 28,120 4,800
Chief Technology 1998 97,307 31,275 90,000 4,800
Officer 1997 90,292 6,102 -- 5,111
Peggy B. Warner.......... 1999 110,963 23,502 34,120 4,800
Vice President of 1998 106,396 8,775 150,000 4,400
Marketing and Sales
</TABLE>
- ---------------
(1) As noted above, all of the named executive officers were initially employed
by KNOLOGY Holdings, Inc. The compensation table reflects the compensation
earned from KNOLOGY Holdings.
(2) All options are exercisable for shares of our common stock and reflect the
4:1 exchange ratio of the exchange of KNOLOGY Holdings capital stock for our
capital stock in November 1999.
(3) Includes car allowances, relocation expenses and premiums on life insurance.
(4) Mr. Johnson has served as the president of KNOLOGY Holdings since May 1999
and as its chief executive officer since June 1999.
(5) Reflects amounts paid to Mr. Morrow based on an annual salary rate of
approximately $120,000.
(6) Mr. Boccucci served as chief financial officer, treasurer and secretary of
KNOLOGY Holdings from November 1995 through August 1997.
110
<PAGE> 114
(7) Includes grants of ITC Holding capital stock valued at $30,789 at the time
of grant.
(8) Reflects amounts paid to Mr. McCants based on an annual salary rate of
approximately $90,000.
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.
1999 LONG-TERM INCENTIVE PLAN
Our board and shareholders approved the KNOLOGY, Inc. 1999 long-term
incentive plan in November 1999. The purpose of the plan is to promote our
success by linking the personal interests of employees, officers and directors
to those of our shareholders. Under our plan, we may grant to our employees,
officers and directors, and those of our subsidiaries, incentive or
non-qualified stock options, stock appreciation rights, performance units,
restricted stock, dividend equivalents, other stock-based awards, or any other
right or interest relating to our stock or cash. The plan authorizes the
issuance of up to 8,000,000 shares of common stock pursuant to awards. The
maximum number of shares of common stock with respect to one or more options
and/or stock appreciation rights that may be granted during any one calendar
year to
111
<PAGE> 115
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 shareholder approval; but it may condition any amendment on the
approval of shareholders if deemed advisable for tax, securities law or other
reasons. No termination or amendment of our plan may adversely affect any
outstanding award without the written consent of the participant. No awards have
yet been granted or approved for grant under our plan.
112
<PAGE> 116
The following table sets forth the information concerning individual grants
of stock options by KNOLOGY Holdings during the fiscal year ended December 31,
1999 to each of the named executive officers during such periods and reflects
the conversion into our options. No stock appreciation rights have been granted.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING FAIR
OPTIONS EXERCISE MARKET
NAME GRANTED PRICE GRANT DATE EXPIRATION DATE VALUE(2)
---- ---------- -------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Rodger L. Johnson.............. 1,020,000 $2.8325 February 3, 1999 February 3, 2009 $4,845,000
President & Chief Executive 980,000 $2.8325 August 4, 1999 August 4, 2009 $4,655,000
Officer
William E. Morrow.............. 600,000 $2.8325 February 3, 1999 February 3, 2009 $2,850,000
Former President and Chief
Executive Officer
Felix L. Boccucci, Jr. ........ 14,120 $2.8325 February 3, 1999 February 3, 2009 $ 67,070
Vice President of Business 20,000 $2.8325 August 4, 1999 August 4, 2009 $ 95,000
Development
Bret T. McCants................ 14,824 $2.8325 February 3, 1999 February 3, 2009 $ 70,414
Vice President of Network 80,000 $2.8325 August 4, 1999 August 4, 2009 $ 380,000
Construction and
Maintenance
Marcus R. Luke................. 14,120 $2.8325 February 3, 1999 February 3, 2009 $ 67,070
Chief Technology Officer 14,000 $2.8325 August 4, 1999 August 4, 2009 $ 66,500
Peggy B. Warner................ 14,120 $2.8325 February 3, 1999 February 3, 2009 $ 67,070
Vice President of Sales and 20,000 $2.8325 August 4, 1999 August 4, 2009 $ 95,000
Marketing
</TABLE>
- ---------------
(1) All options are exercisable for shares of common stock and are granted under
the stock option plan. All option share numbers reflect the 4:1 exchange
ratio of the exchange of KNOLOGY Holdings capital stock for our capital
stock in November 1999. Such options generally vest over five years unless
such person's employment is terminated, in which case options that have not
vested at that time will terminate.
(2) The $4.75 fair market value was determined by our board based upon the value
implicit in the November 1999 exchange transactions described under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Overview" and the expected price of our stock in the
private placement.
We issued a total of 3,941,444 options to our executive officers and
directors. We issued an additional 483,932 options to 328 of our employees in
1999.
113
<PAGE> 117
AGGREGATED OPINIONS/SARS EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END($)(1)
SHARES
ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE # VALUE REALIZED # UNEXERCISABLE UNEXERCISABLE
---- ----------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Rodger Johnson.................. -- -- 0/2,000,000 $ 0/9,500,000
William E. Morrow............... -- -- 90,000/1,110,000 $427,500/5,272,500
Felix L. Boccucci............... -- -- 52,854/77,334 $ 251,056/367,336
Brett McCants................... -- -- 21,000/235,824 $ 99,750/1,120,164
Marcus R. Luke.................. 4,000 19,000 16,496/123,244 $ 78,356/585,409
Peggy B. Warner................. -- -- 0/184,120 $ 0/874,570
</TABLE>
- ---------------
(1) The value of the options is based upon a market price of $4.75 per share.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Marcus R. Luke is the only named executive officer who exercised stock
options during the fiscal year ended December 31, 1999.
COMPENSATION OF DIRECTORS
Our directors do not receive directors' fees. Directors are reimbursed for
their reasonable out-of- pocket travel expenditures. Our directors are also
eligible to receive grants of stock options under our stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of our compensation and stock option committee are
Messrs. Scott, Weber and Burton. Each of these members serves as a director or
executive officer of ITC Holding. We have engaged in, or have ongoing, several
transactions with ITC Holding or its affiliates, as discussed below under the
caption "Certain Transactions and Relationships."
114
<PAGE> 118
CERTAIN TRANSACTIONS AND RELATIONSHIPS
We were formed in 1998 by ITC Holding Company, Inc. As of November 30,
1999, ITC Holding, through a wholly-owned subsidiary named InterCall, Inc.,
owned approximately 43.2 million shares of our Series A preferred stock, which
represented an ownership interest in our company of 90%.
We own 100% of KNOLOGY Holdings, and 100% of certain other companies,
including Interstate Telephone Company, Valley Telephone Company Globe
Telecommunications and ITC Globe. Before we owned them, each of these companies
was owned separately by ITC Holding. ITC Holding determined that KNOLOGY
Holdings and these other companies have parallel growth in the same markets and
that combining their businesses would enhance their ability to take advantage of
the opportunities in these markets. To accomplish this, ITC Holding formed us
and, in November 1999, contributed these companies to us along with certain
other related assets.
KNOLOGY Holdings is our principal subsidiary. ITC Holding formed KNOLOGY
Holdings in 1995. ITC Holdings' percentage ownership in KNOLOGY Holdings fell
below 50% in 1996, but it subsequently reacquired stock in the company, and by
November 1999, it owned 85% of KNOLOGY Holdings which it contributed to us. At
approximately the same time, we offered to exchange our stock for the remaining
stock of KNOLOGY Holdings, as a result of which we now own 100% of KNOLOGY
Holdings. These transactions are described in greater detail below.
ITC Holding is a diversified telecommunications company that owns interests
in many companies that have businesses similar to ours. Because of our
relationship with ITC Holding, we are affiliated with certain of these
companies. Some of them, such as ITC*DeltaCom, Inc. and MindSpring Enterprises,
Inc., provide us with and/or receive from us services and products. We have
described the nature and amount of the business that we do with affiliated
companies in greater detail below.
We have adopted a policy requiring that any material transactions between
us and others affiliated with our officers, directors or principal stockholders
be on terms no less favorable to us than reasonably could have been obtained in
arm's-length transactions with independent third parties.
TRANSACTIONS WITH ITC COMPANIES
Certain of our directors and officers hold or held the following positions
with companies that are affiliated with us:
- Campbell B. Lanier, III, who serves as the Chairman of our board of
directors, also serves as Chairman of the Board and Chief Executive
Officer of ITC Holding Company and all of its subsidiaries including
InterCall, and is also a director of companies that were formerly
subsidiaries of ITC Holding, such as ITC*DeltaCom, MindSpring
Enterprises and Powertel.
- William H. Scott, III, one of our directors, serves as President,
Chief Operating Officer and a director of ITC Holding and all of its
subsidiaries
115
<PAGE> 119
including InterCall, and is also a director of companies that were
formerly subsidiaries of ITC Holding, such as ITC*DeltaCom,
MindSpring Enterprises and Powertel.
- Donald W. Burton, one of our directors, is a director of ITC Holding,
ITC*DeltaCom and Powertel.
- Donald W. Weber, one of our directors, is a director of Powertel.
- Richard Bodman, one of our directors, is the managing general partner
of AT&T Ventures, which controls the AT&T venture funds that own
approximately 9.3% of our company.
- Felix Boccucci, our Vice President of Business Development, served as
an executive officer of ITC Holding prior to October 1997.
We are affiliated with all of these companies, and we have a business
relationship with some of them, as described in detail below.
As of December 31, 1998, Campbell B. Lanier, III beneficially owned
approximately 23% of the common stock of ITC Holding, and William Scott and
Donald Burton beneficially owned approximately 1% and 8%, respectively, of the
common stock of ITC Holding. Most of our other officers, directors and
stockholders also own stock in ITC Holding and, as such, they will all receive
the same amount of stock on a pro rata basis in the distribution as the rest of
the ITC Holding stockholders.
Certain affiliated companies provide us with various services and/or
receive services provided by us. We feel that our transactions with these
affiliated companies are representative of arms' length transactions.
ITC*DeltaCom provides us with wholesale long-distance and related services
and leases capacity to us on certain of its fiber routes. In 1996, 1997 and
1998, these services were worth $482,194, $589,011 and $1,213,533, respectively.
During those years, our company provided ITC*DeltaCom with local and long
distance telephone, programming and other services worth $525,368, $386,842 and
$639,568, respectively. For the first nine months of 1999, we received services
from and provided services to ITC*DeltaCom worth $1,377,363 and $685,907,
respectively. We received these services from ITC*DeltaCom pursuant to an
agreement which expires in May 2000. After the distribution, ITC*DeltaCom will
continue to provide us and certain of our subsidiaries with telecommunications
services in accordance with one-year contracts that we have entered into in
1999. As of March 15, 1999, Mr. Lanier owned approximately 16% of ITC*DeltaCom.
Messrs. Lanier and Scott serve as executive officers and directors of
ITC*DeltaCom and Mr. Burton serves as a director of ITC*DeltaCom.
We received cellular services in 1996, 1997 and 1998 worth $137,389,
$118,064 and $342,696, respectively, from Powertel, Inc., and we leased fiber
cables to Powertel during this time worth $572,659, $519,956 and $593,221. For
the first nine months of 1999, we received services from and leased cables to
Powertel worth $486,522 and $541,857, respectively. We lease these fiber cables
to Powertel pursuant to a fiber lease agreement
116
<PAGE> 120
which expires in April 2000. As of March 12, 1999, ITC Holding owned
approximately 27.5% of Powertel.
We provided services to InterCall, our parent company prior to the
distribution and a wholly-owned subsidiary of ITC Holding, in 1996, 1997 and
1998 worth $449,861, $477,405 and $737,204, respectively. For the first nine
months of 1999, we provided services to InterCall worth $535,110. We provide
these services to InterCall pursuant to an agreement which expires in July 2004.
In 1996, 1997 and 1998, we provided local Internet transport services to
MindSpring Enterprises, Inc., a national Internet access provider, worth
$68,104, $132,524 and $216,049, respectively. For the first nine months of 1999,
we provided services to MindSpring worth $226,885. We provide these services to
MindSpring pursuant to an Internet transport agreement which expires in July
2001. As of December 31, 1998, ITC Holding, through InterCall, owned
approximately 18.8% of MindSpring.
We lease pole space from South Carolina Electric & Gas Co., an affiliate of
SCANA Communications which is one of our stockholders and was a principal
investor in KNOLOGY Holdings in the past, as discussed below. We lease this pole
space pursuant to a one year pole attachment agreement that expires in January
2000. We expect to renew this agreement in January 2000. For the first nine
months of 1999, we paid $808,448 under this agreement.
In 1998, we purchased fiber optic cables from SCANA Communications for a
total purchase price of $306,530.
We lease fiber optic cables from SCANA Communication pursuant to two
operating leases agreement entered into in the fourth quarter of 1998. The terms
of the leases are 15 and 20 years. We expect to pay $87,000 per year to SCANA
under both leases. For the first nine months of 1999, we paid $65,700 under
these agreements.
In November 1999, we entered into a services agreement and a related
support agreement with a wholly-owned subsidiary of ITC Holding named ITC
Service Company under which we agree to provide human resources, information
technology and other services to ITC Service Company and under which ITC Service
Company agrees to lease storage space as needed and provide certain
administrative services to us. We expect to be paid approximately $60,000 per
year for services provided by us, and we expect to pay a substantially smaller
amount for services that ITC Service Company provides to us, under these
agreements. The agreements have no expiration date, but may be terminated on 30
days' notice by either party.
We granted ITC Service Company a right of first refusal and option to lease
fiber along our network in certain locations in Georgia and Alabama pursuant to
an agreement which expires in 2009. ITC Service Company paid us a one-time fee
of $50,000 for this option and right of first refusal. ITC Service Company has
not exercised the option or the right of first refusal.
ITC Holding occasionally provides certain administrative services, such as
legal and tax-planning services, for us. The costs of these services are charged
to us based
117
<PAGE> 121
primarily on the salaries and related expenses for certain ITC Holding
executives and an estimate of their time spent on projects for us. For the year
ended December 31, 1998, KNOLOGY Holdings recorded $3,230,000 in selling,
operations, administrative and rent expenses related to these services. We feel
that the methodology used to calculate the amounts charged is reasonable.
Our insurance provider is J. Smith Lanier & Co. Mr. Lanier's brother and
uncle are principal owners of this insurance placement company, both of whom, as
stockholders in ITC Holding, will receive the same pro rata amount of our Series
A preferred stock in the distribution as the other ITC Holding stockholders. In
1996, 1997 and 1998 this company charged us approximately $222,000, $221,000 and
$628,000, respectively, for insurance services.
We leased office space in 1998 and part of 1999 to ITC*DeltaCom, for which
we received $122,000 and $40,000, respectively, in lease payments. We no longer
lease space to ITC*DeltaCom.
We lease space to Powertel pursuant to a 10-year lease which expires in
2005. In 1998, we received $112,200 in lease income under this agreement. For
the first nine months of 1999, we received $84,150 in lease income under this
agreement.
In 1997, our subsidiaries Interstate Telephone and Valley Telephone paid
$4.2 million in dividends to ITC Holding. In 1998, Interstate Telephone paid
$1.4 million in dividends to ITC Holding.
Effective August 1998, upon the acquisition by ITC Holding if its
majority-owned interest of KNOLOGY Holdings, we participated in a tax sharing
agreement with ITC Holding. The tax sharing agreement allows ITC Holding to
include our results in a consolidated federal income tax return. Based upon our
taxable losses being included in the consolidated tax return, we have recorded
income tax benefits for $5.6 million and $11.0 million for the year ended
December 31, 1998 and the nine months ended September 30, 1999, respectively.
In October 1999, a subsidiary of ITC Holding agreed to lend up to $13
million to KNOLOGY Holdings under a line of credit which matured on the earlier
of November 16, 2002 or one day after the commitment under KNOLOGY Holdings'
existing credit facility is reduced to zero. Interest accrued on the loan at a
rate of 11 3/4% per year. This loan was subordinate to the senior secured credit
facility KNOLOGY Holdings has with First Union National Bank and First Union
Capital Markets. In November 1999, we borrowed $9.6 million under this line of
credit. In accordance with the terms of the loan, the ITC Holding subsidiary
immediately converted this loan into shares of our Series A preferred stock at a
price per share of $4.75, at which time the line of credit terminated.
In November 1999, we acquired KNOLOGY Holdings, Interstate Telephone,
Valley Telephone, Globe Telecommunications and ITC Globe from ITC Holding. ITC
Holding contributed to us stock representing approximately 85% of the
outstanding equity of KNOLOGY Holdings, stock representing 100% of each of
Interstate Telephone, Valley Telephone, Globe Telecommunications and ITC Globe,
272,832
118
<PAGE> 122
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 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.
The tax separation agreement that we entered into with ITC Holding will
continue after the distribution. The purpose of the tax separation agreement is
to allocate the risk of potential adverse tax consequences stemming from the
distribution. We do not anticipate any adverse tax consequences, but any adverse
tax consequences that do occur could be material. This agreement and the
possible adverse tax consequences are discussed under the caption "The
Distribution -- Material Federal Income Tax Consequences of the
Distribution -- Tax Separation Agreement".
SALES OF CAPITAL STOCK
In December 1995 and January 1996, in connection with its initial
capitalization, KNOLOGY Holdings issued to certain investors, including ITC
Holding, SCANA Communications, Inc. and South Atlantic Venture Fund III, 7,780
shares of its preferred stock at a purchase price of $1,000 per share, for an
aggregate amount of $7,780,000. ITC Holding contributed $4,000,000 plus all of
its direct and indirect interests in Cybernet Holding, L.L.C. and in KNOLOGY of
Columbus, Inc. in exchange for shares of KNOLOGY Holdings preferred stock. SCANA
Communications is a communications subsidiary of SCANA Corporation, a
diversified utility company. South Atlantic represents a series of venture
capital funds. Mr. Burton is managing general partner of South Atlantic Venture
Fund I, II and III and is Chairman of South Atlantic Venture Fund, IV, and Mr.
Lanier is the managing general partner of South Atlantic Private Equity Fund,
IV.
119
<PAGE> 123
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
terminated prior to the distribution.
In May 1996, in connection with a private placement of its preferred stock,
KNOLOGY Holdings issued 10 shares of its preferred stock to ITC Holding and
9,302 shares of its preferred stock to new investors at a purchase price of
$1,200 per share, for an aggregate amount of $11,174,440. The new investors
included Century Telephone Enterprises, Inc., a regional communications company
that provides local exchange and cellular telephone services, and certain of the
AT&T venture funds, a series of venture capital funds. In connection with this
private placement, ITC Holding, the AT&T venture funds, KNOLOGY Holdings and
others entered into a stockholders' agreement, which was amended and restated as
of July 28, 1997. Pursuant to the agreement, all parties agreed to take all
action within their respective power as may be required, for as long as Century
Telephone Enterprises, Inc. or AT&T Venture Fund I, L.P. owned more than 5% of
KNOLOGY Holdings' equity securities, to elect one director designated by each
such 5% stockholder. Richard Bodman was elected to KNOLOGY Holdings' board of
directors pursuant to this arrangement. Mr. Bodman's term will expire in 2000.
Century Telephone does not presently have a representative on KNOLOGY Holdings'
board of directors. This stockholders' agreement terminated prior to the
distribution.
In February 1997, KNOLOGY Holdings issued 8,960 shares of preferred stock
to certain of its current stockholders for a purchase price of $1,200 per share,
for an aggregate amount of $10,752,000. As part of this private placement, ITC
Holding, Century Telephone, South Atlantic and the AT&T venture funds
contributed $4,302,000, $2,096,400, $1,000,800 and $1,416,000, respectively, in
exchange for such preferred stock.
In May 1997, KNOLOGY Holdings signed a letter of intent with SCANA
Communications, whereby SCANA agreed to provide KNOLOGY Holdings with a
revolving credit facility of up to $40.0 million for network construction and
working capital. The companies, however, never established this credit facility.
Beginning in June 1997, KNOLOGY Holdings borrowed an aggregate of $11.0 million
of principal plus accrued interest (approximately $305,300) from SCANA pursuant
to a promissory note. The note accrued interest at the rate of 12% per annum and
was payable upon demand after January 1, 1998. KNOLOGY Holdings repaid the
promissory note in October 1997 with a portion of the proceeds from the offering
and the private placement described below. In October 1999, KNOLOGY Holdings
issued to SCANA warrants to purchase 753 shares of KNOLOGY Holdings preferred
stock in connection with these loans. SCANA exercised these warrants in November
1999. The weighted average exercise price of the SCANA warrant is $1,500 per
share of preferred stock.
In October 1997, KNOLOGY Holdings issued approximately 21,400 shares of its
preferred stock to qualified investors in an equity private placement for a
purchase price
120
<PAGE> 124
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 acquisition valued at $1,500 per share. During 1998, 134 of these
shares were returned to KNOLOGY Holdings as part of a purchase price adjustment.
In January 1998, ITC Holding purchased from Century Telephone its preferred
stock of KNOLOGY Holdings. In July 1998, ITC Holding acquired shares of
preferred stock of KNOLOGY Holdings in exchange for $100 in cash and ITC Holding
common stock valued at $1,600 per share for each share of preferred stock of
KNOLOGY Holdings exchanged. ITC Holding purchased 21,551 shares of preferred
stock of KNOLOGY Holdings from several stockholders, including all of the
preferred stock owned by South Atlantic and SCANA Communications in the
exchange.
In November 1999, we completed an exchange with other KNOLOGY Holdings
stockholders, including AT&T venture funds and SCANA Communications, in which we
exchanged our common stock and preferred stock for KNOLOGY Holdings common stock
and preferred stock. Through this exchange offering, we acquired 7,113 shares of
Series A preferred stock of KNOLOGY Holdings from AT&T venture funds for
4,267,800 shares of our Series A preferred stock and 753 shares of our Series A
preferred stock of KNOLOGY Holdings from SCANA Communications for 451,800 shares
of our Series A preferred stock.
We expect to become a party to a stockholders agreement with the holders of
our Series B preferred stock upon the closing of the proposed private placement
of Series B preferred stock. Some large holders of our Series A preferred stock
are expected to become parties to that agreement, including Campbell B. Lanier
III, the chairman of our board of directors, SCANA Communications Holdings, Inc.
and American Water Works Company, Inc.
121
<PAGE> 125
The stockholders agreement is expected to provide that the two directors to
be elected by the holders of our Series B preferred stock, as provided in our
certificate of incorporation, will be designated by certain holders as long as
each such holder maintains at least 45% of its original investment in our
capital stock. Further, the stockholders agreement is expected to provide that
certain holders of our Series B preferred stock will have the right to appoint
board observers as long as each such holder maintains at least 25% of its
original investment. The agreement is also expected to provide certain rights to
each of the holders of at least 5% of our outstanding stock, including the right
of first refusal and co-sale rights in connection with proposed transfers of our
stock by other holders of at least 5% of our outstanding stock, as well as the
preemptive right to purchase its pro-rata share of 75% of any future offerings
of our equity securities in order to maintain its pro rata interest in us. The
stockholders agreement is also expected to provide 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.
The stockholders agreement is further discussed in our "Description of
Securities" section.
122
<PAGE> 126
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of November 30, 1999,
reflecting the November 1999 transaction in which, among other things, ITC
Holding and other stockholders of KNOLOGY Holdings exchanged their KNOLOGY
Holdings stock and certain other assets for stock in our company, and
immediately following the distribution regarding beneficial ownership of our
voting capital stock by:
- each person known by us to beneficially own more than 5% of our
outstanding voting capital stock,
- each of our executive officers,
- each of our directors, and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each of the named individuals is c/o
KNOLOGY, Inc., 1241 O.G. Skinner Drive, West Point, Georgia 31833.
<TABLE>
<CAPTION>
PERCENT OF VOTING
CAPITAL STOCK(2)
AMOUNT AND NATURE OF AMOUNT AND NATURE OF ---------------------------------
NAME AND ADDRESS OF BENEFICIAL BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE AFTER
OWNER BEFORE DISTRIBUTION(1)(4) AFTER DISTRIBUTION(1)(3)(4) DISTRIBUTION(3) DISTRIBUTION(3)
- ------------------------------ ------------------------- --------------------------- --------------- ---------------
<S> <C> <C> <C> <C>
5% Shareholders
ITC Holding Company, Inc...
InterCall, Inc.(5)......... 43,211,531 -- 90% --
AT&T Venture Funds(6)...... 4,267,800(6) 4,267,800(6) 8.9 8.9%
SCANA Communications,
Inc. .................... 451,800 7,220,886 * 15.0
American Water Works
Company, Inc. ........... -- 3,813,402 -- 7.9
South Atlantic Private
Equity Funds(7).......... -- 3,536,632(7) -- 7.4
James O. Hayles(8)......... -- 2,846,641(8) -- 5.9
Carroll Lanier Hodges(9)... -- 3,124,315(9) -- 6.5
Elizabeth L. Lester(10).... -- 3,195,203(10) -- 6.7
Ellen L. Collins(11)....... -- 3,194,575(11) -- 6.7
Executive Officers
Felix L. Boccucci, Jr.(4)... 58,852(4) 81,728(4) * *
Marcus R. Luke(4).......... 39,420(4) 49,878(4) * *
James T. Markle............ -- -- -- --
Bret McCants(4)............ 25,800(4) 26,453(4) * *
Peggy A. Warner............ -- -- -- --
Robert K. Mills............ -- -- -- --
Thomas Patrick Barrett..... -- -- -- --
Rodger L. Johnson.......... -- -- -- --
Anthony J. Palermo......... -- -- -- --
Chad S. Wachter............ -- -- -- --
Directors
Campbell B. Lanier......... 41,181,807(12) 7,825,656(13) 90 16.1
Richard Bodman(6).......... 4,267,800(6) 4,267,800(6) 8.9 8.9
Donald W. Weber............ -- 41,275 -- --
Donald W. Burton(7)........ -- 3,542,630(7) -- 7.4
L. Charles Hilton, Jr. .... -- 376,453 -- *
William H. Scott, III...... 41,181,807(12) 1,373,843(14) 90 2.8
Alan A. Burgess............ -- -- -- --
Rodger L. Johnson.......... -- -- -- --
</TABLE>
123
<PAGE> 127
<TABLE>
<CAPTION>
PERCENT OF VOTING
CAPITAL STOCK(2)
AMOUNT AND NATURE OF AMOUNT AND NATURE OF ---------------------------------
NAME AND ADDRESS OF BENEFICIAL BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP BEFORE AFTER
OWNER BEFORE DISTRIBUTION(1)(4) AFTER DISTRIBUTION(1)(3)(4) DISTRIBUTION(3) DISTRIBUTION(3)
- ------------------------------ ------------------------- --------------------------- --------------- ---------------
<S> <C> <C> <C> <C>
All Named Executive Officers
and Directors as a Group (17
persons)................... 45,573,679 17,585,716 94.9% 36.6%
</TABLE>
- ---------------
* Less than 1%
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days from November 30, 1999. More
than one person may be deemed to be a beneficial owner of the same
securities. All persons shown in the table above have sole voting and
investment power, except as otherwise indicated. Except as otherwise noted,
all voting capital stock listed in the table above consists of our Series A
preferred stock.
(2) For the purpose of computing the percentage ownership of each beneficial
owner, any securities which were not outstanding but which were subject to
options, warrants, rights or conversion privileges held by such beneficial
owner exercisable within 60 days were deemed to be outstanding in
determining the percentage owned by such person, but were not deemed
outstanding in determining the percentage owned by any other person.
(3) The "After Distribution" information reflects the ITC Holding Company
distribution to its shareholders of its 43,211,531 shares of our Series A
preferred stock and the conversion of the $29.7 million loan from ITC
Holding into 6,258,036 options to purchase Series A preferred stock. The
"Before Distribution" information does not reflect the conversion of the
$29.7 million loan into options.
(4) Includes the following shares that the individuals named below have the
right to currently purchase or to purchase within 60 days from November 30,
1999 pursuant to options as follows:
<TABLE>
<CAPTION>
BEFORE AFTER
DISTRIBUTION DISTRIBUTION
------------ ------------
<S> <C> <C>
Felix L. Boccucci, Jr.(a)............................ 52,852(a) 74,422(a)
Marcus R. Luke(a).................................... 25,620(a) 36,078(a)
Bret McCants(a)...................................... 21,000(a) 21,653(a)
Donald W. Weber...................................... -- 41,275
Donald W. Burton..................................... -- 26,024
Campbell B. Lanier................................... -- 529,721
William H. Scott, III................................ -- 645,956
South Atlantic Funds (collectively).................. -- 25,118
Burton Partnership, Limited Partnership.............. -- 906
</TABLE>
(a) includes options to purchase common shares of 52,852, 25,620 and
21,000 for Mr. Boccucci, Mr. Luke and Mr. McCants, respectively.
(5) The address of ITC Holding, Inc. is 1239 O.G. Skinner Drive, West Point,
GA, and the address of InterCall, Inc. is 1211 O.G. Skinner Drive, West
Point, Georgia 31833. InterCall is a wholly-owned subsidiary of ITC
Holding.
(6) The address of each of the AT&T venture funds and of Mr. Bodman is 2
Wisconsin Circle, #610, Chevy Chase, Maryland 20815. Includes 325,800
shares owned by AT&T Venture Fund I, L.P., of which Venture Management I, a
general partnership, is the general partner, of which Mr. Bodman is the
managing general partner; 2,931,600 shares owned by AT&T Venture Fund II,
L.P., of which Venture Management, L.L.C. is the general partner, of which
Mr. Bodman is a manager; includes 153,600 shares owned by Special Partners
Fund, L.P., of which Venture Management III, L.L.C. is
124
<PAGE> 128
the general partner, of which Mr. Bodman is a manager; and includes 856,800
shares owned by Special Partners Fund International, L.P., of which the
investment general partner is Venture Management III, L.L.C., of which Mr.
Bodman is a manager. Each of the respective AT&T venture funds has sole
voting and investment power with respect to the shares beneficially owned
by such fund.
(7) The address of Mr. Burton and of each entity comprising South Atlantic is
614 West Bay Street, Suite 200, Tampa, Florida 33606. Includes 117,552
shares held of record by The Burton Partnership, Limited Partnership, of
which Mr. Burton is the sole general partner; 1,681,925 shares held by
South Atlantic Venture Fund III, Limited Partnership, of which South
Atlantic Venture Partners III, Limited Partnership is the sole general
partner, of which Mr. Burton is the managing partner; 870,528 shares held
by South Atlantic Private Equity Fund IV (QP), Limited Partnership, of
which Mr. Burton is a general partner; 591,099 shares held by South
Atlantic Private Equity Fund IV, Limited Partnership, of which Mr. Burton
is a general partner; and 206,266 shares held by South Atlantic Venture
Fund II, Limited Partnership, of which Mr. Burton is the managing partner.
Each of the respective South Atlantic funds has sole voting and investment
power with respect to the shares beneficially owned by such fund. Also
includes 49,236 shares held of record by four Burton Family trusts of which
Mr. Burton is trustee.
(8) Includes 19,620 shares held of record by two family trusts; 1,273,378
shares held of record by The Fredonia 1999 Annuity Trust; and 1,452,503
shares held of record by The 1997 Trust FBO Campbell B. Lanier IV, all
trusts of which Mr. Hayles is trustee. Also includes 50,570 shares held of
record by Mr. Hayles' wife.
(9) Includes 3,900 shares held of record by two members of Mrs. Hodges
immediate family; and 2,081,959 shares held of record by The James Smith
Lanier II Three Year Trust dated August 26, 1999, of which Mrs. Hodges is a
co-trustee.
(10) Includes 54,468 shares held of record jointly by Mrs. Lester and her
husband; 86,476 shares held of record by three members of Mrs. Lester's
immediate family, and 2,081,959 shares held of record by The James Smith
Lanier II Three Year Trust dated August 26, 1999, of which Mrs. Lester is a
co-trustee.
(11) Includes 54,468 shares held of record jointly by Mrs. Collins and her
husband; 72,214 shares held of record by three members of Mrs. Collins
immediate family; and 2,081,959 shares held of record by The James Smith
Lanier II Three Year Trust dated August 26, 1999, of which Mrs. Collins is
a co-trustee.
(12) These are the shares owned by InterCall, Inc., of which Messrs. Lanier and
Scott are directors. Messrs. Lanier and Scott disclaim beneficial ownership
of these shares.
(13) Includes 121,718 shares held of record by the Jane Lowery Zachry Hyatt
Lanier Trust, of which Mr. C. Lanier, III is trustee; 136,150 shares held
of record by The Campbell B. Lanier, Jr. Irrevocable Life Insurance Trust,
of which Mr. C. Lanier, III is trustee; 58,847 shares held of record by the
Lanier Family Foundation, of which Mr. C. Lanier, III is co-trustee; and
392 shares held of record by Mr. C. Lanier, III's wife.
(14) Includes 44,768 shares held of record by The Martha J. Scott, Trustee FBO
Mary Martha Scott U/A 6/26/91 Trust, of which Mr. Scott's wife is trustee;
2,831 shares held of record by two members of Mr. Scott's immediate family;
87,150 shares held of record by The Melissa H. Lanier 1997 GST Trust, of
which Mr. Scott is trustee; and 160,831 shares held of record by The
Campbell B. Lanier, III Charitable Remainder Trust.
125
<PAGE> 129
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is subject to the
provisions of our certificate of incorporation and our bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
We currently have 200,000,000 shares of common stock authorized and 2,476
shares of common stock outstanding. We currently have 175,000,000 shares of
preferred stock authorized of which 75,000,000 shares are designated as Series A
preferred stock and 50,000,000 shares are designated as Series B preferred
stock. We have 48,035,531 shares of Series A preferred stock outstanding and no
shares of Series B preferred stock outstanding.
COMMON STOCK
Voting Rights. Each holder of common stock is entitled to attend all
special and annual meetings of the stockholders of our company and, together
with the holders of all other classes of stock entitled to attend and vote at
such meetings, to vote upon any matter or thing properly considered and acted
upon by the stockholders. Holders of common stock are entitled to one vote per
share and vote as a single class.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, subject to the
provisions of our preferred stock, holders of common stock are entitled to
participate ratably on a per-share basis in all distributions to the holders of
our common stock in any dissolution, liquidation or winding up.
Dividends. Dividends and distributions may be paid on the common stock in
cash, property or securities, and the holders of our common stock will be
entitled to participate in such dividends and distributions ratably on a per
share basis. The rights of holders of our common stock to receive dividends and
distributions are subject to any provisions of any of our preferred stock
outstanding.
Transfer Restrictions. Any holder of shares of common stock that decides
to sell its shares of common stock must first offer those shares to us before it
can offer the shares to a third party. Our board of directors at its discretion
may waive or terminate the transfer restrictions. All transfer restrictions will
terminate upon a qualified underwritten public offering of our common stock,
which is an underwritten public offering
- with a per-share purchase price of at least $6.00;
- resulting in proceeds to us of at least $50 million prior to expenses and
underwriting commissions; and
- in which our common stock is listed for quotation on the Nasdaq National
Market or a national securities exchange.
126
<PAGE> 130
Redemption. All outstanding shares of our common stock are subject to
redemption if our board of directors determines such action should be taken to
prevent the loss or secure the reinstatement of a license or franchise held by
us or any of our subsidiaries and used to conduct business.
AUTHORIZED PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors to
issue, from time to time and without further stockholder action, except as
required by applicable law, one or more series of preferred stock, and to fix
the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights, conversion
privileges and other rights. The issuance of additional preferred stock may have
the effect of delaying, deferring or preventing a change in control of our
company without further action by the stockholders. Preferred stock issued with
voting, conversion or redemption rights may adversely affect the voting power of
the holders of common stock and existing series of preferred stock, and could
discourage attempts to obtain control of our company.
SERIES A PREFERRED STOCK
Voting Rights. Except as otherwise required by law, the holders of shares
of Series A preferred stock are entitled to attend all special and annual
meetings of the stockholders of our company and, together with the holders of
all other classes of stock entitled to attend and vote at such meetings, to vote
upon any matter or thing properly considered and acted upon by the stockholders.
Holders of Series A preferred stock will vote with holders of common stock on an
as-converted basis. In addition, holders of Series A preferred stock and Series
B preferred stock are entitled to a separate class vote on:
- the issuance of any additional Series A preferred stock;
- the creation of any class or series of capital stock with preference to
or on parity with the Series A preferred stock;
- the voluntary dissolution of our company; and
- any amendment to our certificate of incorporation or bylaws that would
materially adversely affect the preferences of the Series A preferred
stock.
Holders of Series A preferred stock and holders of Series B preferred stock,
which is expected to be issued in a private placement in the near future, are
entitled to vote together as a single class or as separate classes on any
merger, consolidation, recapitalization, liquidation, dissolution, winding-up or
sale of all or substantially all of our assets that constitutes a change of
control.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, following any
required prior distributions or payments for any other series of preferred
stock, the holders of shares of our Series A
127
<PAGE> 131
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
128
<PAGE> 132
greater than 5% stockholders have the right to sell their shares along with the
original selling stockholder on a pro rata basis.
SERIES B PREFERRED STOCK
The Series B preferred stock expected to be issued in the private placement
ultimately will have substantially the same rights, restrictions, preferences
and designations as our Series A preferred stock, other than the differences set
forth below.
Additional Voting Rights. Similar to the rights of the holders of Series
A preferred stock, the holders of Series B preferred stock are entitled to a
separate class vote on:
- the issuance of additional Series B preferred stock; and
- the creation of any class or series of capital stock with preference to
or on parity with the Series B preferred stock.
In addition to the other voting rights granted to holders of shares of
Series A preferred stock, holders of Series B preferred stock will be entitled
to a separate class vote on any redemption or redemptions of common stock or
preferred stock except for
- any redemption or redemptions approved by a director elected by the
holders of the Series B preferred stock; and
- any redemption or redemptions from employees or former employees
representing, in the aggregate, during any twelve-month period in which
such redemption or redemptions occur, not more than 1% of our outstanding
common stock on a fully-diluted basis.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up of our company, whether voluntary or involuntary, before any
distribution or payment is made to the holders of any other class or series of
our capital stock, the holders of shares of Series B preferred stock will be
entitled to receive, out of assets legally available for distribution to
stockholders, a liquidation value equal to the greater of:
- the initial per-share purchase price of $4.75, or
- the amount such holder would have received had his Series B preferred
stock been converted into common stock immediately before the liquidation
event.
If the distributable assets would be insufficient to pay cash in an amount
equal to the full Series B preferred stock liquidation distribution, then such
assets or the proceeds of such assets will be distributed among the holders of
Series B preferred stock ratably on a per share basis.
Board Seats. The holders of Series B preferred stock, voting together as
a separate class, have the right to elect two directors to our board of
directors. Under the stockholders' agreement expected to be entered into in
connection with the proposed private placement of the Series B preferred stock,
certain holders of our Series B preferred stock are expected to have the right
to appoint these two directors as long as each such holder maintains at least
45% of its original investment holding in our capital stock. Additionally, under
the stockholders agreement, certain holders of our Series B
129
<PAGE> 133
preferred stock are expected to have the right to appoint board observers as
long as each such holder maintains at least 25% of its original investment.
Preemptive Rights. We expect to enter into a stockholders' agreement with
the holders of Series B preferred stock and holders of shares of Series A
preferred stock who own shares other than as a result of the distribution. Under
that agreement, each party that is a holder of shares of Series B preferred
stock or Series A preferred stock that represent, on an as-converted basis, at
least 5% of our outstanding capital stock will have the right to purchase its
pro-rata share of 75% of any future offerings of our equity securities. This
right will not apply to issuances pursuant to employee benefit plans or
issuances for non-cash consideration.
Registration Rights. Under the stockholders' agreement mentioned above,
shares of common stock issued or issuable upon the conversion of Series A
preferred stock obtained other than as a result of the distribution and which
were not registered in connection with the distribution or Series B preferred
stock will have the benefit of various registration rights. Holders of such
preferred stock will have the right to require us to effect up to two
registrations on Form S-1 and unlimited registrations on Form S-3, each with
respect to at least 25% of our registrable stock, subject to our reasonable
deferral rights. Holders of such preferred stock also will have unlimited rights
to include shares in future registrations of stock by us or our own account or
the account of other selling stockholders. These rights to include shares in
future registrations will be subject to customary rights of KNOLOGY to exclude
the shares to the extent the managing underwriter determines that it would hurt
the distribution to which the registration relates. We will pay all expenses in
connection with these registrations other than underwriter discounts and
commissions. Approximately 21 million shares of Series B preferred stock and
approximately 48 million shares of Series A preferred stock will have the
benefit of these registration rights. A holder's registration rights will
terminate when all registrable securities beneficially owned by such holder
immediately may be sold under Rule 144(k) of the Securities Act of 1933, as
amended, or our common stock is listed on a national securities exchange or
traded on the Nasdaq market system.
OPTIONS
As of December 20, 1999, we had outstanding options to purchase 6,674,176
shares of our common stock. All of these options were granted under our stock
option plan. The weighted average exercise price of these options is $2.70. The
options will vest at different times between the current date and November 2004,
and each option terminates 10 years from the date of its issuance. The options
terminate upon the option holder's termination of employment. Further, the
options are immediately exerciseable upon the sale of KNOLOGY, unless our board
decides such acceleration is not in the best interests of KNOLOGY.
WARRANTS
As of December 3, 1999, we had outstanding 444,100 warrants, each of which
warrant entitles the warrant holder to purchase 2.2404 shares of our Series A
preferred
130
<PAGE> 134
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. The distribution will not
require us to offer to repurchase the warrants under the warrant agreement.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Certain provisions of the Delaware General Corporation Law, our certificate
of incorporation, our bylaws and our stock option plans may have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt. This may be true even in circumstances where
a takeover attempt might result in payment of a premium over market price for
shares held by stockholders.
Following the completion of the distribution, we will become subject to
Section 203 of the Delaware General Corporation Law. Section 203 prohibits,
subject to certain exceptions, a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder. A
business combination includes mergers, asset sales and other transactions that
may result in a financial benefit to stockholders. A person will be deemed an
interested stockholder triggering this protection if the person together with
any affiliates or associates of such person, beneficially owns, directly or
indirectly, 15% or more of our outstanding voting stock. There are three
exceptions to these provisions. First, if our board of directors gives prior
approval to either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder then the restrictions do not
apply. Second, the restrictions will not apply if, upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of our outstanding
voting stock. Finally, the restrictions will not apply if, at the time of or
following the consummation of the transaction in which the stockholder became an
interested stockholder, our board of directors approves the business combination
and stockholders holding at least 66 2/3% of our outstanding voting stock not
owned by the interested stockholder authorize the business combination.
We may issue 50,000,000 shares of undesignated preferred stock. Under
certain circumstances, the issuance of preferred stock could be utilized as a
method of discouraging, delaying or preventing a change in control of our stock.
The provisions of our certificate of incorporation and bylaws may have the
effect of delaying, deferring or preventing a non-negotiated merger or other
business combination involving us. These provisions are intended to encourage
any person interested in acquiring us to negotiate with and obtain the approval
of our board of directors in connection with the transaction. Certain of these
provisions may, however, discourage
131
<PAGE> 135
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. Anthony S. Harrington, a partner of Hogan & Hartson, currently
owns 80,768 shares of common stock of ITC Holding and will receive 87,986 shares
of our Series A preferred stock in the distribution. 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, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, and KNOLOGY Holdings, Inc. as of December
31, 1997 and July 31, 1998 and for each of the two years in the period ended
December 31, 1997 and the period ended July 31, 1998 included in this prospectus
and in the registration statement have been audited by Arthur Andersen LLP,
independent accountants, as indicated in their reports with respect thereto, and
are included in reliance upon the authority of said firm as experts in giving
said reports.
The financial statements of Cable Alabama Corporation as of August 31, 1998
and September 30, 1997 and for the eleven month period ended August 31, 1998 and
the year ended September 30, 1997 included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and have been so included in reliance upon the report of such
firm given on their authority as experts in accounting and auditing.
132
<PAGE> 136
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It
includes exhibits and schedules. This prospectus is part of the registration
statement. It does not contain all of the information that is in the
registration statement. The registration statement contains more information
about our company and our capital stock. Statements contained in this prospectus
concerning the provisions of documents filed as exhibits to the registration
statement are necessarily summaries of such documents. Each of these statements
is qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. You may read and copy all or any portion of the registration
statement at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room's
operations. The registration statement is also available to you on the SEC's
Internet site (www.sec.gov). We intend to furnish our stockholders with annual
reports containing financial statements audited by our independent accountants
and quarterly reports containing unaudited financial statements for the first
three quarters of each fiscal year.
133
<PAGE> 137
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KNOLOGY, INC.
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets -- December 31, 1997 and 1998
and September 30, 1999 (unaudited)........................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
1996, 1997 and 1998 and the Nine Months Ended September
30, 1999 (unaudited)...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
KNOLOGY HOLDINGS, INC.
Report of Independent Public Accountants.................... F-28
Consolidated Balance Sheets -- December 31, 1997 and July
31, 1998.................................................. F-29
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and the Period Ended July 31,
1998...................................................... F-30
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
1996, 1997 and the Period Ended July 31, 1998............. F-31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and the Period Ended July 31,
1998...................................................... F-32
Notes to Consolidated Financial Statements.................. F-33
CABLE ALABAMA CORPORATION
Report of Independent Public Accountants.................... F-49
Balance Sheets -- August 31, 1998 and September 30, 1997.... F-50
Statements of Operations and Deficit for the Period Ended
August 31, 1998 and the Year Ended September 30, 1997..... F-51
Statements of Cash Flows for the Period Ended August 31,
1998 and the Year Ended September 30, 1997................ F-52
Notes to Financial Statements............................... F-53
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Financial Information............................. F-56
Unaudited Consolidated Pro Forma Balance Sheet as of
September 30, 1999........................................ F-56
Unaudited Consolidated Pro Forma Statement of Operations for
the Period Ended September 30, 1999....................... F-58
Unaudited Pro Forma Statement of Operations for the Year
Ended December 31, 1998................................... F-59
</TABLE>
F-1
<PAGE> 138
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KNOLOGY, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY,
INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and 1998
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KNOLOGY,
Inc. and subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective August 1998, the
Company acquired a majority ownership interest in KNOLOGY Holdings, Inc. in a
business combination accounted for as a purchase. As a result of this
acquisition, the financial information for 1998 includes the accounts of KNOLOGY
Holdings, Inc. and, therefore, is not comparable to periods prior to the
acquisition.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 30, 1999
F-2
<PAGE> 139
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 626,902 $ 5,158,774 $ 21,199,977
Marketable securities...................................... 0 66,231,397 0
Accounts receivable, net of allowance for doubtful accounts
of $108,528 and $393,766 in 1997 and 1998,
respectively............................................. 3,660,359 8,774,536 9,674,793
Accounts receivable -- affiliates.......................... 0 6,785,691 8,636,849
Prepaid expenses........................................... 54,798 500,022 1,216,793
------------ ------------ ------------
Total current assets................................. 4,342,059 87,450,420 40,728,412
------------ ------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
System and installation equipment.......................... 27,924,111 188,753,702 250,696,942
Test and office equipment.................................. 1,038,956 8,539,784 11,384,537
Automobiles and trucks..................................... 765,114 3,777,458 5,327,864
Production equipment....................................... 0 857,028 924,274
Land....................................................... 300,975 2,750,244 2,750,244
Buildings.................................................. 641,563 10,902,460 13,424,846
Inventory.................................................. 255,225 32,417,006 26,097,032
Leasehold improvements..................................... 407,778 1,145,184 1,335,300
------------ ------------ ------------
31,333,722 249,142,866 311,941,039
Less accumulated depreciation and amortization............. (20,072,876) (37,257,198) (53,285,137)
------------ ------------ ------------
Property, plant, and equipment, net.................. 11,260,846 211,885,668 258,655,902
------------ ------------ ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net........................... 0 73,925,988 62,311,348
Investments................................................ 14,283,627 825,072 1,412,064
Other...................................................... 309,960 593,663 559,677
------------ ------------ ------------
Total assets......................................... $ 30,196,492 $374,680,811 $363,667,403
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.......................... $ 0 $ 25,094 $ 12,174
Accounts payable........................................... 2,804,112 8,877,925 16,050,716
Accounts payable -- affiliates............................. 132,329 248,306 347,203
Accrued liabilities........................................ 1,835,707 23,076,341 6,907,270
Advances from affiliates................................... 0 2,025,604 1,171,252
Unearned revenue........................................... 810,091 3,231,232 3,593,068
------------ ------------ ------------
Total current liabilities............................ 5,582,239 37,484,502 28,081,683
NONCURRENT LIABILITIES:
Notes payable.............................................. 0 109,150 19,116,496
Accrued interest payable................................... 0 21,036,541 35,825,088
Unamortized investment tax credits......................... 513,605 441,989 388,277
Deferred income taxes...................................... 560,473 321,658 321,658
Bonds payable, net of discount............................. 0 255,020,209 266,685,707
------------ ------------ ------------
Total liabilities.................................... 6,656,317 314,414,049 350,418,909
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
MINORITY INTEREST........................................... 0 3,267,653 0
------------ ------------ ------------
WARRANTS (NOTE 3)........................................... 0 2,486,960 2,486,960
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Series A Preferred stock, $.01 par value per share;
75,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 1997 and 1998 and September
30, 1999................................................. 0 0 0
Series B Preferred stock, $.01 par value per share;
50,000,000 shares authorized, 0 shares issued and
outstanding at December 31, 1997 and 1998 and September
30, 1999................................................. 0 0 0
Common stock, $.01 par value per share; 200,000,000 shares
authorized, 100 shares issued and outstanding at December
31, 1997 and 1998 and September 30, 1999................. 1 1 1
Additional paid-in capital................................. 20,358,995 75,312,104 75,312,104
Retained earnings (accumulated deficit).................... 3,181,179 (20,802,344) (64,526,921)
Unrealized gains (losses).................................. 0 2,388 (23,650)
------------ ------------ ------------
Total stockholders' equity........................... 23,540,175 54,512,149 10,761,534
------------ ------------ ------------
Total liabilities and stockholders' equity........... $ 30,196,492 $374,680,811 $363,667,403
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 140
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Telephone........................................ $17,527,208 $17,633,313 $ 22,318,344 $ 15,970,354 $ 21,236,214
Video............................................ 0 0 22,527,403 14,149,220 25,871,947
Internet services and other...................... 0 0 286,775 165,475 1,716,067
----------- ----------- ------------ ------------ ------------
Total operating revenues................... 17,527,208 17,633,313 45,132,522 30,285,049 48,824,228
----------- ----------- ------------ ------------ ------------
OPERATING EXPENSES:
Cost of services................................. 2,991,412 3,121,108 12,739,540 9,010,401 18,573,719
Selling, operations, and administrative.......... 8,331,795 9,498,461 37,323,345 24,256,479 35,760,116
Depreciation and amortization.................... 3,022,056 2,781,800 17,326,895 9,013,477 29,526,358
----------- ----------- ------------ ------------ ------------
Total operating expenses................... 14,345,263 15,401,369 67,389,780 42,280,357 83,860,193
----------- ----------- ------------ ------------ ------------
OPERATING INCOME (LOSS)............................ 3,181,945 2,231,944 (22,257,258) (11,995,308) (35,035,965)
----------- ----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income.................................. 0 0 9,639,050 8,366,231 1,251,191
Interest expense................................. (9,933) (12,431) (29,033,088) (21,477,687) (24,287,041)
Affiliate interest income (expense), net......... 193,495 467,815 (34,115) (25,253) (106,248)
Equity losses in subsidiary...................... (1,052,227) (2,444,706) 0 0 0
Other income (expense), net...................... 488,776 (59,184) 782,954 747,511 174,122
----------- ----------- ------------ ------------ ------------
Total other expense........................ (379,889) (2,048,506) (18,645,199) (12,389,198) (22,967,976)
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS, AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. 2,802,056 183,438 (40,902,457) (24,384,506) (58,003,941)
MINORITY INTERESTS................................. 0 0 13,294,079 11,292,126 3,267,653
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... 2,802,056 183,438 (27,608,378) (13,092,380) (54,736,288)
INCOME TAX (PROVISION) BENEFIT..................... (1,371,865) (1,010,779) 5,631,618 1,704,350 11,011,711
----------- ----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................. 1,430,191 (827,341) (21,976,760) (11,388,030) (43,724,577)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (NOTE 2)............................... 0 0 (582,541) (582,541) 0
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS).................................. 1,430,191 (827,341) (22,559,301) (11,970,571) (43,724,577)
SUBSIDIARY PREFERRED STOCK DIVIDENDS............... 0 (4,193,276) (1,424,222) (63,907) 0
----------- ----------- ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS..................................... $ 1,430,191 $(5,020,617) $(23,983,523) $(12,034,478) $(43,724,577)
=========== =========== ============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON SHAREHOLDERS.............. $ 14,301.91 $(50,206.17) $(239,835.23) $(120,344.78) $(437,245.77)
=========== =========== ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING...................................... 100 100 100 100 100
=========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 141
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS UNREALIZED TOTAL
--------------- --------------- PAID-IN (ACCUMULATED GAINS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) (LOSSES) EQUITY
------ ------ ------ ------ ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.......... 0 $0 100 $1 $ 5,175,002 $ 8,168,034 $ 184,854 $ 13,527,891
Comprehensive Loss:
Net income attributable to common
stockholders.................... 0 0 0 0 0 1,430,191 0 1,430,191
Unrealized loss on marketable
securities...................... 0 0 0 0 0 0 (184,854) (184,854)
------------
Comprehensive Income........ 1,245,337
------------
Additional infusion of equity..... 0 0 0 0 874,493 0 0 874,493
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, December 31, 1996.......... 0 0 100 1 6,049,495 9,598,225 0 15,647,721
Comprehensive Loss:
Net loss attributable to common
stockholders.................... 0 0 0 0 0 (5,020,617) 0 (5,020,617)
------------
Comprehensive Loss.......... (5,020,617)
------------
Acquisition of subsidiary stock... 0 0 0 0 14,310,000 0 0 14,310,000
Merger of subsidiary out of
consolidated group.............. 0 0 0 0 (500) (1,396,429) 0 (1,396,929)
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, December 31, 1997.......... 0 0 100 1 20,358,995 3,181,179 0 23,540,175
Comprehensive Loss:
Net loss attributable to common
stockholders.................... 0 0 0 0 0 (23,983,523) 0 (23,983,523)
Unrealized gain on marketable
securities...................... 0 0 0 0 0 0 2,388 2,388
------------
Comprehensive Loss.......... (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 0 0 51,916,884
Additional infusion of equity..... 0 0 0 0 3,033,073 0 0 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 (43,724,577) 0 (43,724,577)
Unrealized loss on marketable
securities...................... 0 0 0 0 0 0 (26,038) (26,038)
------------
Comprehensive Loss.......... (43,750,615)
------ -- --- -- ----------- ------------ --------- ------------
BALANCE, September 30, 1999
(unaudited)....................... 0 $0 100 $1 $75,312,104 $(64,526,921) $ (23,650) $ 10,761,534
====== == === == =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 142
KNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 1,430,191 $ (827,341) $ (22,559,301) $(11,970,571) $(43,724,577)
----------- ------------ ------------- ------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 3,022,056 2,781,800 17,326,895 9,013,477 29,526,358
Amortization of bond discount.................... 0 0 13,651,778 9,948,239 11,665,498
Gain (loss) on disposition of assets............. 0 0 71,378 0 (7,809)
Loss on sale of investments...................... (273,725) (13,315) (515,903) (515,903) 0
Cumulative effect of change in accounting
principle...................................... 0 0 582,541 582,541 0
Deferred income taxes............................ 10,231 (764,802) (238,815) 0 0
Amortization of deferred investment tax credit... (71,616) (71,616) (71,616) (53,712) (53,712)
Equity in net loss of subsidiary................. 1,052,227 2,444,706 0 0 0
Minority interest in net loss of subsidiary...... 0 0 (13,294,079) (11,292,126) (3,267,653)
Changes in operating assets and liabilities:
Accounts receivable............................ 487,157 (811,787) (10,292,009) (4,240,850) (2,751,415)
Prepaid expenses............................... (15,772) 5,580 (408,164) (283,697) (716,771)
Accounts payable............................... (2,056,062) 2,111,164 (80,289) (2,457,826) 7,271,688
Accrued liabilities and interest............... 1,373,123 (1,283,101) 37,437,445 20,594,284 (1,380,524)
Unearned revenue............................... 15,155 59,934 1,514,093 301,052 361,836
Other.......................................... (202,235) 48,894 (88,466) (109,869) 7,948
----------- ------------ ------------- ------------ ------------
Total adjustments............................ 3,340,539 4,507,457 45,594,789 21,485,610 40,655,444
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities................................. 4,770,730 3,680,116 23,035,488 9,515,039 (3,069,133)
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (995,320) (1,727,079) (120,227,057) (80,913,266) (64,290,709)
Purchase of investments and acquisitions, net of
cash acquired.................................... 0 (14,310,000) (73,920,617) (73,390,887) 0
Organizational cost expenditures................... 0 0 (251,815) (216,122) (406,535)
Proceeds from sale of investments.................. 797,958 118,711 162,264,322 132,411,488 66,231,397
Dividends from affiliate/return of capital......... 0 (4,193,276) (1,424,222) (63,907) 0
Accounts payable-capital related................... 0 (2,112,296) 0 0 0
Investment in ClearSource, Inc..................... 0 0 (825,072) (825,072) (586,992)
Proceeds from sale of property..................... 0 0 32,075 0 74,632
Other.............................................. 0 0 (234,417) 0 0
----------- ------------ ------------- ------------ ------------
Net cash (used in) provided by investing
activities................................. (197,362) (22,223,940) (34,586,803) (22,997,766) 1,021,793
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short-term
borrowings....................................... (911,326) 0 (11,654) (8,169) (5,574)
Expenditures related to issuance of debt and credit
facility......................................... 0 0 (1,498,817) (286,599) (51,531)
Proceeds from credit facility...................... 0 0 0 0 19,000,000
Proceeds from the issuance of subsidiary common
stock............................................ 0 0 3,152 3,152 0
Additional infusion of equity...................... 874,493 14,310,000 15,564,902 14,632,113 0
(Advances to) repayments from affiliate............ (4,420,343) 4,416,407 2,025,604 836,207 (854,352)
----------- ------------ ------------- ------------ ------------
Net cash (used in) provided by financing
activities................................. (4,457,176) 18,726,407 16,083,187 15,176,704 18,088,543
----------- ------------ ------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 116,192 182,583 4,531,872 1,693,977 16,041,203
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 328,127 444,319 626,902 626,902 5,158,774
----------- ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 444,319 $ 626,902 $ 5,158,774 $ 2,320,879 $ 21,199,977
=========== ============ ============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........... $ 9,933 $ 12,431 $ 46,162 $ 12,761 $ 5,471
=========== ============ ============= ============ ============
Cash paid during the period for income taxes....... $ 167,038 $ 1,145,805 $ 1,742,947 $ 0 $ 0
=========== ============ ============= ============ ============
Merger of subsidiary out of consolidated group..... $ 0 $ 108,108 $ 0 $ 0 $ 0
=========== ============ ============= ============ ============
Subsidiary preferred stock dividends............... $ 0 $ 4,193,276 $ 1,424,222 $ 63,907 $ 0
=========== ============ ============= ============ ============
Detail of investments and acquisitions:
Cash acquired.................................... $ 0 $ 0 $ (6,144,581) $ (6,144,581) $ 0
Property, plant, and equipment................... 0 0 30,133,876 30,133,876 0
Intangible assets................................ 0 0 55,009,395 54,479,665 0
Minority interest................................ 0 0 20,912,251 20,912,251 0
Common and/or Preferred Stock received
(issued)....................................... 0 14,310,000 (34,532,324) (34,532,324) 0
Bond discount.................................... 0 0 8,542,000 8,542,000 0
----------- ------------ ------------- ------------ ------------
Net cash paid for acquisitions................... $ 0 $ 14,310,000 $ 73,920,617 $ 73,390,887 $ 0
=========== ============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 143
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
1. ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
ORGANIZATION
KNOLOGY, Inc. (the "Company"), a wholly owned subsidiary of ITC Holding
Company, Inc. ("ITC Holding") was incorporated under the laws of the State of
Delaware in September 1998. The purpose of incorporating the Company was to
enable ITC Holding to complete a reorganization of certain of its wholly owned
and majority owned subsidiaries on November 23, 1999 (the "Reorganization"), as
follows:
a. ITC Holding contributed all of the outstanding capital stock of
Interstate Telephone, Inc; Valley Telephone, Inc.; Globe Telecom, Inc.; and
ITC Globe, Inc. to the Company (collectively, "Telephone Operations
Group").
b. ITC Holding contributed its 85% interest in KNOLOGY Holdings, Inc.
("KNOLOGY Holdings") to the Company.
c. ITC Holding contributed its 6% interest in ClearSource, Inc.
("ClearSource"); $5.7 million in cash to purchase additional ClearSource
shares, and subscription rights to purchase ClearSource shares to the
Company.
d. Other minority shareholders exchanged the remaining 15% of KNOLOGY
Holdings for shares of stock of the Company.
As a result of the Reorganization, the Telephone Operations Group and
KNOLOGY Holdings and subsidiaries are now wholly owned subsidiaries of the
Company. Following the Reorganization, ITC Holding holds a 90% interest in the
Company. ITC Holding will not own any capital stock of the Company following the
proposed distribution of the Company's shares to ITC Holding's shareholders
(Note 11).
The Reorganization has been accounted for in a manner similar to a pooling
of interest for the Telephone Operations Group. KNOLOGY Holdings and
subsidiaries have been treated as an equity investment in subsidiary in 1996 and
1997 in relation to the Company's 24% and 29% ownership interest, respectively.
KNOLOGY Holdings and subsidiaries have been consolidated with the Company in
1998 in relation to the 85% controlling interest obtained in July 1998 (Note 9)
which was recorded at ITC Holding's historical cost. For the period from August
1998 to December 1998, the 15% of KNOLOGY Holdings that the Company did not own
has been reflected as minority interest and the pro-rata losses attributed to
the minority holders to the extent that their investment was greater than zero
(which it was for the period discussed here) in accordance with Financial
Accounting Standards Board Current Text on Consolidation and Statement of
Financial Accounting Standards No. 94. Because a controlling interest in KNOLOGY
Holdings was acquired in August 1998, the financial statements for the year
ended December 31, 1998 include the accounts of KNOLOGY Holdings for the
F-7
<PAGE> 144
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entire year and the minority interest in losses includes the 58% share of
KNOLOGY Holdings' losses for the period January 1998 to July 1998.
The exchange of the remaining 15% of KNOLOGY Holdings for shares of stock
of the Company was accounted for as an acquisition of a minority interest of a
subsidiary. The stock issued in the exchange was valued at $22.4 million and was
recorded as goodwill since the book value of net assets acquired (which
approximated fair value) was less than zero. The Company had recorded 100% of
KNOLOGY Holdings' losses since KNOLOGY Holdings' equity was less than zero.
NATURE OF BUSINESS
The Telephone Operations Group is wholly owned and provides a full line of
local telephone and related services and broadband services. Certain of the
Telephone Operations Group subsidiaries are subject to regulation, by state
public service commissions of applicable states, for intrastate
telecommunications services. For applicable interstate matters related to
telephone service, certain Telephone Operations Group subsidiaries are subject
to regulation by the Federal Communications Commission.
KNOLOGY Holdings and its subsidiaries own and operate advanced hybrid
fiber-coaxial networks and provide residential and business customers broadband
communications services, including analog and digital cable television, local
and long-distance telephone, high-speed Internet access, and broadband carrier
services to various markets in the southeastern United States.
The Company has experienced operating losses as a result of the expansion
of the advanced broadband communications networks and services into new and
existing markets. The Company expects to continue to focus on increasing its
customer base and expanding its broadband operations. Accordingly, the Company
expects that its operating expenses and capital expenditures will continue to
increase as it extends its broadband communications networks in the existing and
new markets in accordance with its business plan. On December 22, 1998, KNOLOGY
Holdings entered into a $50 million four-year senior secured credit facility,
which may be used for working capital and other purposes, including capital
expenditures and permitted acquisitions (Note 3). The Company also plans to
complete a private placement of Series B preferred stock to a small group of
institutional investors to provide additional funds for its expansion plans
(Note 11). While management expects its expansion plans will result in
profitability, there can be no assurance that growth in the Company's revenue or
customer base will continue or that the Company will be able to achieve or
sustain profitability and/or positive cash flow.
F-8
<PAGE> 145
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and its wholly owned and
majority-owned subsidiaries. Investments in which the Company does not exercise
significant control are accounted for using the cost method of accounting.
Investments in which the Company does exercise significant control and owns less
than 50% are accounted for using the equity method. All significant intercompany
balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
Following the proposed distribution (Note 11), the Company will become a
separate taxable entity. Accordingly, the pro forma income taxes reflect income
taxes as if the Company were a separate taxable entity. In addition, the pro
forma earnings per share reflect the proposed distribution as if it had occurred
at the beginning of each period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
----------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA DATA (NOTE 2):
Pro forma income tax (provision)
benefit............................ $(1,371,865) $(1,010,779) $ 2,382,644 $ 1,704,350 $ 0
Pro forma net income (loss)
attributable to common
shareholders....................... $ 1,430,191 $(5,020,617) $(27,232,497) $(12,034,478) $(54,736,288)
=========== =========== ============ ============ ============
Pro forma basic and diluted net
income (loss) attributable to
common shareholders................ $ 14,301.91 $(50,206.17) $(272,324.97) $(120,344.78) $(547,362.88)
=========== =========== ============ ============ ============
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
F-9
<PAGE> 146
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of stockholders' equity until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific identification
basis. Securities available for sale at December 31, 1998 are primarily
comprised of commercial paper.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as incurred.
The cost and accumulated depreciation of property and equipment disposed of are
removed from the related accounts, and any gain or loss is included in or
deducted from income. Depreciation and amortization (excluding telephone plant)
are provided over the estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.............................................. 25
System and installation equipment...................... 7-10
Production equipment................................... 7
Test and office equipment.............................. 3-7
Automobiles and trucks................................. 5
Leasehold improvements................................. 5
</TABLE>
Depreciation of telephone plant is provided on a straight-line method,
using class or overall group rates acceptable to regulatory authorities. Such
rates range from 2% to 24%.
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to system and installation
equipment when installed.
Interest is capitalized in connection with the construction of the
Company's broadband networks. The capitalized interest is recorded as part of
the asset to which it relates and is amortized over the asset's estimated useful
life. In 1998, approximately $2,469,000 of interest costs was capitalized.
For the nine months ended September 30, 1998 and 1999, approximately
$1,493,000 and $2,404,000, respectively of interest costs were capitalized
(unaudited).
F-10
<PAGE> 147
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired as well as various other acquired
intangibles and costs associated with the issuance of debt and the consummation
of a credit facility. Intangible assets and the related useful lives and
accumulated amortization at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
1998 (YEARS)
----------- ------------
<S> <C> <C>
Goodwill...................................... $33,377,467 10-40
Subscriber base............................... 34,863,072 3
Debt issuance costs (Note 3).................. 9,382,124 4-10
Noncompete agreement.......................... 1,500,000 3
Other......................................... 102,979 10-15
-----------
79,225,642
Less accumulated amortization................. 5,299,654
-----------
Intangibles, net.............................. $73,925,988
===========
</TABLE>
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires
that all nongovernmental entities expense costs of start-up activities,
including pre-operating, preopening, and organization activities, as the costs
are incurred. Adoption of this statement resulted in a cumulative effect of
accounting change of $582,541.
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and cost in excess of net assets acquired
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The effect of adopting SFAS
No. 121 was not material to the Company's consolidated financial statements.
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying amount
of an asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows are
based on many factors, including
F-11
<PAGE> 148
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current operating results, expected market trends, and competitive influences.
If an impairment has occurred, a loss equal to the difference between the
carrying value of the asset and its fair value is recognized. The resulting
reduced carrying amount of the asset is accounted for as its new cost and
depreciated over the asset's remaining useful life. Management believes that the
long-lived assets in the accompanying consolidated balance sheets are
appropriately valued.
INVESTMENTS
Investments and equity ownership in associated companies consisted of the
following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Equity ownership in associated companies:
KNOLOGY Holdings preferred stock, 14,267
shares in 1997........................ $14,184,734 $ 0
Nonmarketable investments, at cost:
ClearSource, Inc. common and preferred
stock, 0 and 333,444 shares in 1997
and 1998, respectively................ 0 825,072
Other nonmarketable investments.......... 98,893 0
----------- -----------
$14,283,627 $ 825,072
=========== ===========
</TABLE>
At December 31, 1998, KNOLOGY Holdings, Inc. owned approximately 11% of
ClearSource, Inc. ("ClearSource"). ClearSource was formed during 1998 to build
and operate advanced broadband networks offering a bundle of communications
services to residential and business customers. The Company's investment in
ClearSource is accounted for under the cost method of accounting.
As of December 31, 1997 and 1998, the Company owned approximately 29% and
85%, respectively, of KNOLOGY Holdings. The Company's ownership interest in
KNOLOGY Holdings was accounted for using the equity method during 1997. The
Company's equity in KNOLOGY Holdings' losses included in the accompanying
statements of operations was $1,052,227 and $2,444,706 for the years ended
December 31, 1996 and 1997, respectively. KNOLOGY Holdings' results of
operations and its cash flows are included in the accompanying financial
statements for the year ended December 31, 1998.
F-12
<PAGE> 149
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the assets, liabilities and equity as of December
31, 1997 and the results of operations for the years ended December 31, 1996 and
1997 of associated companies in which the Company's investments were accounted
for by the equity method.
<TABLE>
<CAPTION>
1997
------------
<S> <C>
ASSETS:
Current assets........................................... $235,670,423
Property and other noncurrent assets..................... 80,527,677
------------
Total assets.................................... $316,198,100
============
LIABILITIES AND EQUITY:
Current liabilities...................................... $ 8,840,263
Noncurrent liabilities................................... 253,232,923
Warrants................................................. 2,486,960
Equity................................................... 51,637,954
------------
Total liabilities and equity.................... $316,198,100
============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues............................... $ 5,334,183 $10,355,068
Operating loss................................... (2,703,273) (5,511,386)
Net loss................................ (3,125,428) (9,091,533)
</TABLE>
REVENUE RECOGNITION
The Company's revenues are recognized when services are provided,
regardless of the period in which they are billed. Fees billed in advance are
included in the accompanying balance sheets as unearned revenue and are deferred
until the month the service is provided.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Approximately
$1,000, $9,000, and $587,000 of advertising expense are recorded in the
Company's statements of operations for the years ended December 31, 1996, 1997,
and 1998, respectively.
Approximately $405,000 and $1,144,000 of advertising expense are recorded
in the Company's statements of operations for the nine months ended September
30, 1998 and 1999, respectively (unaudited).
F-13
<PAGE> 150
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSTALLATION FEES
The Company recognizes installation revenue when the customer is initially
billed for the connection of services as the installation direct costs exceed
installation revenue on a per customer basis.
SOURCES OF SUPPLIES
The Company purchases customer premise equipment and plant materials from
outside vendors. Although numerous suppliers market and sell customer premise
equipment and plant materials, the Company currently purchases each customer
premise component from a single vendor and has several suppliers for plant
materials. If the suppliers are unable to meet the Company's needs as it
continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Company's network could result, which would
adversely affect operating results.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The potential for material credit loss
is mitigated by the large number of customers with relatively small receivable
balances. The carrying amount of the Company's receivables approximates their
fair values.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes,
as set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred taxes are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Deferred
tax benefit represents the change in the deferred tax asset and liability
balances (Note 6).
For the years ended December 31, 1997 and 1998, the Telephone Operations
Groups was included in the consolidated tax returns of the Company's parent
company, ITC Holding. Effective August 1998, KNOLOGY Holdings was included in
the consolidated federal income tax return of ITC Holding. The Company and its
subsidiaries file separate state income tax returns. Under a tax sharing
arrangement, the Company recorded an income tax benefit of $5,631,618 and an
affiliate receivable in the amount of $6,785,691 at December 31, 1998 for the
utilization of net operating losses included in the consolidated tax return of
ITC Holding. For the period from January 1, 1998 to July 31, 1998, KNOLOGY
Holdings filed a separate federal income tax return.
F-14
<PAGE> 151
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment tax credits related to telephone plant have been deferred and
are being amortized as a reduction of federal income tax expense over the
estimated useful lives of the assets giving rise to the credits.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company has chosen to disclose comprehensive income,
which consists of net income and unrealized appreciation, in the statements of
stockholders' equity. Prior years have been restated to conform to the SFAS No.
130 requirements.
NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." That
statement requires the disclosure of basic net income (loss) per share and
diluted net income (loss) per share. Basic net income (loss) per share is
computed by dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
net loss per share gives effect to all potentially dilutive securities. The
Company did not have any potentially dilutive securities during the periods
presented.
3. LONG-TERM DEBT
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Senior Discount Notes, with a face value of
$444,100,000, bearing interest at 11.875% beginning
October 15, 2002, payable semiannually beginning
April 15, 2003 with principal and any unpaid interest
due October 15, 2007................................ $255,020,209
Capitalized lease obligation, at a rate of 10%, payable
in quarterly installments of $6,304 through December
2006, secured....................................... 134,244
------------
255,154,453
Less current maturities................................ 25,094
------------
$255,129,359
============
</TABLE>
F-15
<PAGE> 152
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are maturities of long-term debt for each of the next five years
as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................... $ 25,094
2000........................................... 13,438
2001........................................... 14,833
2002........................................... 16,374
2003........................................... 18,074
Thereafter..................................... 444,146,431
------------
Total.............................. $444,234,244
============
</TABLE>
The fair values of long-term debt, including current maturities, at
December 31, 1998 are estimated to be approximately $280,804,000, based on a
valuation technique that considers cash flows discounted at current rates.
On December 22, 1998, KNOLOGY Holdings entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp., which may be used for working capital and other purposes,
including capital expenditures and permitted acquisitions. At KNOLOGY Holdings'
option, interest will accrue based on either the Alternate Base Rate plus
applicable margin or the LIBOR rate plus applicable margin. Obligations under
the credit facility will be secured by substantially all tangible and intangible
assets of KNOLOGY Holdings and its current and future subsidiaries. The credit
facility includes a number of covenants, including, among others, covenants
limiting the ability of KNOLOGY Holdings and its subsidiaries and their present
and future subsidiaries to incur debt, create liens, pay dividends, make
distributions or stock repurchases, make certain investments, engage in
transactions with affiliates, sell assets, and engage in certain mergers and
acquisitions. The credit facility also includes covenants requiring compliance
with certain operating and financial ratios on a consolidated basis. The credit
facility allows KNOLOGY Holdings to borrow up to five times certain individual
subsidiary's "consolidated adjusted cash flow" as defined in the credit
facility. In connection with the initiation of the revolving credit facility,
KNOLOGY Holdings incurred approximately $1,256,000 in related costs which are
being amortized on a straight-line basis over the five year term.
In the fourth quarter of 1997, KNOLOGY Holdings issued units consisting of
senior discount notes due 2007 and warrants to purchase Preferred Stock for
gross proceeds of approximately $250 million. The notes were offered at a
substantial discount from face value, with no interest payable for the first
five years. Approximately $2.5 million of the gross proceeds has been allocated
to the warrants. Each warrant allows the holder to purchase .003734 shares of
KNOLOGY Holdings' preferred stock. KNOLOGY Holdings incurred approximately $7.9
million in costs to issue the senior discount notes. These costs are being
amortized at an effective rate over the life of the notes. The indenture
relating to the notes contains certain covenants that, among other
F-16
<PAGE> 153
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
things, limit the ability of KNOLOGY Holdings to incur indebtedness, pay
dividends, prepay subordinated indebtedness, repurchase capital stock, make
investments, engage in transactions with stockholders and affiliates, create
liens, sell assets, and engage in mergers and consolidations. The proceeds from
the offering of the units have been, and will be, used to repay certain
indebtedness of KNOLOGY Holdings, to fund expansion of KNOLOGY Holdings'
business, and for additional working capital and general corporate purposes.
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for
varying periods. Leases that expire are generally expected to be renewed or
replaced by other leases.
Future minimum rental payments required under the operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $293,493
2000............................................... 198,888
2001............................................... 166,181
2002............................................... 155,199
2003 and thereafter................................ 125,575
--------
Total minimum lease payments........... $939,336
========
</TABLE>
Total rental expense for all operating leases was approximately $0, $0 and
$435,000 for the years ended December 31, 1996, 1997, and 1998, respectively.
Total rental expense for all operating leases was approximately $260,000
and $407,000 for the nine months ended September 30, 1998 and 1999 (unaudited).
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into contracts with various entities to provide
programming to be aired by KNOLOGY Holdings. The Company pays a monthly fee as
cost for the programming services, generally based on the number of average
subscribers to the program, although some fees are adjusted based on the total
number of subscribers to the system and/or the system penetration percentage.
Certain contracts have minimum monthly fees. The Company estimates that it will
pay approximately $6.5 million in programming fees under these contracts during
1999.
F-17
<PAGE> 154
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Company which would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
6. INCOME TAXES
The (provision) benefit for income taxes from continuing operations
consisted of the following for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Current........................ $(1,361,634) $(1,775,581) $ 5,392,803
Deferred....................... 347,527 1,596,002 10,662,185
Increase in valuation
allowance................... (357,758) (831,200) (10,423,370)
----------- ----------- ------------
Income tax provision
(benefit)................... $(1,371,865) $(1,010,779) $ 5,631,618
=========== =========== ============
</TABLE>
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The significant components of deferred tax assets and liabilities as of
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........ $ 0 $ 8,923,583
Equity in losses of subsidiaries........ 1,188,958 1,188,958
Deferred charges........................ 170,704 0
Deferred bond interest.................. 0 12,919,184
Deferred revenues....................... 426,910 190,918
Other................................... 85,978 1,841,404
Valuation allowance..................... (1,188,958) (15,777,328)
----------- ------------
Total deferred tax assets...... 683,592 9,286,719
Deferred tax liabilities:
Depreciation and amortization........... 1,244,065 9,608,377
----------- ------------
Net deferred income taxes.................. $ 560,473 $ 321,658
=========== ============
</TABLE>
At December 31, 1997 the Company had deferred tax assets related to equity
losses of subsidiaries. Management has recorded a 100% valuation allowance in
1997 against these deferred tax assets, as the Company has determined it is more
likely than not that the deferred tax assets will not be realized. The Company
has available, at December 31, 1998, unused net operating loss carryforwards of
approximately $23,657,000, expiring in
F-18
<PAGE> 155
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
various years from 2005 to 2013, unless utilized. Management has recorded a
total valuation allowance of $15,777,328 in 1998 on these operating loss
carryforwards, the majority of which contain limitations on utilization, and the
equity losses of subsidiaries.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended December 31, 1996, 1997,
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax (provision) benefit at statutory
rate............................................ (34)% (34)% 34%
State income taxes, net of federal benefit...... (4) (4) 4
Other........................................... 2 (60) 1
Increase in valuation allowance................. (13) (453) (25)
--- ---- ---
(49)% (551)% 14%
=== ==== ===
</TABLE>
7. EQUITY INTERESTS
CAPITAL TRANSACTIONS
The Company has authorized 200,000,000 shares of $.01 par value common
stock, 75,000,000 shares of $.01 par value Series A convertible preferred stock,
and 50,000,000 shares of $.01 par value Series B convertible preferred stock.
KNOLOGY HOLDINGS' STOCK OPTION PLAN
Under KNOLOGY Holdings' 1995 stock option plan (the "Stock Option Plan"),
as adopted in December 1995 and amended in February 1998, 700,000 shares of
KNOLOGY Holdings' common stock are reserved and authorized for issuance upon the
exercise of the options. All employees of KNOLOGY Holdings are eligible to
receive options under the Stock Option Plan. The Stock Option Plan is
administered by the compensation and stock option committee of the board of
directors. Options granted under the Stock Option Plan are intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended. All options were granted at an exercise price equal to the
estimated fair value of the common stock at the dates of grant as determined by
the board of directors based on equity transactions and other analyses. The
options expire ten years from the date of grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure
F-19
<PAGE> 156
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting methodology
required by APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company accounts for KNOLOGY Holdings' stock-based compensation plans
under APB Opinion No. 25, under which no compensation cost has been recognized
by the Company. However, the Company has computed, for pro forma disclosure
purposes, the value of all options for shares of KNOLOGY Holdings' common stock
to employees of KNOLOGY Holdings using the Black-Scholes option pricing model
and the following weighted average assumptions in 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate.......... 6.31% 6.43% 5.42%
Expected dividend yield.......... 0% 0% 0%
Expected lives................... Seven years Seven years Seven years
Expected volatility.............. 30% 30% 30%
</TABLE>
F-20
<PAGE> 157
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair value of options granted was $8.00, $8.44, and
$10.21 for 1996, 1997, and 1998, respectively. The total value of options for
KNOLOGY Holdings' stock granted to employees of KNOLOGY Holdings during 1996,
1997, and 1998 was computed as approximately $154,000, $304,000, and $1,832,000,
respectively, which would be amortized on a pro forma basis over the five-year
vesting period of the options.
A summary of the status of KNOLOGY Holdings' stock option plan at December
31, 1998 is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
SHARES SHARE
------- ---------
<S> <C> <C>
Outstanding at December 31, 1996:................... 52,797 8.00
Granted.......................................... 126,384 8.44
Forfeited........................................ (15,939) 8.00
-------
Outstanding at December 31, 1997:................... 163,242 8.34
Granted.......................................... 565,376 10.18
Forfeited........................................ (36,056) 9.52
Exercised........................................ (394) 8.00
-------
Outstanding at December 31, 1998.................... 692,168
=======
Exercisable shares as of December 31:
1996............................................. 0 $ 0.00
=======
1997............................................. 6,606 8.00
=======
1998............................................. 30,006 8.00
=======
</TABLE>
TELEPHONE OPERATIONS GROUP STOCK OPTION PLAN
The Company's parent, ITC Holding, sponsors a stock option plan which
provides for the granting of stock options to substantially all employees of the
Telephone Operations Group. Options are generally granted at a price
(established by ITC Holding's board of directors based on equity transactions
and other analyses) equal to at least 100% of the fair market value of ITC
Holding's common stock on the option grant date. Options granted generally
become exercisable 40% after two years and 20% per annum for the next three
years and remain exercisable for ten years after the option grant date.
F-21
<PAGE> 158
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
ITC Holding accounts for its stock-based compensation plans under APB
Opinion No. 25, under which no compensation cost has been recognized by the
Company. However, the Company has computed, for pro forma disclosure purposes,
the value of all options for shares of ITC Holding's common stock granted to
employees of the Telephone Operations Group using the Black-Scholes option
pricing model prescribed by SFAS No. 123 and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate....................... 6.3% 6.0% 5.3%
Expected dividend yield....................... 0% 0% 0%
Expected lives................................ Ten years Ten years Ten years
Expected volatility........................... 50% 60% 50%
</TABLE>
The weighted average fair value of options granted was $4.91, $4.54, and
$9.58 for 1996, 1997, and 1998, respectively. The total value of options for ITC
Holding's stock granted to employees of the Telephone Operations Group during
1996, 1997, and 1998 was computed as approximately $407,000, $2,427,000, and
$382,000, respectively, which would be amortized on a pro forma basis over the
five-year vesting period of the options.
A summary of the status of the Telephone Operations Group's portion of ITC
Holding's stock option plan at December 31, 1998 is presented in the following
table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
SHARES SHARE
-------- ------------
<S> <C> <C>
Outstanding at December 31, 1996:..................... 479,756 $ 0.15-$3.36
Granted............................................ 188,732 $ 3.36-$7.75
Forfeited.......................................... (33,800) $ 0.49-$7.75
Exercised.......................................... (31,000) $ 0.28-$2.73
--------
Outstanding at December 31, 1997:..................... 603,688 $ 0.15-$7.75
Granted............................................ 86,968 $8.38-$12.50
Forfeited.......................................... (93,172) $1.26-$12.50
Exercised.......................................... (149,372) $ 0.28-$3.36
--------
Outstanding at December 31, 1998...................... 448,112 $0.15-$12.50
========
</TABLE>
F-22
<PAGE> 159
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the exercise price range, number of shares,
weighted average exercise price and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
EXERCISABLE AT WEIGHTED REMAINING
EXERCISE PRICE DECEMBER 31, AVERAGE CONTRACTUAL
RANGE 1998 PRICE LIFE(YEARS)
-------------- -------------- -------- -----------
<S> <C> <C> <C> <C>
$ 1.58-$2.21 145,154 1.70 5.45
$ 2.73-$4.01 21,472 2.73 7.20
</TABLE>
PRO FORMA NET INCOME (LOSS)
If the Company had accounted for these plans in accordance with SFAS No.
123, the Company's net income (loss) for the periods presented would be as
follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net income (loss) attributable to common
shareholders for the years ended December 31:
1996........................................... $ 1,430,191 $ 1,186,319
1997........................................... (5,020,617) (7,113,134)
1998........................................... (23,983,523) (24,642,829)
Earnings (loss) per share attributable to common
stockholders for the years ended December 31:
1996........................................... $ 14,301.91 $ 11,863.19
1997........................................... (50,206.17) (71,134.34)
1998........................................... (239,835.23) (246,428.29)
</TABLE>
TELEPHONE OPERATIONS GROUP SAVINGS PLAN
The Telephone Operations Group has a savings plan (the "Savings Plan") that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. Under the Savings Plan, participating employees may defer a
portion of their pretax earnings, up to the Internal Revenue Service annual
contribution limit. Annually, the Telephone Operations Group determines whether
to make a discretionary matching contribution equal to a percentage, determined
by the Telephone Operations Group, of the employee's deferred compensation
contribution. Employer contributions to the Savings Plan of approximately
$118,000, $96,000, and $125,000 were made for the years ended December 31, 1996,
1997, and 1998, respectively.
F-23
<PAGE> 160
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS
ITC Holding occasionally provides certain administrative services, such as
legal and tax planning services, for the Company. The costs of these services
are charged to the Company based primarily on the salaries and related expenses
for certain of the ITC Holding executives and an estimate of their time spent on
projects specific to the Company. For the years ended December 31, 1996, 1997,
and 1998, the Company recorded approximately $1,547,000, $3,459,000, and
$3,230,000, respectively, in selling, operations, and administrative expenses
related to these services. In the opinion of management, amounts charged to the
Company are consistent with costs that would be incurred from third party
providers.
Certain of ITC Holding's affiliates provide the Company with various
services and/or receive services provided by the Company. These entities include
InterCall, Inc., which provides conference calling services. In addition, we
receive services from ITC*DeltaCom, Inc., an affiliate of ITC Holding which
provides wholesale long-distance and related services and which leases capacity
on certain of its fiber routes. ITC Holding also holds equity investments in the
following entities which do business with the Company: Powertel, Inc., which
provides cellular services, and MindSpring Enterprises, Inc., which is a
national provider of Internet access. In management's opinion, the Company's
transactions with these affiliated entities are representative of arm's-length
transactions.
For the years ended December 31, 1996, 1997, and 1998, the Company received
services from these affiliated entities in the amounts of approximately
$620,000, $707,000, and $1,570,000, respectively, which are reflected in cost of
services and selling, operations, and administrative expenses in the Company's
statements of operations.
The Company also provides switching, programming, and other services for
various affiliated companies on a contracted or time and materials basis. Total
amounts paid by the affiliated companies for these services approximated
$1,616,000, $1,517,000, and $2,186,000, respectively, for the years ended
December 31, 1996, 1997, and 1998 and are reflected in operating revenues in the
Company's statements of operations.
During 1998, the Company leased office space to ITC*DeltaCom, Inc. and
Powertel, Inc. Approximately $234,000 of lease income related to these
transactions is recorded as other income in the Company's statement of
operations for the year ended December 31, 1998.
Relatives of the stockholders of ITC Holding are stockholders and employees
of the Company's insurance provider. The costs charged to the Company for
insurance services were approximately $222,000, $221,000, and $628,000 for the
years ended December 31, 1996, 1997, and 1998, respectively.
F-24
<PAGE> 161
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. BUSINESS ACQUISITIONS
KNOLOGY HOLDINGS ACQUISITIONS
In January 1998, the Company acquired an additional 6,747 shares of KNOLOGY
Holdings preferred stock, representing an approximate 13% ownership interest in
KNOLOGY Holdings, in exchange for cash of $10,177,234. The acquisition of the
additional interest was accounted for as a step acquisition. The fair value of
net assets acquired totaled $6,775,879, resulting in goodwill of $3,401,355.
Effective July 1998, the Company acquired an additional 42,565 shares,
representing approximately 43% of KNOLOGY Holdings' outstanding stock.
The Company recorded its acquisition of this additional ownership interest
under the purchase method of accounting as a step acquisition. Accordingly, the
Company recorded the pro rata share of net assets acquired at fair value. The
Company determined that the book value of the pro rata share of assets and trade
liabilities acquired approximated fair value. The fair value of KNOLOGY
Holdings' senior discount notes (Note 4) was determined to be less than book
value at the date of acquisition based on quoted market prices. As a result, a
debt discount of approximately $8,542,000 was recorded to adjust the book value
of the pro rata share of senior notes acquired to fair value (Note 4).
The total value paid by the Company was $36,687,424, including cash of
$2,155,100, common and preferred stock valued at $34,532,324. The fair value of
net assets acquired totaled $22,678,372, resulting in goodwill of $14,009,052.
Prior to the acquisition, the Company owned more stock than any other single
KNOLOGY Holdings stockholder, owning approximately 42% of the outstanding stock.
As a result of the acquisition, the Company owns approximately 85% of the
outstanding stock of KNOLOGY Holdings at December 31, 1998.
The goodwill and debt discount created upon the acquisition of KNOLOGY
Holdings is amortized over 10 years on a straight line basis and the term of the
senior notes on the effective interest method, respectively.
CABLE ALABAMA ACQUISITION
On October 30, 1998, KNOLOGY Holdings acquired substantially all of the
assets of Cable Alabama Corporation ("Cable Alabama") for approximately
$60,733,000 in cash and also purchased for $5,000,000 in cash certain real
property located in Huntsville, Alabama. Cable Alabama owned and operated a
cable television system serving the Huntsville, Alabama area. KNOLOGY Holdings
plans to upgrade the existing Cable Alabama plant is being upgraded to provide
local and long-distance telephone service and high-speed Internet access
services. The acquisition has been accounted for under the purchase method of
accounting.
F-25
<PAGE> 162
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TTE, INC. ACQUISITION
On June 1, 1998, KNOLOGY Holdings acquired TTE, Inc., a non-facilities
based reseller of local, long distance and operator services to small and
medium-sized business customers throughout South Carolina, for a purchase price
of $1.3 million. The acquisition has been accounted for under the purchase
method of accounting.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The assets of TTE, Inc. and Cable Alabama have been included in the
Company's consolidated financial statements effective June 1, 1998 and September
1, 1998, respectively. The following unaudited pro forma results of operations
for the year ended December 31, 1998 assume that the acquisitions occurred on
January 1, 1998. The unaudited pro forma information is presented for
informational purposes only and may not be indicative of the actual results of
operations had the acquisitions occurred on the assumed date, nor is the
information necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Operating revenues.......................................... $ 55,359,204
Loss before extraordinary items............................. (37,454,927)
Net loss attributable to common stockholders................ (33,830,072)
Net loss per share attributable to common stockholders
(a)....................................................... (338,300.72)
</TABLE>
- ---------------
(a) Loss per share is computed using 100 as the number of shares outstanding in
1998.
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements. Management has identified the
reportable segments based on broadband services offered.
While management of the Company monitors the revenue generated from each of
the various broadband services, operations are managed and financial performance
is evaluated based upon the delivery of a multiple of the services to customers
over a single network. As a result of multiple services being provided over a
single network, there are many shared expenses and shared assets related to
providing the various broadband services to customers. Management believes that
any allocation of the shared expenses or assets to the broadband services would
be arbitrary and impractical.
F-26
<PAGE> 163
KNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company owns and operates advanced hybrid fiber-coaxial networks and
provides residential and business customers broadband communications services,
including video analog and digital cable television and local and long-distance
telephone. Internet services include high-speed Internet access via cable
modems, local transport services, such as local Internet transport, special
access, local private line, and local exchange transport services.
<TABLE>
<CAPTION>
INTERNET SERVICES
VIDEO TELEPHONE AND OTHER
----------- ----------- -----------------
<S> <C> <C> <C>
1996
Operating revenues................... $ 0 $17,527,208 $ 0
Cost of services..................... 0 2,991,412 0
----------- ----------- --------
Gross margin......................... $ 0 $14,535,796 $ 0
=========== =========== ========
1997
Operating revenues................... $ 0 $17,633,313 $ 0
Cost of services..................... 0 3,121,108 0
----------- ----------- --------
Gross margin......................... $ 0 $14,512,205 $ 0
=========== =========== ========
1998
Operating revenues................... $22,527,403 $22,318,344 $286,775
Cost of services..................... 8,750,858 3,890,799 97,883
----------- ----------- --------
Gross margin......................... $13,776,545 $18,427,545 $188,892
=========== =========== ========
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
DISTRIBUTION AND PRIVATE PLACEMENT
The Company is in the process of registering with the Securities and
Exchange Commission shares of its common stock in order to complete a
distribution of its Series A convertible preferred stock to the stockholders of
ITC Holding. Shortly following this distribution, the Company intends to
complete a private placement of its Series B preferred stock to a small group of
institutional investors for approximately $100 million. There can be no
assurance that this offering will be completed.
F-27
<PAGE> 164
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To KNOLOGY Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of KNOLOGY
HOLDINGS, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997
and July 31, 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997 and the period ended July 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KNOLOGY
Holdings, Inc. and subsidiaries as of December 31, 1997 and July 31, 1998 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1997 and the period ended July 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 15, 1999
F-28
<PAGE> 165
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,144,581 $ 5,483,929
Marketable securities..................................... 227,880,923 181,290,428
Accounts receivable -- trade, net of allowance of $108,529
and $270,854 at December 31, 1997 and July 31, 1998,
respectively............................................ 1,607,859 3,035,380
Accounts receivable - affiliates.......................... 0 21,000
Prepaid expenses.......................................... 37,060 297,101
------------ ------------
Total current assets................................ 235,670,423 190,127,838
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
System and installation equipment......................... 56,909,159 93,481,398
Test and office equipment................................. 1,628,485 3,658,597
Automobiles and trucks.................................... 837,490 2,035,893
Production equipment...................................... 297,286 440,954
Land...................................................... 0 300,975
Buildings................................................. 1,936,035 4,575,330
Inventory................................................. 5,806,320 18,507,889
Leasehold improvements.................................... 324,270 489,787
------------ ------------
67,739,045 123,490,823
Less accumulated depreciation and amortization............ (5,171,309) (11,424,440)
------------ ------------
Property, plant, and equipment, net................. 62,567,736 112,066,383
------------ ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net (Note 2)................. 17,896,146 18,014,255
Investments............................................... 0 825,072
Other..................................................... 63,795 63,795
------------ ------------
Total assets........................................ $316,198,100 $321,097,343
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 25,094 $ 25,094
Accounts payable.......................................... 5,817,733 4,429,417
Accounts payable--affiliate............................... 452,346 0
Accrued liabilities....................................... 1,638,042 8,854,827
Unearned revenue.......................................... 907,048 1,362,263
------------ ------------
Total current liabilities........................... 8,840,263 14,671,601
NONCURRENT LIABILITIES:
Notes payable (Note 3).................................... 120,804 115,426
Accrued interest payable.................................. 3,201,688 13,353,765
Bonds payable, net of discount of $194,189,569 and
$186,621,207 at December 31, 1997 and July 31, 1998,
respectively............................................ 249,910,431 257,478,793
------------ ------------
Total liabilities................................... 262,073,186 285,619,585
------------ ------------
COMMITMENTS AND CONTINGENCIES
WARRANTS (NOTE 3)........................................... 2,486,960 2,486,960
------------ ------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value per share;
50,000 and 100,000 shares authorized, 49,985 and 49,851
shares issued and outstanding at December 31, 1997 and
July 31, 1998, respectively (Note 7).................... 500 499
Common stock, $.01 par value per share; 200,000 and
16,000,000 shares authorized, 0 and 394 shares issued
and outstanding at December 31, 1997 and July 31, 1998,
respectively (Note 7)................................... 0 4
Additional paid-in capital................................ 65,060,712 64,864,366
Accumulated deficit....................................... (13,402,495) (31,858,376)
Unrealized losses on marketable securities (Note 2)....... (20,763) (15,695)
------------ ------------
Total stockholders' equity.......................... 51,637,954 32,990,798
------------ ------------
Total liabilities and stockholders' equity.......... $316,198,100 $321,097,343
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE> 166
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
------------------------- ENDED JULY 31,
1996 1997 1998
----------- ----------- --------------
<S> <C> <C> <C>
OPERATING REVENUES..................................... $ 5,334,183 $10,355,068 $ 11,150,159
OPERATING EXPENSES:
Cost of services..................................... 2,513,693 4,758,730 4,932,239
Selling, operations, and administrative.............. 3,883,738 7,392,540 10,548,058
Depreciation and amortization........................ 1,640,025 3,715,184 4,335,794
----------- ----------- ------------
Total operating expenses..................... 8,037,456 15,866,454 19,816,091
----------- ----------- ------------
OPERATING LOSS......................................... (2,703,273) (5,511,386) (8,665,932)
----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income...................................... 46,221 2,774,909 7,054,380
Interest expense..................................... (1,055,498) (6,226,023) (16,449,898)
Affiliate interest income, net....................... 273,799 0 0
Other (expense) income, net.......................... (60,000) (129,033) 188,110
----------- ----------- ------------
Total other expense.......................... (795,478) (3,580,147) (9,207,408)
----------- ----------- ------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............... (3,498,751) (9,091,533) (17,873,340)
INCOME TAX BENEFIT..................................... 373,323 0 0
----------- ----------- ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................... (3,125,428) (9,091,533) (17,873,340)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NOTE 2).......................... 0 0 (582,541)
----------- ----------- ------------
NET LOSS............................................... $(3,125,428) $(9,091,533) $(18,455,881)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER SHARE................... $ (1.53) $ (2.10) $ (2.46)
=========== =========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 2,043,900 4,325,250 7,497,696
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-30
<PAGE> 167
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL (LOSS) GAIN ON TOTAL
--------------- --------------- PAID-IN ACCUMULATED MARKETABLE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES EQUITY
------ ------ ------ ------ ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995...... 7,520 $ 75 0 $ 0 $ 7,454,615 $ (1,185,534) $ 0 $ 6,269,156
Comprehensive Loss
Net loss...................... 0 0 0 0 0 (3,125,428) 0 (3,125,428)
------------
Comprehensive Loss............ (3,125,428)
------------
Issuance of preferred stock,
net of related offering
expenses of $379,701........ 9,572 96 0 0 11,054,603 0 0 11,054,699
------ ---- --- ------ ----------- ------------ -------- ------------
BALANCE, December 31, 1996...... 17,092 171 0 0 18,509,218 (4,310,962) 0 14,198,427
Comprehensive Loss:
Net loss...................... 0 0 0 0 0 (9,091,533) 0 (9,091,533)
Unrealized loss on marketable
securities.................. 0 0 0 0 0 0 (20,763) (20,763)
------------
Comprehensive Loss............ (9,112,296)
------------
Issuance of preferred stock,
net of related offering
expenses of $99,677......... 30,408 304 0 0 42,824,019 0 0 42,824,323
Purchase of Beach Cable
(Note 9).................... 2,485 25 0 0 3,727,475 0 0 3,727,500
------ ---- --- ------ ----------- ------------ -------- ------------
BALANCE, December 31, 1997...... 49,985 500 0 0 65,060,712 (13,402,495) (20,763) 51,637,954
Comprehensive Loss:
Net loss...................... 0 0 0 0 0 (18,455,881) 0 (18,455,881)
Unrealized gain on marketable
securities.................. 0 0 0 0 0 0 5,068 5,068
------------
Comprehensive Income........ (18,450,813)
------------
Issuance of common stock under
stock options............... 0 0 394 4 3,148 0 0 3,152
Beach Cable purchase price
adjustment.................. (134) (1) 0 0 (199,494) 0 0 (199,495)
------ ---- --- ------ ----------- ------------ -------- ------------
BALANCE, July 31, 1998.......... 49,851 $499 394 $ 4 $64,864,366 $(31,858,376) $(15,695) $ 32,990,798
====== ==== === ====== =========== ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-31
<PAGE> 168
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
------------------------------ ENDED JULY 31,
1996 1997 1998
------------ --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,125,428) $ (9,091,533) $(18,455,881)
------------ --------------- ------------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 1,640,025 3,715,184 4,335,794
Amortization of bond discount........................... 0 2,386,856 7,568,362
Gain on disposition of assets........................... 21,370 23,464 0
Cumulative effect of change in accounting principle..... 0 0 582,541
Deferred income taxes................................... (373,323) 0 0
Changes in operating assets and liabilities:
Accounts receivable................................... (512,337) (721,396) (1,448,521)
Prepaid expenses...................................... (180,950) 244,199 (260,041)
Accounts payable...................................... (39,648) 4,302,245 (1,840,662)
Accrued liabilities and interest...................... 293,394 163,317 17,368,862
Unearned revenue...................................... 278,757 243,007 455,215
Other................................................. 133 1,345 5,068
------------ --------------- ------------
Total adjustments................................... 1,127,421 10,358,221 26,766,618
------------ --------------- ------------
Net cash (used in) provided by operating
activities........................................ (1,998,007) 1,266,688 8,310,737
------------ --------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements.................. (14,416,135) (39,625,408) (50,089,645)
Acquisitions, net......................................... 0 0 (1,014,288)
Organizational cost expenditures.......................... (20,133) (470,923) (248,433)
Purchase of investments................................... (5,000) (227,956,301) 0
Proceeds from sale of investments......................... 0 0 46,590,495
Accounts payable -- capital related....................... 0 0 (3,214,982)
Investment in ClearSource, Inc............................ 0 0 (825,072)
Proceeds from sale of property............................ 0 69,152 0
Other..................................................... 0 0 315,906
------------ --------------- ------------
Net cash used in investing activities............... (14,441,268) (267,983,480) (8,486,019)
------------ --------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short term borrowings...... (160,900) (29,903,385) (5,378)
Expenditures related to issuance of debt and credit
facility................................................ 0 0 (283,649)
Proceeds from the issuance of common stock................ 0 0 3,152
Proceeds from the issuance of debt and short-term
borrowings, net of discount and issue costs on bonds.... 1,258,238 257,370,383 0
Proceeds from the issuance of preferred stock, net of
related offering expenses............................... 10,868,699 42,824,323 (199,495)
Repayments from affiliates................................ 4,255,836 0 0
Proceeds from the issuance of warrants.................... 0 2,486,960 0
------------ --------------- ------------
Net cash provided by (used in) financing
activities........................................ 16,221,873 272,778,281 (485,370)
------------ --------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (217,402) 6,061,489 (660,652)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 300,494 83,092 6,144,581
------------ --------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 83,092 $ 6,144,581 $ 5,483,929
============ =============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 1,016,039 $ 1,543,125 $ 3,672
============ =============== ============
Cash paid during the period for income taxes.............. $ 0 $ 0 $ 0
============ =============== ============
Details of acquisitions:
Property, plant, and equipment.......................... $ 0 $ 4,756,005 $ 0
Intangible Assets....................................... 0 2,796,139 1,014,288
Liabilities Assumed..................................... 0 (3,824,644) 0
Preferred stock issued.................................. 0 (3,727,500) 0
------------ --------------- ------------
Net cash paid for acquisitions.......................... $ 0 $ 0 $ 1,014,288
============ =============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
F-32
<PAGE> 169
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND JULY 31, 1998
1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
KNOLOGY Holdings, Inc. was incorporated in Delaware in November 1995 under
the name CyberNet Holding, Inc. In April 1997, the Company formally changed its
name to KNOLOGY Holdings, Inc.
NATURE OF BUSINESS
KNOLOGY Holdings, Inc. and its subsidiaries (the "Company") own and operate
advanced hybrid fiber-coaxial networks and provide residential and business
customers broadband communications services, including analog and digital cable
television, local and long-distance telephone, high-speed Internet access, and
broadband carrier services to various markets in the southeastern United States.
The Company has experienced operating losses as a result of the expansion
of the advanced broadband communications networks and services into new and
existing markets. The Company expects to continue to focus on increasing its
customer base and expanding its broadband operations. Accordingly, the Company
expects that its operating expenses and capital expenditures will continue to
increase as it extends its broadband communications networks in the existing and
new markets in accordance with its business plan. While management expects its
expansion plans will result in profitability, there can be no assurance that
growth in the Company's revenue or customer base will continue or that the
Company will be able to achieve or sustain profitability and/or positive cash
flow.
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and all subsidiaries. All
significant intercompany balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-33
<PAGE> 170
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a separate
component of stockholders' equity until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific identification
basis. Securities available for sale at July 31, 1998 are primarily comprised of
commercial paper.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the estimated
useful lives of the assets, commencing when the asset is installed or placed in
service. Maintenance, repairs, and renewals are charged to expense as incurred.
The cost and accumulated depreciation of property and equipment disposed of are
removed from the related accounts, and any gain or loss is included in or
deducted from income. Depreciation and amortization are provided over the
estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 25
System and installation equipment........................... 7-10
Production equipment........................................ 7
Test and office equipment................................... 3-7
Automobiles and trucks...................................... 5
Leasehold improvements...................................... 5
</TABLE>
Inventories are valued at the lower of cost or market (determined on a
weighted average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to system and installation
equipment when installed.
Interest is capitalized in connection with the construction of the
Company's broadband networks. The capitalized interest is recorded as part of
the asset to which it relates and is amortized over the asset's estimated useful
life. For the year ended December 31, 1997 and the period ended July 31, 1998,
$676,160 and $1,954,976 of interest cost was capitalized, respectively. No
interest was capitalized prior to 1997.
F-34
<PAGE> 171
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE AND OTHER ASSETS
Intangible and other assets include the excess of the purchase price of
acquisitions over the fair value of net assets acquired as well as various other
acquired intangibles and costs associated with the issuance of debt and the
consummation of a credit facility. Intangible and other assets and the related
useful lives and accumulated amortization at December 31, 1997 and July 31, 1998
are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
DECEMBER 31, JULY 31, PERIOD
1997 1998 (YEARS)
------------ ----------- ------------
<S> <C> <C> <C>
Goodwill.......................... $ 9,875,262 $10,889,550 40
Debt issuance costs............... 7,883,307 8,166,956 4-10
Other............................. 955,048 350,540 10-15
----------- -----------
18,713,617 19,407,046
Less accumulated amortization..... 817,471 1,347,285
----------- -----------
Intangibles and other assets,
net............................ $17,896,146 $18,059,761
=========== ===========
</TABLE>
During 1998, the Company adopted the provisions of AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which requires
that all nongovernmental entities expense costs of start-up activities,
including pre-operating, preopening, and organization activities, as the costs
are incurred. Adoption of this statement resulted in a cumulative effect of
accounting change of $582,541 or $.08 per basic and diluted share.
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and cost in excess of net assets acquired
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The effect of adopting SFAS
No. 121 was not material to the Company's consolidated financial statements.
The Company reviews its long-lived assets such as property and equipment,
goodwill, and other intangible assets for impairment at each balance sheet date
or whenever events or changes in circumstances indicate that the carrying amount
of an asset should be assessed. Management evaluates the tangible and intangible
assets related to each acquisition individually to determine whether an
impairment has occurred. An impairment is recognized when the undiscounted
future cash flows estimated to be generated by the assets are not sufficient to
recover the unamortized balance of the asset. Estimates of future cash flows are
based on many factors, including current operating results, expected market
trends, and competitive influences. If an
F-35
<PAGE> 172
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment has occurred, a loss equal to the difference between the carrying
value of the asset and its fair value is recognized. The resulting reduced
carrying amount of the asset is accounted for as its new cost and depreciated
over the asset's remaining useful life. Management believes that the long-lived
assets in the accompanying consolidated balance sheets are appropriately valued.
INVESTMENTS
At July 31, 1998, investments represent the Company's 11% ownership in
ClearSource, Inc. ClearSource, Inc. was formed during 1998 to build and operate
advanced broadband networks offering a bundle of communications services to
residential and business customers. The Company's investment in ClearSource,
Inc. is accounted for under the cost method of accounting.
REVENUE RECOGNITION
Subscriber revenues are recognized in the month of service. Subscriber fees
billed in advance are included in the accompanying balance sheets as unearned
revenue and are deferred until the month the service is provided.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Approximately
$165,000, $158,000, and $237,160 of advertising expense are recorded in the
Company's statements of operations for the years ended December 31, 1996 and
1997 and the period ended July 31, 1998, respectively.
SOURCES OF SUPPLIES
The Company purchases customer premise equipment and plant materials from
outside vendors. Although numerous suppliers market and sell customer premise
equipment and plant materials, the Company currently purchases each customer
premise component from a single vendor and has several suppliers for plant
materials. If the suppliers are unable to meet the Company's needs as it
continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Company's network could result, which would
adversely affect operating results.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The potential for material credit loss
is mitigated by the large number of customers with relatively small receivable
balances. The carrying amount of the Company's receivables approximates their
fair values.
F-36
<PAGE> 173
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes,
as set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred taxes are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Deferred
tax benefit represents the change in the deferred tax asset and liability
balances (Note 6).
Effective August 1998, the Company will be included in the consolidated
federal income tax return of its parent company, ITC Holding Company, Inc. ("ITC
Holding") (Note 7). The Company and its subsidiaries file separate state income
tax returns.
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." That
statement requires the disclosure of basic net loss per share and diluted net
loss per share. Basic net loss per share is computed by dividing net loss
available to common shareholders by the weighted-average number of common shares
outstanding during the period. As the Company has no significant common stock
outstanding, the convertible preferred stock is assumed to be converted for
purposes of this calculation. Diluted net loss per share gives effect to all
potentially dilutive securities. The Company's potentially dilutive securities
are not included in the computation of diluted net loss per share as their
effect is antidilutive.
3. LONG-TERM DEBT
Long-term debt at December 31, 1997 and July 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Senior Discount Notes, with a face value
of $444,100,000, bearing interest at
11.875% beginning October 15, 2002,
payable semiannually beginning April 15,
2003 with principal and any unpaid
interest due October 15, 2007.......... $249,910,431 $257,478,793
Capitalized lease obligation, at a rate of
10%, payable in quarterly installments
of $6,304 through December 2006,
secured................................ 145,898 140,520
------------ ------------
250,056,329 257,619,313
Less current maturities................... 25,094 25,094
------------ ------------
$250,031,235 $257,594,219
============ ============
</TABLE>
F-37
<PAGE> 174
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are maturities of long-term debt for each of the next five years
as of July 31, 1998:
<TABLE>
<S> <C>
1999........................................... $ 25,094
2000........................................... 13,438
2001........................................... 14,833
2002........................................... 16,374
2003........................................... 18,074
Thereafter..................................... 444,159,353
------------
Total.............................. $444,234,246
============
</TABLE>
The fair values of long-term debt, including current maturities, at
December 31, 1997 and July 31, 1998 are estimated to be approximately
$253,781,000 and $270,833,000 respectively, based on a valuation technique that
considers cash flows discounted at current rates.
In the fourth quarter of 1997, the Company issued units consisting of
senior discount notes due 2007 and warrants to purchase Preferred Stock for
gross proceeds of approximately $250 million. The notes were offered at a
substantial discount from face value, with no interest payable for the first
five years. Approximately $2.5 million of the gross proceeds has been allocated
to the warrants. Each warrant allows the holder to purchase .003734 shares of
the Company's preferred stock. The Company incurred approximately $7.9 million
in costs to issue the senior discount notes. These costs are being amortized at
an effective rate over the life of the notes. The indenture relating to the
notes contains certain covenants that, among other things, limit the ability of
the Company to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, engage in transactions
with stockholders and affiliates, create liens, sell assets, and engage in
mergers and consolidations. The proceeds from the offering of the units have
been, and will be, used to repay certain indebtedness of the Company, to fund
expansion of the Company's business, and for additional working capital and
general corporate purposes.
On June 2, 1997, the Company borrowed $3 million under a promissory note
from SCANA at 12% interest with an original maturity of June 30, 1997. In July
1997, and again in September 1997, the Company and SCANA amended the promissory
note agreement to increase the borrowings to $10 million and to extend the
maturity date until January 1, 1998. On September 29, 1997, the Company borrowed
an additional $1 million at 12% interest under an oral agreement with SCANA with
similar terms. In connection with the SCANA notes discussed above, SCANA and the
Company are negotiating warrants to purchase approximately 753 shares of the
Company's preferred stock. In October 1999, the Company executed the agreement
to issue warrants to purchase Preferred Stock of the Company. The Company will
record the fair value of
F-38
<PAGE> 175
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the warrants as interest expense in the fourth quarter of 1999. On October 24,
1997, the Company repaid all of these borrowings.
On May 13, 1997, the Company obtained a $3 million bridge loan facility
from First National Bank of West Point (the "Bridge Facility") to provide
additional liquidity until long-term financing could be arranged. Interest
accrued at the prime rate (as announced by SunTrust Bank, Atlanta) plus .5% per
annum on all outstanding principal amounts, plus accrued but unpaid interest. As
amended on September 18, 1997, the Bridge Facility was payable on demand, with a
final maturity date of December 15, 1997. On December 15, 1997, the Company
repaid all of these borrowings.
4. OPERATING LEASES
The Company leases office space, utility poles, and other assets for
varying periods. Leases that expire are generally expected to be renewed or
replaced by other leases.
Future minimum rental payments required under the operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
July 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $208,342
2000............................................... 166,274
2001............................................... 124,565
2002............................................... 113,583
2003 and thereafter................................ 153,150
--------
Total minimum lease payments........... $765,914
========
</TABLE>
Total rental expense for all operating leases was approximately $70,000,
$75,000 and $97,000, for the years ended December 31, 1996 and 1997 and the
period ended July 31, 1998, respectively.
5. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into contracts with various entities to provide
programming to be aired by the Company. The Company pays a monthly fee as cost
for the programming services, generally based on the number of average
subscribers to the program, although some fees are adjusted based on the total
number of subscribers to the system and/or the system penetration percentage.
Certain contracts have minimum monthly fees. The Company estimates that it will
pay approximately $6.5 million in programming fees under these contracts during
1999.
F-39
<PAGE> 176
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL PROCEEDINGS
In the normal course of business, the Company is subject to various
litigation; however, in management's opinion, there are no legal proceedings
pending against the Company which would have a material adverse effect on the
financial position, results of operations, or liquidity of the Company.
6. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities at December 31, 1996 and 1997
and July 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $3,875 $7,221 $ 6,987
Deferred bond interest................... 0 0 8,792
Other.................................... 92 279 280
Valuation allowance...................... (2,475) (4,165) (10,270)
------ ------ --------
Total deferred tax assets....... 1,492 3,335 5,789
Deferred tax liabilities:
Depreciation and amortization............ (1,492) (3,335) (5,789)
------ ------ --------
Net deferred income taxes................... $ 0 $ 0 $ 0
====== ====== ========
</TABLE>
Effective August 1998, the Company will be included in the consolidated
federal income tax return of its parent company, ITC Holding (Note 7). The
Company and its subsidiaries file separate state income tax returns.
The Company has available, at December 31, 1996 and 1997 and July 31, 1998,
unused net operating loss carryforwards of approximately $10,273,00,
$19,144,000, and $18,523,000, respectively, expiring in various years from 2005
to 2013, unless utilized. Management has recorded a valuation allowance of
approximately $2,475,000, $4,165,000, and $10,270,000 for the years ended
December 31, 1996 and 1997 and the period ended July 31, 1998, respectively, on
these net operating loss carryforwards, the majority of which contain
limitations on utilization.
F-40
<PAGE> 177
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax benefit computed at statutory tax rates
to the income tax benefit for the years ended December 31, 1996 and 1997 and the
period ended July 31, 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at statutory rate........................ 34% 34% 34%
State income taxes, net of federal benefit.................. 2 4 5
Prior year actualization.................................... 6 (3) (4)
Goodwill.................................................... 1 (1) (1)
Deferred tax valuation allowance............................ (32) (34) (34)
--- --- ---
11% 0% 0%
=== === ===
</TABLE>
7. EQUITY INTERESTS
CAPITAL TRANSACTIONS
The Company has authorized 16,000,000 shares of $.01 par value common stock
and 100,000 shares of $.01 par value convertible preferred stock at December 31,
1998. In February 1998, the Company completed a 150-for-1 stock split of the
Company's common stock, par value $.01 per share, which was effected in the form
of a stock dividend of new shares of common stock. In connection with the stock
split, the Company increased the number of shares of authorized common stock
from 200,000 to 16,000,000 and changed the conversion ratio between the common
stock and the preferred stock from 1-to-1 to a ratio of 150-to-1.
In June 1998, ITC Holding made an offer to acquire outstanding shares of
the Company in exchange for $100 in cash and ITC Holding Common Stock valued at
$1,600 for each share of the Company's Preferred Stock exchanged (the
"Exchange"). The Exchange was completed effective July 31, 1998. Prior to the
exchange, ITC Holding (through its wholly owned subsidiaries) owned
approximately 42% of the outstanding stock of the Company, representing the
largest stockholder of the Company. As a result of the exchange, ITC Holding
owns approximately 85% of the outstanding stock of the Company.
In May 1998, the Company issued 394 shares of common stock, valued at $8
per share, to an employee under the Company's 1995 stock option plan. In
February 1997, the Company offered and accepted 8,960 shares of preferred stock
for subscription at $1,200 per share. Additionally, in October 1997, the Company
offered and accepted 21,448 shares of preferred stock for subscription at $1,500
per share. In December 1997, in conjunction with the acquisition of KNOLOGY of
Panama City, Inc., the Company issued 2,485 shares of preferred stock valued at
$1,500 per share. During 1998, 134 shares of preferred stock issued in
connection with the acquisition were returned to the Company as part of a
purchase price adjustment. The amount of the consideration paid
F-41
<PAGE> 178
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in excess of the par value, net of expenses incurred in connection with each
issuance, is included in additional paid-in capital on the accompanying balance
sheets. Each share of convertible preferred stock is automatically convertible
into common stock on a 150-for-1 basis at the earlier of either the effective
date of a public offering of common stock by the Company or on December 8, 2005.
In the event of liquidation of the Company, whether voluntary or involuntary,
the holders of convertible preferred stock are entitled to receive preferential
distributions of $1,000, $1,200, or $1,500 per share (depending on when the
stock was issued) before any distributions to common stockholders. The holders
of the preferred stock are not entitled to any other preferences, including
dividends.
STOCKHOLDERS' AGREEMENT
The Company entered into a stockholders' agreement (the "Stockholders'
Agreement"), dated as of December 8, 1995 and amended as of January 25, 1996 and
April 19, 1996, with all of the stockholders of the Company. None of the parties
to the Stockholders' Agreement may transfer any class or series of capital stock
of the Company or any right or option to acquire any share of capital stock of
the Company held by such party to third parties (subject to limited exceptions)
without having offered rights of first refusal to purchase such securities to
the Company. The Stockholders' Agreement will irrevocably terminate upon the
consummation of an initial public offering.
STOCK OPTION PLAN
Under the Company's 1995 stock option plan (the "Stock Option Plan"), as
adopted in December 1995 and amended in February 1998, 700,000 shares (after
giving effect to the 150-for-1 common stock split) of common stock are reserved
and authorized for issuance upon the exercise of the options. All employees of
the Company are eligible to receive options under the Stock Option Plan. The
Stock Option Plan is administered by the compensation and stock option committee
of the board of directors. Options granted under the Stock Option Plan are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended. All options were granted at an
exercise price equal to the estimated fair value of the common stock at the
dates of grant as determined by the board of directors based on equity
transactions and other analyses. The options expire ten years from the date of
grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock
F-42
<PAGE> 179
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting methodology
required by APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, under which no compensation cost has been recognized by the
Company. However, the Company has computed, for pro forma disclosure purposes,
the value of all options for shares of the Company's common stock to employees
of the Company using the Black-Scholes option pricing model and the following
weighted average assumptions in 1996, 1997, and the period ended July 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate.......... 6.31% 6.43% 5.42%
Expected dividend yield.......... 0% 0% 0%
Expected lives................... Seven years Seven years Seven years
Expected volatility.............. 30% 30% 30%
</TABLE>
The weighted average fair value of options granted was $8, $8.44, and
$10.00 for the years ended December 31, 1996 and 1997 and the period ended July
31, 1998, respectively. The total value of options for the Company's stock
granted to employees of the Company for the years ended December 31, 1996 and
1997 and the period ended July 31, 1998 was computed as approximately $154,000,
$304,000, and $1,125,000, respectively, which would be amortized on a pro forma
basis over the five-year vesting period of the options. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's net
loss for the periods presented would be as follows:
<TABLE>
<CAPTION>
AS
REPORTED PRO FORMA
------------ ------------
<S> <C> <C>
Net loss for the year ended December 31,
1996................................... $ (3,125,428) $ (3,155,917)
Net loss for the year ended December 31,
1997................................... (9,091,533) (9,188,862)
Net loss for the period ended July 31,
1998................................... (18,455,881) (18,579,005)
Basic and diluted net loss per share for
the year ended December 31, 1996....... $ (1.53) $ (1.54)
Basic and diluted net loss per share for
the year ended December 31, 1997....... (2.10) (2.12)
Basic and diluted net loss per share for
the period ended July 31, 1998:........ (2.46) (2.47)
</TABLE>
F-43
<PAGE> 180
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plan at July 31, 1998
is presented in the following table (after giving effect to the 150-for-1 common
stock split):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996:......... 52,797 8.00
Granted................................ 126,384 8.44
Forfeited.............................. (15,939) 8.00
-------
Outstanding at December 31, 1997:......... 163,242 8.34
Granted................................ 348,980 10.00
Forfeited.............................. (21,032) 8.32
Exercised.............................. (394) 8.00
-------
Outstanding at July 31, 1998.............. 490,796
=======
Exercisable shares as of:
December 31, 1996...................... 0 $0.00
=======
December 31, 1997...................... 6,606 8.00
=======
July 31, 1998.......................... 17,428 8.00
=======
</TABLE>
8. RELATED-PARTY TRANSACTIONS
ITC Holding provides certain administrative services, such as legal and tax
planning services, for the Company. The costs of these services are charged to
the Company based primarily on the salaries and related expenses for certain of
the ITC Holding executives and an estimate of their time spent on projects
specific to the Company. For the years ended December 31, 1996 and 1997 and the
period ended July 31, 1998, the Company recorded approximately $24,000, $31,000,
and $92,000, respectively, in selling, operations, and administrative expenses
related to these services. In the opinion of management, amounts charged to the
Company are consistent with costs that would be incurred from third party
providers. Additionally, during 1997, ITC Holding paid several invoices related
to the construction of the Company's building. At December 31, 1997, there is
approximately $419,000 related to these payments included in accounts
payable -- affiliate in the Company's balance sheet.
Certain of ITC Holding affiliates provide the Company with various services
and/or receive services provided by the Company. These entities include
Interstate Telephone Company, which provides switching and billing telephone
services; and InterCall, Inc., which provides conference calling services. In
addition, we receive services from ITC*DeltaCom, Inc., an affiliate of ITC
Holding which provides wholesale long-distance and related services and which
leases capacity on certain of its fiber routes. ITC Holding also holds equity
investments in the following entities which do business with the Company:
Powertel, Inc., which provides cellular services, and MindSpring
F-44
<PAGE> 181
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Enterprises, Inc., which is a national provider of Internet access. In
management's opinion, the Company's transactions with these affiliated entities
are representative of arm's-length transactions.
For the years ended December 31, 1996 and 1997 and the period ended July
31, 1998, the Company received services from these affiliated entities in the
amounts of $48,000, $247,000, and $757,000, respectively, which are reflected in
cost of services and selling, operations, and administrative expenses in the
Company's statements of operations. In addition, in 1996 and 1997, the Company
received services from these affiliated entities in the amount of $11,000 and
$13,000, respectively, which is reflected in field and technical expenses in the
Company's statement of operations. At December 31, 1997, amounts payable for
these services of $33,000 are recorded in the Company's balance sheet as
accounts payable -- affiliate.
During 1998, the Company leased office space to ITC*DeltaCom, Inc. and
Powertel, Inc. Approximately $137,000 of lease income related to these
transactions is recorded as other income in the Company's statement of
operations for the year ended July 31, 1998.
In December 1996 and 1997, the Company invested $5,000 and $55,000,
respectively, in an airplane co-owned by ITC Holding and several of its
subsidiaries and other affiliated entities.
Relatives of the stockholders of ITC are stockholders and employees of the
Company's insurance provider. The costs charged to the Company for insurance
services were approximately $36,000, $134,000, and $140,000 or the years ended
December 31, 1996, 1997, and the period ended July 31, 1997, respectively.
The chief executive officer of an affiliate served from July 15, 1996 to
February 20, 1997 as president and chief executive officer of the Company. He
served in his capacity as chief executive officer and president of the Company
at the request of the Company and ITC Holding and received no compensation from
the Company for the year ended December 31, 1996. The value of his services
provided through February 20, 1997 is estimated to total approximately $20,000.
9. BUSINESS ACQUISITIONS
On June 1, 1998, the Company acquired TTE, Inc., a non-facilities based
reseller of local, long distance and operator services to small and medium-sized
business customers throughout South Carolina, for a purchase price of $1.3
million. The acquisition has been accounted for under the purchase method of
accounting.
On December 5, 1997, the Company consummated the acquisition of Beach
Cable, Inc., a Florida corporation that owned and operated a cable television
system in Panama City Beach, Florida ("Beach Cable"). The acquisition was
effected pursuant to an Agreement and Plan of Merger dated December 5, 1997 (the
"Merger Agreement") by
F-45
<PAGE> 182
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and among the Company, KNOLOGY of Panama City, Inc., Beach Cable, and L. Charles
Hilton, Jr., the sole stockholder of Beach Cable, under which KNOLOGY of Panama
City, Inc., a Delaware corporation and a wholly owned subsidiary of the Company,
merged (the "Merger") with and into Beach Cable. Beach Cable, the surviving
corporation in the Merger, was renamed KNOLOGY of Panama City, Inc. as of the
effective time of the Merger (the "Effective Time") and became a wholly owned
subsidiary of the Company. At the Effective Time, all of the issued and
outstanding shares of Common Stock, no par value, of KNOLOGY of Panama City were
converted into 2,485 shares of preferred stock, par value $.01 per share, of the
Company valued at approximately $3.7 million. Immediately following the Merger,
the Company also contributed cash of approximately $3.9 million to KNOLOGY of
Panama City to repay an existing note and related accrued interest to Hilton,
Inc., a holding company owned by L. Charles Hilton, Jr. The Merger has been
accounted for under the purchase method of accounting.
As a result of the acquisition of KNOLOGY of Panama City, Inc.,
approximately one month's operations of KNOLOGY of Panama City are included in
the accompanying statement of operations for the year ended December 31, 1997.
The following unaudited pro forma results of operations for the years ended
December 31, 1997 and 1998 assumes that the TTE, Inc. and Beach Cable, Inc.
acquisitions occurred on January 1, 1997. The pro forma information is presented
for informational purposes only and may not be indicative of the actual results
of operations had the acquisitions occurred on the assumed date, nor is the
information necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Operating revenues................................ $ 14,264,686 $ 12,493,550
Loss before extraordinary items................... (10,074,430) (17,909,739)
Net loss.......................................... (10,074,430) (18,492,280)
Net loss per share(a)............................. (2.33) (2.47)
</TABLE>
- ---------------
(a) Net loss per share is computed using 4,325,250 and 7,497,696 as the number
of shares outstanding at December 31, 1997 and July 31, 1998, respectively.
10. SEGMENT INFORMATION
Effective January 1998, the Company adopted SFAS No. 131, "Disclosures
about segments of an Enterprise and Related Information," which established
revised standards for the reporting of financial and descriptive information
about operating segments in financial statements.
The Company owns and operates advanced hybrid fiber-coaxial networks and
provides residential and business customers broadband communications services,
including video analog and digital cable television and local and long-distance
telephone.
F-46
<PAGE> 183
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Internet services include high-speed Internet access via cable modems, local
transport services, such as local Internet transport, special access, local
private line, and local exchange transport services. Management has identified
the reportable segments based on broadband services offered.
While management of the Company monitors the revenue generated from each of
the various broadband services, operations are managed and financial performance
is evaluated based upon the delivery of a multiple of the services to customers
over a single network. As a result of multiple services being provided over a
single network, there are many shared expenses and shared assets related to
providing the various broadband services to customers. Management believes that
any allocation of the shared expenses or assets to the broadband services would
be arbitrary and impractical.
Revenues by broadband communications service are as follows:
<TABLE>
<CAPTION>
SEVEN
MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------ JULY 31,
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Video............................ $5,334,183 $10,319,495 $ 9,991,798
Telephone........................ 0 16,490 1,077,674
Internet services................ 0 19,083 80,687
---------- ----------- -----------
Consolidated revenues............ $5,334,183 $10,355,068 $11,150,159
========== =========== ===========
</TABLE>
11. SUBSEQUENT EVENTS
CREDIT FACILITY
On December 22, 1998, the Company entered into a $50 million four-year
senior secured credit facility with First Union National Bank and First Union
Capital Markets Corp., which may be used for working capital and other purposes,
including capital expenditures and permitted acquisitions. At the Company's
option, interest will accrue based on either the Alternate Base Rate plus
applicable margin or the LIBOR rate plus applicable margin. Obligations under
the credit facility will be secured by substantially all tangible and intangible
assets of the Company and its current and future subsidiaries. The credit
facility includes a number of covenants, including, among others, covenants
limiting the ability of the Company and its subsidiaries and their present and
future subsidiaries to incur debt, create liens, pay dividends, make
distributions or stock repurchases, make certain investments, engage in
transactions with affiliates, sell assets, and engage in certain mergers and
acquisitions. The credit facility also includes covenants requiring compliance
with certain operating and financial ratios on a consolidated basis. The credit
facility allows the Company to borrow up to five times certain individual
subsidiaries' consolidated adjusted cash flow as defined in the credit facility.
In connection with the initiation of the revolving credit facility, the Company
F-47
<PAGE> 184
KNOLOGY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred $1,255,681 in related costs which are being amortized on a
straight-line basis over the five year term.
ACQUISITIONS
On October 30, 1998, the Company acquired substantially all of the assets
of Cable Alabama Corporation ("Cable Alabama") for approximately $60,733,000 in
cash and also purchased for $5,000,000 in cash, certain real property located in
Huntsville, Alabama (the "Acquisition"). Cable Alabama owned and operated a
cable television system serving the Huntsville, Alabama area. KNOLOGY plans to
upgrade the existing Cable Alabama plant into a high-speed fiber-coaxial network
that is two-way interactive to provide additional broadband communications
services, such as local and long-distance service, digital television and
high-speed Internet access. The acquisition has been accounted for under the
purchase method of accounting.
The assets acquired are held by KNOLOGY of Huntsville, Inc. and have been
included in the Company's consolidated financial statements effective September
1, 1998. The unaudited pro forma results of operations for the years ended
December 31, 1997 and 1998 assumes the acquisition occurred on January 1, 1997.
The pro forma information is presented for informational purposes only and may
not be indicative of the actual results of operations had the Acquisition
occurred on the assumed date, nor is the information necessarily indicative of
future results of operations.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Operating revenues................................ $ 22,379,066 $ 18,914,289
Loss before extraordinary item.................... (23,659,283) (26,648,764)
Net loss.......................................... (23,659,283) (27,231,305)
Net loss per share(a)............................. (5.47) (3.63)
</TABLE>
- ---------------
(a) Loss per share is computed using 4,325,250 and 7,497,696 as the number of
shares outstanding at December 31, 1997 and July 31, 1998, respectively.
F-48
<PAGE> 185
INDEPENDENT AUDITORS' REPORT
Stockholders
CableAmerica Corporation
Phoenix, Arizona
We have audited the accompanying balance sheets of Cable Alabama
Corporation (the "Company") a wholly-owned subsidiary of CableAmerica
Corporation as of August 31, 1998 and September 30, 1997, and the related
statements of operations and deficit and of cash flows for the eleven-month
period ended August 31, 1998 and the year ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at August 31, 1998 and September
30, 1997, and the results of its operations and its cash flows for the
eleven-month period ended August 31, 1998 and the year ended September 30, 1997
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records maintained by the Company and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Company
had been operated as an unaffiliated company (see Notes 1 and 5 to the financial
statements regarding expenses allocated from CableAmerica Corporation).
As discussed in Note 6 to the financial statements, on October 30, 1998,
the Company sold substantially all of its assets.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 7, 1998
F-49
<PAGE> 186
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
BALANCE SHEETS
AUGUST 31, 1998 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Note 6)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,640 $ 19,753
Subscriber accounts receivable -- less allowance for
doubtful accounts of $68,000 and $101,000.............. 930,026 889,105
Prepaid expenses and other assets......................... 336,126 400,037
Deferred income taxes (Note 4)............................ 2,174,000 2,340,000
------------ ------------
Total current assets.............................. 3,448,792 3,648,895
------------ ------------
CABLE TELEVISION SYSTEMS AND EQUIPMENT:
Reception and distribution facilities..................... 34,926,769 31,699,513
Land, building and improvements........................... 81,178 68,809
Vehicles, equipment and fixtures.......................... 1,321,356 1,261,170
Construction in progress.................................. 116,557 336,673
------------ ------------
Total............................................. 36,445,860 33,366,165
Less accumulated depreciation and amortization............ (22,689,797) (20,352,138)
------------ ------------
Cable television systems and equipment -- net..... 13,756,063 13,014,027
------------ ------------
TOTAL............................................. $ 17,204,855 $ 16,662,922
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (Note 6)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 868,237 $ 2,389,229
Accrued payroll........................................... 88,544 103,001
Accrued property tax...................................... 125,740 96,807
Other accrued expenses.................................... 237,939 260,961
------------ ------------
Total current liabilities......................... 1,320,460 2,849,998
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 6)
STOCKHOLDERS' EQUITY (Note 2):
Common stock, $100 par value -- authorized, 1,500 shares;
issued and outstanding, 1,500 shares................... 150,000 150,000
Additional paid-in capital................................ 20,664,426 18,886,572
Deficit................................................... (4,930,031) (5,223,648)
------------ ------------
Total stockholders' equity........................ 15,884,395 13,812,924
------------ ------------
TOTAL............................................. $ 17,204,855 $ 16,662,922
============ ============
</TABLE>
See notes to financial statements.
F-50
<PAGE> 187
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
STATEMENTS OF OPERATIONS AND DEFICIT
ELEVEN-MONTH PERIOD ENDED AUGUST 31, 1998 AND
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Basic services............................................ $ 7,791,166 $ 7,540,638
Pay services.............................................. 2,096,561 2,298,352
Other services............................................ 2,153,775 2,185,008
----------- -----------
Total revenues.................................... 12,041,502 12,023,998
----------- -----------
COSTS AND EXPENSES:
Programming............................................... 4,285,888 4,103,038
Selling, general and administrative....................... 3,421,791 3,477,576
Depreciation and amortization............................. 2,415,754 2,543,540
Allocated corporate expenses (Note 5)..................... 1,458,452 1,669,996
----------- -----------
Total costs and expenses.......................... 11,581,885 11,794,150
----------- -----------
INCOME BEFORE INCOME TAX PROVISION.......................... 459,617 229,848
INCOME TAX PROVISION (Note 4)............................... 166,000 80,000
----------- -----------
NET INCOME.................................................. 293,617 149,848
DEFICIT, BEGINNING OF PERIOD................................ (5,223,648) (5,373,496)
----------- -----------
DEFICIT, END OF PERIOD...................................... $(4,930,031) $(5,223,648)
=========== ===========
</TABLE>
See notes to financial statements.
F-51
<PAGE> 188
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
STATEMENTS OF CASH FLOWS
ELEVEN-MONTH PERIOD ENDED AUGUST 31, 1998 AND
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 293,617 $ 149,848
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,415,754 2,543,540
Deferred income taxes.................................. 166,000 80,000
Changes in operating assets and liabilities:
Subscriber accounts receivable....................... (40,921) (226,021)
Prepaid expenses and other assets.................... 63,910 (17,876)
Accounts payable..................................... (1,520,992) 1,170,861
Accrued expenses and other liabilities............... (8,546) 24,906
----------- -----------
Net cash provided by operating activities......... 1,368,822 3,725,258
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES -- Purchase or
construction of cable television systems and equipment.... (3,157,789) (5,323,569)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -- Contributions to
capital by parent company................................. 1,777,854 1,613,437
----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (11,113) 15,126
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 19,753 4,627
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 8,640 $ 19,753
=========== ===========
</TABLE>
See notes to financial statements.
F-52
<PAGE> 189
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
NOTES TO FINANCIAL STATEMENTS
ELEVEN-MONTH PERIOD ENDED AUGUST 31, 1998 AND
YEAR ENDED SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation -- Cable Alabama Corporation (the "Company") is a
wholly-owned subsidiary of CableAmerica Corporation ("CAC"). The accompanying
financial statements have been prepared from the separate records maintained by
the Company and may not necessarily be indicative of the conditions that would
have existed or the results of operations if the Company had been operated as an
unaffiliated company (see Note 5 regarding expenses allocated from CAC). The
Company provides cable television services to various communities within
Alabama.
Significant accounting policies are summarized below:
a. Cable Television Systems and Equipment -- Cable television systems and
equipment are stated at cost and are depreciated using the straight-line method
over the estimated useful lives as follows:
<TABLE>
<S> <C>
Reception and distribution facilities............ 10 years
Equipment and fixtures........................... 5-10 years
Vehicles......................................... 3-5 years
Buildings and improvements....................... 10-30 years
</TABLE>
Direct costs associated with the construction of new cable television
plant, the expansion of existing cable television plant, and the
rebuilding of cable television plant are capitalized. Interest
allocated from CAC is capitalized on construction-in-progress. Interest
costs of approximately $10,000 and $26,000 were capitalized in 1998 and
1997, respectively.
b. Cash and cash equivalents include cash on hand and in banks.
c. Income Taxes -- The Company is included in the consolidated income tax
return of CAC. CAC's policy is to allocate income tax expense or benefit to
subsidiaries as if they filed separate returns. The Company follows Statement of
Financial Accounting Standards ("SFAS") No. 109 Accounting for Income Taxes.
SFAS No. 109 requires an asset and liability approach for financial accounting
and reporting for income tax purposes. This statement recognizes (a) the amount
of taxes payable or refundable for the current year, and (b) deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in the financial statements or tax returns.
d. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and
F-53
<PAGE> 190
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
2. STOCKHOLDERS' EQUITY
CAC has a $42,500,000 revolving line of credit agreement with two
commercial banks. At August 31, 1998 and September 30, 1997, CAC had borrowings
under the lines of credit of $42,500,000 and $37,800,000, respectively.
Borrowings are collateralized by all of the common stock of each of the
wholly-owned subsidiary companies of CAC, including the Company. The lines of
credit were paid off and terminated on October 30, 1998 (Note 6).
3. LEASES
Operating Leases -- The Company has operating leases for various offices
and warehouses under terms ranging from one to ten years. Rental expense
amounted to $163,000 and $184,000 for the eleven-month period ended August 31,
1998 and the year ended September 30, 1997, respectively, which was paid to the
shareholders of CAC, as lessors of such leases.
In connection with the sale of assets subsequent to year-end, described in
Note 6, all of the Company's lease agreements were assumed by the purchaser.
4. INCOME TAXES
A reconciliation of the difference between the provision for income taxes
and income taxes at the statutory United States federal income tax rate for the
eleven-month period ended August 31, 1998 and the year ended September 30, 1997
is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Income tax provision at statutory United States
federal income tax rate.......................... $156,000 $ 73,000
State taxes and other............................ 10,000 7,000
-------- --------
Income tax provision............................. $166,000 $ 80,000
======== ========
</TABLE>
The components of the Company's deferred income tax asset are as follows:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 30,
1998 1997
---------- -------------
<S> <C> <C>
Federal net operating loss carryforwards...... $2,793,000 $2,863,000
State net operating loss carryforwards........ 468,000 474,000
Difference in book and tax carrying basis of
property and equipment..................... (1,626,000) (1,548,000)
Tax credits................................... 484,000 484,000
Other......................................... 55,000 67,000
---------- ----------
Net deferred tax asset........................ $2,174,000 $2,340,000
========== ==========
</TABLE>
F-54
<PAGE> 191
CABLE ALABAMA CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF CABLEAMERICA CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approximately $9.1 million of estimated Alabama state net
operating loss carryforwards available to offset state taxable income. These
carryforwards expire through 2012.
Additionally, the Company has been allocated the following carryforwards
available as offsets to Federal taxable income or as credits against regular
federal income taxes:
<TABLE>
<CAPTION>
NET OPERATING LOSSES ALTERNATIVE MINIMUM TAX CREDITS
EXPIRING FROM 2005 TO 2012 AND INVESTMENT TAX CREDITS
- -------------------------- -------------------------------
<S> <C>
$8,100,000 $484,000
------------- -----------
</TABLE>
5. ALLOCATED CORPORATE EXPENSES
CAC provides substantially all administration, finance and accounting
services for the Company. CAC allocates corporate expenses, including interest
(based on total assets) and other expenses (based on the number of basic
subscribers) to its subsidiaries. The total expenses allocated to the Company
for 1998 and 1997 were approximately $1,458,000 and $1,670,000, respectively.
6. SUBSEQUENT EVENT
On October 30, 1998, the Company sold substantially all of its assets.
Proceeds of the sale were approximately $60,000,000.
F-55
<PAGE> 192
PRO FORMA FINANCIAL INFORMATION
The pro forma balance sheet as of September 30, 1999 gives effect to the
Reorganization and related activities, the exercise of the SCANA warrants, the
portion of the private placement under firm commitment, and the ITC Holding
loans that have been or will be converted to equity as if they had occurred on
September 30, 1999. Pro forma statements of operations for the nine months ended
September 30, 1999 and the year ended December 31, 1998 are presented below to
give effect to the Reorganization as if it had occurred on January 1, 1998. The
pro forma statement of operations for the year ended December 31, 1998 also
gives effect to the acquisition of Cable Alabama as if it had occurred on
January 1, 1998.
The unaudited pro forma consolidated financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
pro forma transactions occurred at the beginning of the periods presented, nor
is it indicative of future financial position or results of operations.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
KNOLOGY, INC. ADJUSTMENTS KNOLOGY, INC.
------------- ------------ -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................... $ 21,199,977 $ 1,129,500(a) $167,359,343
100,000,000(b)
39,366,860(c)
5,663,006(e)
Accounts receivable, net..................... 9,674,793 -- 9,674,793
Accounts receivable, affiliates.............. 8,636,849 (8,636,849)(g) --
Prepaid expenses............................. 1,216,793 -- 1,216,793
------------ ------------ ------------
Total current assets................. 40,728,412 137,522,517 178,250,929
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET............. 258,655,902 -- 258,655,902
------------ ------------ ------------
OTHER LONG-TERM ASSETS:
Intangible and other assets, net............. 62,311,348 22,418,100(d) 84,729,448
Investments.................................. 1,412,064 1,836,992(e) 3,249,056
Other........................................ 559,677 -- 559,677
------------ ------------ ------------
Total assets......................... $363,667,403 $161,777,609 $525,445,012
============ ============ ============
CURRENT LIABILITIES:
Current portion of long-term debt............ $ 12,174 $ -- $ 12,174
Accounts payable............................. 16,050,716 -- 16,050,716
Accounts payable -- affiliates............... 347,203 -- 347,203
Accrued liabilities.......................... 6,907,270 -- 6,907,270
Advances from affiliates..................... 1,171,252 -- 1,171,252
Unearned revenue............................. 3,593,068 -- 3,593,068
------------ ------------ ------------
Total current liabilities............ 28,081,683 -- 28,081,683
</TABLE>
F-56
<PAGE> 193
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
KNOLOGY, INC. ADJUSTMENTS KNOLOGY, INC.
------------- ------------ -------------
<S> <C> <C> <C>
NONCURRENT LIABILITIES:
Notes payable................................ 19,116,496 -- 19,116,496
Accrued interest payable..................... 35,825,088 -- 35,825,088
Unamortized investment tax credits........... 388,277 -- 388,277
Deferred income taxes........................ 321,658 (321,658)(g) --
Bonds payable, net of discount............... 266,685,707 -- 266,685,707
------------ ------------ ------------
Total liabilities.................... 350,418,909 (321,658) 350,097,251
WARRANTS....................................... 2,486,960 2,239,105(d) 4,726,065
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock..................... -- 4,518(a) 480,355
20,297(c)
22,807(e)
432,733(f)
Series B Preferred Stock..................... -- 210,526(b) 210,526
Common stock................................. 1 24(f) 25
Additional paid in capital................... 75,312,104 22,418,100(d) 243,591,720
1,920,150(a)
99,789,474(b)
39,346,563(c)
(2,239,105)(d)
7,477,191(e)
(432,757)(f)
Accumulated Deficit.......................... (64,526,921) (795,168)(a) (73,637,280)
(8,315,191)(g)
Unrealized losses............................ (23,650) -- (23,650)
------------ ------------ ------------
Total stockholders' equity........... 10,761,534 159,860,162 170,621,696
------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $363,667,403 $161,777,609 $525,445,012
============ ============ ============
</TABLE>
- ---------------
(a) Reflects the exercise of the SCANA warrants and the related net cash
proceeds of $1.1 million and the recording of the fair value of the
warrants as determined by the Black-Scholes model of $0.8 million and the
related charge to retained earnings.
(b) Reflects $100 million of firm commitments in the private placement of Series
B preferred stock.
(c) Reflects $39.4 million of loans from ITC Holding converted into 2,029,724
shares of Series A preferred stock and options to purchase 6,391,329 shares
of Series A preferred stock. The option amount is reflected in additional
paid-in capital as no options have been exercised.
(d) Reflects the acquisition of minority interest of KNOLOGY Holdings recorded
at the fair market value of consideration surrendered of $22.4 million and
the exchange of our warrants for KNOLOGY Holdings warrants and the
cancellation of the KNOLOGY Holdings warrants.
(e) Reflects the contribution of ITC Holding's approximate 6% interest in
ClearSource, cash of $5.7 million and subscription rights to purchase
ClearSource shares, in exchange for 2,280,702 shares of Series A preferred
stock recorded at the historical cost of $1.8 million for the ClearSource
shares contributed and $5.7 million for the cash contributed.
(f) Reflects the recording of the distribution.
(g) Reflects the elimination of deferred income taxes and the related affiliate
receivable which resulted from KNOLOGY Holdings participation in the tax
sharing arrangement with ITC Holding. As KNOLOGY will prepare its income tax
return on a separate company basis, it will provide a full valuation
allowance against any income tax benefit.
F-57
<PAGE> 194
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
KNOLOGY, PRO FORMA KNOLOGY,
INC. ADJUSTMENTS INC.
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE.......................................... $ 48,824,228 $ -- $ 48,824,228
OPERATING EXPENSES
Cost of services............................... 18,573,719 -- 18,573,719
Selling, operations and administrative......... 35,760,116 -- 35,760,116
Depreciation and amortization.................. 29,526,358 1,681,358(a) 31,207,716
------------ ------------- ------------
Total Operating Expenses............... 83,860,193 1,681,358 85,541,551
OTHER INCOME (EXPENSE)
Interest income................................ 1,251,191 -- 1,251,191
Interest expense............................... (24,287,041) -- (24,287,041)
Affiliate interest expense..................... (106,248) -- (106,248)
Other income................................... 174,122 -- 174,122
------------ ------------- ------------
(22,967,976) -- (22,967,976)
------------ ------------- ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST... (58,003,941) (1,681,358) (59,685,299)
MINORITY INTEREST................................ 3,267,653 (3,267,653)(a) --
------------ ------------- ------------
LOSS BEFORE INCOME TAXES......................... (54,736,288) (4,949,011) (59,685,299)
INCOME TAX BENEFIT............................... 11,011,711 (11,011,711)(b) --
------------ ------------- ------------
PRO FORMA LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS................................... $(43,724,577) $ (15,960,722) $(59,685,299)
============ ============= ============
BASIC AND DILUTED LOSS PER SHARE................. $(437,245.77) $ (1.10)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES -- BASIC
AND DILUTED.................................... 100 54,353,796(c)
============ ============
</TABLE>
- ---------------
(a) Reflects the elimination of the minority interest and additional
amortization expense associated with the increase in intangible assets
which resulted from the acquisition of minority interests at fair market
value in conjunction with the Exchange. The intangible assets of $22.4
million will be amortized over ten years.
(b) Reflects the elimination of income tax benefit due to the operating losses
of the consolidated entity. After the distribution, KNOLOGY Holdings will
no longer participate in a tax sharing agreement with ITC Holding and thus
record a full valuation allowance against the income tax benefit.
(c) As the Company has no significant common stock outstanding, Series A and
Series B convertible preferred stock is assumed to be converted for
purposes of this calculation. Diluted net loss per share gives effect to
all potentially dilutive securities. The Company's potentially dilutive
securities are not included in the computation of diluted net loss per
share as their effect is antidilutive.
F-58
<PAGE> 195
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL (A) PRO FORMA PRO FORMA
KNOLOGY, INC. CABLE ALABAMA ADJUSTMENTS KNOLOGY, INC.
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE............................ $ 45,132,522 $8,873,291 $ -- $ 54,005,813
OPERATING EXPENSES
Cost of services................. 12,739,540 3,181,970 -- 15,921,510
Selling, operations and
administrative................ 37,323,345 2,463,277 (122,756)(b) 39,663,866
Depreciation and amortization.... 17,326,895 1,764,472 8,846,500(c) 30,179,677
2,241,810(f)
Allocated corporate expenses..... -- 996,601 -- 996,601
------------ ---------- ------------- ------------
Total Operating
Expenses............... 67,389,780 8,406,320 10,965,554 86,761,654
OTHER INCOME (EXPENSE)
Interest income.................. 9,639,050 -- (2,383,333)(e) 7,255,717
Interest expense................. (29,033,088) -- -- (29,033,088)
Affiliate interest expense....... (34,115) -- -- (34,115)
Other income..................... 782,954 -- -- 782,954
------------ ---------- ------------- ------------
(18,645,199) -- (2,383,333) (21,028,532)
------------ ---------- ------------- ------------
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS, AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE........................ (40,902,457) 466,971 (13,348,887) (53,784,373)
MINORITY INTEREST.................. 13,294,079 -- (8,968,717)(d) --
(4,325,362)(f)
------------ ---------- ------------- ------------
LOSS BEFORE INCOME TAXES CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE........................ (27,608,378) 466,971 (26,642,966) (53,784,373)
INCOME TAX BENEFIT................. 5,631,618 (173,000) (5,458,618)(g) --
------------ ---------- ------------- ------------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE... (21,976,760) 293,971 (32,101,584) (53,784,373)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE............. (582,541) -- -- (582,541)
------------ ---------- ------------- ------------
NET LOSS........................... (22,559,301) 293,971 (32,101,584) (54,366,914)
PREFERRED STOCK DIVIDENDS.......... (1,424,222) -- 1,424,222(h) --
------------ ---------- ------------- ------------
PRO FORMA INCOME (LOSS)
ATTRIBUTABLE TO COMMON
SHAREHOLDERS:.................... $(23,983,523) $ 293,971 $ (30,677,362) $(54,366,914)
============ ========== ============= ============
BASIC AND DILUTED LOSS PER
SHARE:........................... $(239,835.23) $ (1.00)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES -- BASIC AND DILUTED...... 100 54,353,796(i)
============ ============
</TABLE>
F-59
<PAGE> 196
- ---------------
(a) The effective date of the Cable Alabama acquisition was September 1, 1998.
These historical amounts related to Cable Alabama include the unaudited
results of operations for the period January 1, 1998 to August 31, 1998.
(b) Reflects the reduction of rent expense related to the purchase of real
property in connection with the Cable Alabama transaction.
(c) Reflects additional depreciation and amortization expense associated with
the increase in the basis of the acquired assets to fair market value at the
date of acquisition and the allocation of the purchase price to the acquired
subscriber base and non-compete agreement. Amounts allocated to subscriber
base, non-compete agreement, plant and building are amortized over three,
three, ten and twenty-five years, respectively. The purchase price
allocation arising from the acquisition of Cable Alabama is as follows:
<TABLE>
<S> <C>
Property, plant and equipment............................... $30,117,306
Customer list............................................... 34,115,706
Noncompete agreement........................................ 1,500,000
-----------
65,733,012
===========
</TABLE>
(d) Represents the increase in losses applicable to the Company based on an 85%
ownership interest in KNOLOGY Holdings for the year ended December 31, 1998.
(e) Reflects the elimination of interest income resulting from lower cash and
investments due to cash paid for acquisition.
(f) Reflects the elimination of the minority interest and additional
amortization expense associated with the increase in intangible assets which
resulted from the acquisition of minority interests at fair market value in
conjunction with the Exchange. The intangible assets of $22.4 million will
be amortized over ten years.
(g) Reflects the elimination of income tax benefit due to the operating losses
of the consolidated entity. After the distribution, KNOLOGY Holdings will no
longer participate in a tax sharing agreement with ITC Holding and thus
record a full valuation allowance against the income tax benefit.
(h) Reflects the elimination of earnings, distributed to ITC Holding related to
any excess earnings that would be allocated to business development of
KNOLOGY.
(i) As the Company has no significant common stock outstanding, Series A and
Series B convertible preferred stock is assumed to be converted for purposes
of this calculation. Diluted net loss per share gives effect to all
potentially dilutive securities. The Company's potentially dilutive
securities are not included in the computation of diluted net loss per share
as their effect is antidilutive.
F-60
<PAGE> 197
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated.
<TABLE>
<S> <C>
Blue Sky Fees and Expenses................................. $ 5,000
Accounting Fees and Expenses............................... 200,000
Legal Fees and Expenses.................................... 200,000
Printing and Engraving Expenses............................ 195,000
--------
Total.......................................... 600,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware corporation law, a corporation may
indemnify its directors, officers, employees and agents and its former
directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in non derivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The Delaware
Corporation Law provides, however, that such person must have acted in good
faith and in a manner such person reasonably believed to be in (or not) the best
interests of the corporation and, in the case of a criminal action, such person
must have had no reasonable cause to believe his or her conduct was unlawful. In
addition, the Delaware corporation law does not permit indemnification in an
action or suit by or in the right of the corporation, where such person has been
adjudged liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
Our Certificate of Incorporation and our Bylaws contain provisions that further
provide for the indemnification of our directors and officers to the fullest
extent permitted by the Delaware Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We were formed in September 1998 as a wholly-owned subsidiary of ITC
Holding.
KNOLOGY, INC.
In November 1999 we completed an exchange of our securities for the
outstanding KNOLOGY Holdings' securities. We issued 2,476 shares of our common
stock, 30,363,000 shares of our Series A preferred stock and warrants to
purchase 994,961 shares of our Series A preferred stock to holders of KNOLOGY
Holdings' outstanding
II-1
<PAGE> 198
common stock, preferred stock and warrants. As part of the exchange, we issued
an additional 13,362,105 to InterCall in exchange for the stock of Interstate
Telephone Company, Inc., Valley Telephone Company, Inc., Globe
Telecommunications, Inc. and ITC Globe, Inc. In connection with the exchange we
assumed KNOLOGY Holdings' existing stock option plan under the terms of that
plan without any action by the holders of options outstanding thereunder. As a
result of the assumption of the plan options to purchase 6,674,176 shares of our
common stock became outstanding.
InterCall received 25,539,000 shares of our Series A preferred stock in the
exchange, the AT&T Venture Funds collectively received 4,267,800 shares of our
Series A preferred stock in the exchange and SCANA received 451,800 shares of
our Series A preferred stock in the exchange.
In January 2000 InterCall acquired options to purchase 6,258,036 shares of
KNOLOGY Series A preferred stock by converting a $29.7 million balance
outstanding under a loan agreement.
The issuances of securities described above were made in reliance on
exemptions from registration provided by Section 4(2) or Regulation D of the
Securities Act as transactions by an issuer not involving any public offering.
The persons and entities exchanging securities with us in the transactions
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access to information about our
company, through their relationships with us or through information about us
made available to them.
Commencing in November 1999 we are serving as a holding company of KNOLOGY
Holdings, Inc., Interstate Telephone Company, Inc., Valley Telephone Company,
Inc., Globe Telecommunications, Inc. and ITC Globe, Inc. In the last three
years, prior to our ownership of such companies, our subsidiaries offered and
sold the following equity securities that were not registered under the
Securities Act:
KNOLOGY HOLDINGS, INC.
In December 1995 and January 1996, in connection with its initial
capitalization, KNOLOGY Holdings issued to certain of its stockholders 7,780
shares of its preferred stock for a purchase price of $1,000 per share, for an
aggregate amount of $7,780,000. ITC Holding Company, Inc. contributed $4,000,000
plus all of its direct and indirect interests in Cybernet Holding, L.L.C. and in
KNOLOGY of Columbus, Inc. in exchange for the preferred stock.
In April 1996, in connection with a private placement of its preferred
stock, KNOLOGY Holdings issued to certain of its current stockholders 9,312
shares of preferred stock for a purchase price of $1,200 per share, for an
aggregate amount of $11,174,400.
II-2
<PAGE> 199
In February 1997, KNOLOGY Holdings issued 8,960 shares of its preferred
stock to certain of its current stockholders for a purchase price of $1,200 per
share, for an aggregate amount of $10,752,000.
In October 1997, KNOLOGY Holdings issued approximately 21,400 shares of its
preferred stock to qualified investors in a equity private placement for a
purchase price of $1,500 per share, for an aggregate amount of approximately
$32.2 million. ITC Holding, Century Telephone Enterprises, Inc., South Atlantic,
the AT&T venture funds and SCANA Communications, Inc. purchased approximately
$10.0 million, $2.5 million, $5.5 million, $5.0 million and $5.0 million of our
preferred stock, respectively, in the equity private placement. ITC Holding
subsequently repurchased all shares of KNOLOGY Holdings' preferred stock owned
by Century Telephone, South Atlantic and SCANA Communications in 1998.
On October 22, 1997, KNOLOGY Holdings issued 444,100 units, each of which
consists of one senior discount note and one warrant to purchase .003734 shares
of its preferred stock, for net proceeds of approximately $242.4 million. The
warrants may be exercised at a price of $.01 per share, subject to adjustment,
at any time beginning one year after the date of issuance and prior to the close
of business on the tenth anniversary of such grant. Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities, Inc. and First Union Capital Markets Corp.
served as KNOLOGY Holdings' placement agents in the transaction. SCANA
Communications purchased 71,050 of the units for an aggregate purchase price of
$39,998,308.
In December 1997, KNOLOGY Holdings acquired Beach Cable, Inc., a cable
television system in Panama City, Florida. L. Charles Hilton, Jr., who became a
director of our company in November 1999, was the founder and sole stockholder
of Beach Cable. Mr. Hilton received 2,485 shares of KNOLOGY Holdings preferred
stock in the acquisition valued at $1,500 per share. During 1998, 134 of these
shares were returned to KNOLOGY Holdings as part of a purchase price adjustment.
Pursuant to its 1995 stock option plan, KNOLOGY Holdings granted options to
purchase its common stock to its key employees and non-employee directors and
those of its subsidiaries. As of October 30, 1999, KNOLOGY Holdings had issued
outstanding options to purchase 1,771,578 shares of its common stock pursuant to
the plan at exercise prices ranging from $8.00 to $11.33 per share.
In May 1998, KNOLOGY Holdings issued 394 shares of its common stock, at an
exercise price of $8 per share, to an employee who exercised options granted
under its 1995 stock option plan.
Each issuance of securities described above was made in reliance on an
exemption from registration provided by Section 4(2) or Regulation D of the
Securities Act as a transaction by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for distribution in connection with such transactions and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access to information about KNOLOGY Holdings, Inc.,
through
II-3
<PAGE> 200
their relationships with KNOLOGY Holdings or through information about KNOLOGY
Holdings made available to them.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
2.1(1) -- Agreement and Plan of Merger, dated December 5, 1997, by and
among KNOLOGY Holdings, Inc., KNOLOGY of Panama City, Inc.,
Beach Cable, Inc. and L. Charles Hilton
2.2(2) -- Purchase Agreement between Cable Alabama Corporation and
KNOLOGY of Huntsville, Inc., dated as of October 19, 1998.
3.1(6) -- Certificate of Incorporation of KNOLOGY, Inc.
3.2(6) -- Bylaws of KNOLOGY, Inc.
4.1(6) -- Specimen Certificate for Shares of Common Stock, par value
$0.01, of KNOLOGY, Inc.
4.2(6) -- Specimen Certificate for Shares of Series A Preferred Stock,
par value $0.01, of KNOLOGY, Inc.
4.4(1) -- Indenture dated as of October 22, 1997 between KNOLOGY
Holdings, Inc. and United States Trust Company of New York,
as Trustee, relating to the 11 7/8% Senior Discount Notes
Due 2007 of KNOLOGY Holdings, Inc.
4.5(1) -- Registration Rights Agreement, dated October 22, 1997,
between KNOLOGY Holdings, Inc., the Placement Agents and
SCANA Communications, Inc.
4.6 -- Form of Senior Discount Note (contained in Indenture filed
as Exhibit 4.5)
4.7 -- Form of Exchange Note (contained in Indenture filed as
Exhibit 4.5)
5.1(6) -- Form of Opinion of Hogan & Hartson, L.L.P.
8.1(4) -- Form of Opinion of Arthur Andersen LLP regarding certain tax
matters.
10.1(1) -- Unit Purchase Agreement, dated as of October 16, 1997
between KNOLOGY Holdings, Inc. and SCANA Communications,
Inc.
10.4(1) -- Lease Agreement dated April 15, 1996 by and between D.L.
Jordan and American Cable Company, Inc.
10.5(1) -- Pole Attachment Agreement dated January 1, 1998 by and
between Gulf Power Company and Beach Cable, Inc.
10.6(1) -- Telecommunications Facility Lease and Capacity Agreement,
dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc.
</TABLE>
II-4
<PAGE> 201
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.7(1) -- Master Pole Attachment Agreement dated January 12, 1998 by
and between South Carolina Electric and Gas and KNOLOGY
Holdings, Inc. d/b/a/ KNOLOGY of Charleston.
10.8(1)* -- License Agreement dated September 29, 1995 by and between
Montgomery Cablevision and Entertainment, Inc. and American
Communications Services of Montgomery, Inc.
10.9(1)* -- License Agreement dated January 17, 1996 by and between
American Cable, Inc. and American Communication Services of
Columbus, Inc.
10.10(1)* -- Addendum to License Agreement dated April 21, 1997 by and
between American Cable, Inc. and American Communication
Services of Columbus, Inc.
10.11(1) -- Lease Agreement, dated December 5, 1997 by and between The
Hilton Company and KNOLOGY of Panama City, Inc.
10.13(1) -- Certificate of Membership with National Cable Television
Cooperative, dated January 29, 1996, of Cybernet Holding,
Inc.
10.18(2) -- Ordinance No. 99-16 effective March 16, 1999 between
Columbus consolidated Government and KNOLOGY of Columbus,
Inc.
10.19(1) -- Ordinance No. 16-90 (Montgomery, Alabama) dated March 6,
1990.
10.20(1) -- Ordinance No. 50-76 (Montgomery, Alabama)
10.21(1) -- Ordinance No. 9-90 (Montgomery, Alabama) dated January 16,
1990.
10.22(1) -- Resolution No. 58-95 (Montgomery, Alabama) dated April 6,
1995.
10.23(1) -- Resolution No. 92-7 (Panama City Beach, Florida) dated July
23, 1992.
10.24(1) -- License (Bay County, Florida) dated January 5, 1993.
10.25(1) -- Resolution No. 97-22 (Panama City Beach, Florida) dated
December 3, 1997.
10.26(1) -- Resolution No. 2075 (Bay County, Florida) dated November 18,
1997.
10.27(3) -- Ordinance No. 5999 (Augusta, Georgia) dated January 20,
1998.
10.28(3) -- Ordinance No. 1723 (Panama City, Florida) dated March 10,
1998.
10.30(2) -- Ordinance No. 98054 (Mount Pleasant, South Carolina) dated
March 9, 1999.
10.31(2) -- Franchise Agreement (Charleston County, South Carolina)
dated December 15, 1998.
10.32(2) -- Ordinance No. 1998-47 (North Charleston, South Carolina)
dated May 28, 1998.
10.33(2) -- Ordinance No. 1998-77 (Charleston, South Carolina) dated
April 28, 1998.
10.34(2) -- Ordinance No. 98-5 (Columbia County, Georgia) dated August
18, 1998.
</TABLE>
II-5
<PAGE> 202
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.36(2) -- Network Access Agreement dated July 1, 1998 between SCANA
Communications, Inc., f/k/a MPX Systems, Inc. and KNOLOGY
Holdings, Inc.
10.37(2) -- Internet Access Contract dated September 1, 1998 between
ITC* DeltaCom, Inc. and KNOLOGY Holdings, Inc.
10.38(2) -- Collocation Agreement for Multiple Sites dated on or about
June 1998 between Interstate FiberNet, Inc. and KNOLOGY
Holdings, Inc.
10.39(2)* -- Lease Agreement dated October 12, 1998 between Southern
Company Services, Inc. and KNOLOGY Holdings, Inc.
10.40(2) -- Facilities Transfer Agreement dated February 11, 1998
between South Carolina Electric and Gas Company and KNOLOGY
Holdings, Inc., d/b/a KNOLOGY of Charleston.
10.41(2) -- License Agreement dated March 3, 1998 between BellSouth
Telecommunications, Inc. and KNOLOGY Holdings, Inc.
10.44(2) -- Pole Attachment Agreement dated February 18, 1998 between
KNOLOGY Holdings, Inc. and Georgia Power Company
10.46(2) -- Assignment Agreement dated March 4, 1998 between Gulf Power
Company and KNOLOGY of Panama City, Inc.
10.47(2) -- Adoption Agreements dated March 1, 1999 between KNOLOGY
Holdings, Inc. and BellSouth Telecommunications, Inc.
10.48(2)* -- Lease Switching Agreement between South Carolina Net for TTE
Inc. and KNOLOGY Holdings, Inc.
10.50(2)* -- Carrier Services Agreement dated September 30, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
10.51(2)* -- Reseller Services Agreement dated September 9, 1998 between
Business Telecom, Inc. and KNOLOGY Holdings, Inc.
10.52(2)* -- Private Line Services Agreement dated September 10, 1998
between BTI Communications Corporation and KNOLOGY Holdings,
Inc.
10.53(2) -- Credit Facility Agreement between First Union National Bank,
First Union Capital Markets Corp. and KNOLOGY Holdings, Inc.
dated December 22, 1998.
10.54(2) -- Ordinance No. 284 (Cedar Grove, Florida) dated June 9, 1998.
10.55(2) -- License Agreement dated January 5, 1993 between County
Commissioners of Bay County Florida and Beach Cable, Inc.
10.56(2) -- Ordinance No. 647 (Lynn Haven, Florida) dated May 12, 1998
between KNOLOGY of Panama City, Inc. and the City of Lynn
Haven.
10.57(2) -- Ordinance No. 1723 (Panama City, Florida) dated March 10,
1998 between KNOLOGY of Panama City, Inc. and the City of
Panama City.
</TABLE>
II-6
<PAGE> 203
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.58(2) -- Resolution No. 97-22 (Panama City Beach, Florida) dated
December 3, 1997 between Panama City Beach, Florida and
KNOLOGY Holdings, Inc.
10.59(6) -- Form of Tax Separation Agreement between ITC Holding and
KNOLOGY, Inc.
10.60(6) -- Right of First Refusal and Option Agreement, dated November
19, 1999 by and between KNOLOGY of Columbus, Inc. and ITC
Service Company, Inc.
10.61(6) -- Services Agreement dated November 2, 1999 between KNOLOGY,
Inc. and ITC Service Company, Inc.
10.62(6) -- Support Agreement, dated November 2, 1999 between Interstate
Telephone Company, Inc. and ITC Service Company, Inc.
10.63(6) -- 1995 KNOLOGY Holdings, Inc. Stock Option Plan, assumed by
KNOLOGY, Inc. as of November 23, 1999.
10.64(6) -- KNOLOGY, Inc. Long Term Incentive Plan.
10.65(6) -- Warrant Agreement, dated as of December 3, 1999, between
KNOLOGY, Inc. and United States Trust Company of New York
(including form of Warrant Certificate).
10.66(6) -- Warrant Registration Rights Agreement, dated as of December
3, 1999, between KNOLOGY, Inc. and United States Trust
Company of New York.
10.67(6) -- Section 351 Agreement by and among KNOLOGY, Inc., InterCall,
Inc., Valley Telephone Company and Globe Telecommunications,
Inc., dated November 1, 1999.
10.68(6) -- Amendment to Section 351 Agreement by and among KNOLOGY,
Inc., InterCall, Inc., Valley Telephone Company and Globe
Telecommunications, Inc., dated November 22, 1999.
10.69(6) -- Form of Stockholder Letter of Transmittal relating to the
exchange of KNOLOGY, Inc. capital stock for KNOLOGY
Holdings, Inc. capital stock.
10.70(6) -- Form of Warrant Holder Letter of Transmittal relating to the
exchange of KNOLOGY, Inc. warrants for KNOLOGY Holdings,
Inc. warrants.
10.71(5) -- KNOLOGY, Inc. Spin-Off Plan.
10.72(6) -- Loan Agreement between InterCall, Inc. and KNOLOGY, Inc.
dated December 22, 1999
10.73(6) -- Line of Credit Note from KNOLOGY, Inc. to InterCall, Inc.
dated December 22, 1999
10.74(6) -- Form of Residual Note from KNOLOGY, Inc. to ITC Holding
Company, Inc.
</TABLE>
II-7
<PAGE> 204
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- -------------------
<C> <C> <S>
10.75(6) -- Form of Letter to ITC Holding Company, Inc. option holders
from ITC Holding Company, Inc.
12.1(5) -- Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
21.1(6) -- Subsidiaries of KNOLOGY, Inc.
23.1(5) -- Consent of Arthur Andersen LLP.
23.2(5) -- Consent of Deloitte & Touche LLP.
23.3(5) -- Consent of Morgan Stanley & Co. Incorporated.
23.4(6) -- Consent of Hogan & Hartson L.L.P. (included in its opinion
filed as Exhibit 5.1 hereto).
23.5(4) -- Consent of Arthur Andersen LLP relating to Exhibit 8.1.
24.1(6) -- Power of Attorney.
27.1(6) -- Financial Data Schedule for year ended 1997 (for SEC use
only).
27.2(6) -- Financial Data Schedule for year ended 1998 (for SEC use
only).
99.1(6) -- IRS Private Letter Ruling, dated April 1, 1999.
99.2(6) -- IRS Private Letter Ruling, dated December 22, 1999.
99.3(6) -- Letter to ITC Holding Company, Inc. from Morgan Stanley &
Co. Incorporated, dated August 22, 1999.
</TABLE>
- ---------------
(1) Filed previously in connection with KNOLOGY Holdings, Inc.'s Registration
Statement on Form S-4, (File No. 333-43339) and incorporated herein by
reference.
(2) Filed previously in connection with KNOLOGY Holdings, Inc.'s Annual Report
on Form 10-K in the year ended December 31, 1998 and incorporated herein by
reference.
(3) Filed previously in connection with KNOLOGY Holdings, Inc.'s Annual Report
on Form 10-K in the year ended December 31, 1997 and incorporated herein by
reference.
(4) To be filed by amendment.
(5) Filed herewith.
(6) Previously filed.
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit was filed separately with the
Secretary of the Commission without such text pursuant to the approval of
our Application Requesting Confidential Treatment under Rule 406 of the
Securities Act.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set
forth therein is not applicable or is included elsewhere in the Financial
Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the
II-8
<PAGE> 205
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-9
<PAGE> 206
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 18th day of January, 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 January 18, 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-10
<PAGE> 207
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To KNOLOGY, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of KNOLOGY, Inc. (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
November 30, 1999. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed under Schedule II herein
as it relates to KNOLOGY, Inc. and subsidiaries is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Atlanta, Georgia
November 30, 1999
S-1
<PAGE> 208
SCHEDULE II
KNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Allowance for doubtful accounts, balance at
beginning of year....................... $ 17,113 $ 23,342 $ 108,528
Addition charged to cost and expense....... 81,082 367,527 1,303,372
Deductions................................. (74,853) (282,341) (1,018,234)
-------- --------- -----------
Allowance for doubtful accounts, balance at
end of year............................. $ 23,342 $ 108,528 $ 393,766
======== ========= ===========
</TABLE>
S-2
<PAGE> 1
EXHIBIT 10.71
KNOLOGY, INC. SPIN-OFF PLAN
WHEREAS, ITC Holding Company, Inc. ("ITC Holding") maintains the ITC
Holding Company, Inc. Stock Option Plan, as amended and restated (the "ITC
Option Plan");
WHEREAS, in connection with the distribution ("Distribution") of KNOLOGY
Series A Preferred Stock by ITC Holding on December 30, 1999, ITC Holding has
determined that it is appropriate and desirable to adjust the outstanding and
unexercised options granted under the ITC Option Plan (the "ITC Options") by
reducing the exercise price of the ITC Options and also distributing options to
purchase KNOLOGY Series A Preferred Stock (the "KNOLOGY Options");
WHEREAS, the purpose of this adjustment is to account for the reduction
in the fair market value of ITC Holding common stock as a result of the
Distribution;
WHEREAS, it is intended that this adjustment satisfy the requirements of
Section 424(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, KNOLOGY, Inc. ("KNOLOGY") will be the issuer of shares of Stock
on exercise of the KNOLOGY Options, and, therefore, wishes to adopt this KNOLOGY
Inc. Spin-Off Plan (the "Plan") pursuant to which the shares of Stock will be
issued; and
WHEREAS, the Plan is intended only for the KNOLOGY Options distributed in
connection with the Distribution and no additional options shall be granted
under this Plan.
NOW, THEREFORE, BE IT RESOLVED, that KNOLOGY sets forth herein the terms
of the Plan as follows:
Section 1. Except as provided in Sections 2 through 10 below, the terms of
the Plan shall be identical to the terms of the ITC Option Plan,
attached hereto as Exhibit A; provided, however, that the terms of
the Plan shall be interpreted in a manner not inconsistent with
the implementation of the Distribution of the KNOLOGY Options and
the administration thereof.
Section 2. The name of the Plan shall be the "KNOLOGY Spin-Off Plan".
Section 3. The Plan shall be effective as of December __, 1999, the date the
Plan was approved by the Board of Directors of KNOLOGY.
<PAGE> 2
Section 4. "Stock" shall mean the Series A Preferred Stock, par value $0.01,
of KNOLOGY and any other capital stock of KNOLOGY into which such
stock may be converted, or reclassified or that may be issued in
respect of, in exchange for or in substitution of, such stock by
reason of any stock splits, stock dividends, distributions,
mergers, consolidations or other like events (including automatic
conversion of the Series A Preferred Stock pursuant to its terms).
Section 5. Notwithstanding anything else to the contrary contained in the
Plan, if an Option is granted, assumed or modified pursuant to the
Plan on account of any recapitalization, reclassification, stock
split, reverse split, combination of shares, exchange of shares,
stock dividend or other distribution payable in capital stock of
ITC Holding or KNOLOGY, or other increase or decrease in such
shares effected without receipt of consideration by ITC Holding or
KNOLOGY, the Option Price payable with respect to shares that are
subject to the Option may be less than the Fair Market Value of
the shares to the extent necessary and appropriate to properly
reflect the transaction.
Section 6. Only holders of outstanding but unexercised ITC Options who
receive Options distributed in the Distribution occurring on or
about December 30, 1999 are eligible to participate in the Plan.
Section 7. Solely for purposes of the Plan, an Optionee who is employed by or
provides services to (1) ITC Holding, or (2) ITC/\DeltaCom, Inc.
or any of their respective affiliates immediately following the
Distribution and who continues to be employed by or provide
services to such company or any of its affiliates following the
Distribution shall not be considered to have terminated qualifying
employment or service for purposes of the plan and options granted
thereunder (including, without limitation, option exercise and
vesting provisions).
Section 8. The number of shares of Stock reserved for issuance under the
Plan is 6,258,036 shares, which is the number of shares of Stock
available for issuance pursuant to the exercise of KNOLOGY Options
distributed by ITC Holding in the Distribution to holders of ITC
Options.
Section 9. The term "Optionee" shall mean a person who holds an Option issued
under the Plan.
2
<PAGE> 3
Section 10. The term "Company" shall KNOLOGY, Inc. and any successor to such
corporation.
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Plan as of the __ day of December, 1999 to evidence its adoption of
this Plan.
KNOLOGY, INC.
By:
--------------------------
3
<PAGE> 4
Exhibit A
ITC HOLDING COMPANY, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2. Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3. Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4. Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5. Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.6. Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7. ISO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.8. Non-ISO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.9. Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.10. Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.11. Option Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.12. Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.13. Parent Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.14. Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.15. Rule 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.16. Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.17. Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.18. Surrendered Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.19. Ten Percent Shareholder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. SHARES SUBJECT TO OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. GRANT OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7.1. Board Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7.2. $100,000 Limit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. OPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9. EXERCISE PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10. NONTRANSFERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11. SURRENDER OF OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11.1. General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
<S> <C>
11.2. Procedure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
11.3. Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11.4. Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. SECURITIES REGISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
13. LIFE OF PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
14. ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
15. SALE OR MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
16. AMENDMENT OR TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
17. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.1. No Shareholder Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.2. No Contract of Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.3. Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.4. Other Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.5. Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17.6. Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
-ii-
<PAGE> 7
ITC HOLDING COMPANY, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
1. PURPOSE
The purpose of this Plan is to promote the interests of the
Company and its Subsidiaries by granting Options to purchase Stock to Optionees
in order (1) to attract and retain Employees, (2) to provide an additional
incentive to each Optionee to work to increase the value of Stock and (3) to
provide each Optionee with a stake in the future of the Company which
corresponds to the stake of each of the Company's shareholders.
2. DEFINITIONS
Each term set forth in this Section 2 shall have the meaning
set forth opposite such term for purposes of this Plan and, for purposes of
such definitions, the singular shall include the plural and the plural shall
include the singular.
2.1. BOARD
"Board" means the Board of Directors of the Company.
2.2. CODE
"Code" means the Internal Revenue Code of 1986, as amended.
2.3. COMPANY
"Company" means ITC Holding Company, Inc. and any successor to
such corporation.
2.4. EMPLOYEE
"Employee" means (for purposes of granting ISOs) any
full-time employee of the Company or any Subsidiary and (for purposes of
granting Non-ISOs) any officer, director or full-time employee of the Company
or any Subsidiary.
2.5. EXCHANGE ACT
"Exchange Act: means the Securities Exchange Act of 1934, as
amended.
<PAGE> 8
2.6. FAIR MARKET VALUE
"Fair Market Value" means the price which the Board acting in
good faith determines through any reasonable valuation method that a share of
stock might change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or to sell and both having reasonable
knowledge of the relevant facts.
2.7. ISO
"ISO" means an option granted under this Plan to purchase
stock which is intended by the Company to satisfy the requirements of Code
Section 422A.
2.8. NON-ISO
"Non-ISO" means an option granted under this Plan to purchase
Stock which is not intended by the Company to satisfy the requirements of Code
Section 422A.
2.9. OPTION
"Option" means an ISO or a Non-ISO.
2.10. OPTIONEE
"Optionee" means any Employee, consultant or adviser of the
Company or any Subsidiary.
2.11. OPTION CERTIFICATE
"Option Certificate" means the written certificate or
instrument which sets forth the terms of an Option granted to an Employee under
this Plan.
2.12. OPTION PRICE
"Option Price" means the price which shall be paid to purchase
one share of Stock upon the exercise of an Option granted under this Plan.
2.13. PARENT CORPORATION
"Parent Corporation" means any corporation which is a parent
of the Company within the meaning of Code Section 425(e).
-2-
<PAGE> 9
2.14. PLAN
"Plan" means this ITC Holding Company, Inc. Stock Option Plan,
as amended from time to time.
2.15. RULE 16B-3
"Rule 16b-3" means the exemption under Rule 16b-3 to Section
16(b) of the Exchange Act or any successor to such rule.
2.16. STOCK
"Stock" means the common stock of the Company.
2.17. SUBSIDIARY
"Subsidiary" means any corporation which is a subsidiary
corporation of the Company within the meaning of Code Section 425(f).
2.18. SURRENDERED SHARES
"Surrendered Shares" means the shares of Stock described in
Section 11 as to which an Optionee has surrendered his or her Option in
accordance with Section 11.
2.19. TEN PERCENT SHAREHOLDER
"Ten Percent Shareholder" means a person who owns (after
taking into account the attribution rules of Code Section 425(d)) more than ten
percent (10%) of the total combined voting power of all classes of stock of
either the Company, a Subsidiary or a Parent Corporation.
3. SHARES SUBJECT TO OPTIONS
There shall be 1,000,000 shares of Stock reserved for use
under this Plan, and such shares of Stock shall be reserved to the extent that
the Company deems appropriate from authorized but unissued shares of Stock.
Furthermore, any shares of Stock subject to an Option which remain after the
cancellation, expiration or exchange of such Option thereafter shall again
become available for use under this Plan, but any Surrendered Shares which
remain after the surrender of an Option under Section 11 and any shares of
stock used to satisfy a withholding obligation under Section 17.3 shall not
again become available for use under this Plan.
-3-
<PAGE> 10
4. EFFECTIVE DATE
The effective date of this Plan shall be the date it is
adopted by the Board, provided that, to the extent this Plan provides for the
issuance of ISOs, the shareholders of the Company (acting at a duly called
meeting of such shareholders) approve those portions of this Plan related to
the granting of ISOs within twelve (12) months after the date of adoption. If
any ISOs are granted under this Plan before the date of such shareholder
approval, these ISOs automatically shall be granted subject to such approval.
However, any requirement of shareholder approval shall not apply to the extent
this Plan provides for the issuance of Non-ISOs unless such approval is
necessary to comply with Section 16(b) of the Exchange Act.
5. ADMINISTRATION
This Plan shall be administered by the Board. The Board
acting in its absolute discretion shall exercise such powers and take such
action as expressly called for under this Plan and, further, the Board shall
have the power to interpret this Plan and (subject to Section 16) to take such
other action in the administration and operation of this Plan as the Board
deems equitable under the circumstances, which action shall be binding on the
Company, on each affected Optionee and on each other person directly or
indirectly affected by such action. However, at such time as the Company
becomes subject to the reporting requirements under Section 16(b) of the
Exchange Act, no member of the Board shall serve as such under this Plan unless
such person is a "disinterested person" within the meaning of Rule 16b-3 of the
Exchange Act.
6. ELIGIBILITY
Only Optionees shall be eligible for the grant of Options
under this Plan.
7. GRANT OF OPTIONS
7.1. BOARD ACTION.
The Board acting in its absolute discretion shall grant
Options to Optionees under this Plan from time to time to purchase shares of
Stock and, further, shall have the right to grant new Options in exchange for
outstanding Options. Each grant of an Option shall be evidenced by an Option
Certificate, and each Option Certificate shall (1) specify whether the Option
is an ISO or Non-ISO, and (2) incorporate such other terms and conditions as
the Board acting in its absolute discretion deems consistent with the terms of
this Plan, including (without
-4-
<PAGE> 11
limitation) a restriction on the number of shares of Stock subject to the
Option which first become exercisable or subject to surrender during any
calendar year. If the Board grants an ISO and a Non-ISO to an Optionee on the
same date, the right of the Optionee to exercise or surrender one such Option
shall not be conditioned on his or her failure to exercise or surrender the
other such Option.
7.2. $100,000 LIMIT.
To the extent that the aggregate Fair Market Value of Stock
(determined as of the date the ISO is granted) with respect to which ISOs first
become exercisable in any calendar year exceeds $100,000, such Options shall be
treated as Non-ISOs. The Fair Market Value of the Stock subject to any other
option (determined as of the date such option was granted) which (1) satisfies
the requirements of Section 422A of the Code and (2) is granted to an Optionee
under a plan maintained by the Company, a Subsidiary, or a Parent Corporation
shall be treated (for purposes of this $100,000 limitation) as if granted under
this Plan. Finally, this $100,000 limitation shall be administered in
accordance with the rules under Section 422A(d) of the Code.
8. OPTION PRICE
The Option Price for each share of Stock subject to an ISO
shall be no less than the Fair Market Value of a share of Stock on the date the
ISO is granted; provided, however, if the Option is an ISO granted to Ten
Percent Shareholder, the Option Price for each share of Stock subject to such
ISO shall be no less than 110% of the Fair Market Value of a share of Stock on
the date such ISO is granted. The Option Price for each share of Stock subject
to a Non-ISO may be less than the Fair Market Value of a share of Stock on the
date the Non-ISO is granted but shall not be less than adequate consideration
(as determined by the Board) for such share. The Option Price shall be payable
in full upon the exercise of any Option, and an Option Certificate at the
discretion of the Board can provide for the payment of the Option Price either
in cash, check or in Stock acceptable to the Board or in any combination of
cash, check and Stock acceptable to the Board. Any payment made in Stock shall
be treated as equal to the Fair Market Value of such Stock on the date the
properly endorsed certificate for such Stock is delivered to the Board (or to
its delegate).
9. EXERCISE PERIOD
Each Option granted under this Plan shall be exercisable in
whole or in part at such time or times as set forth in the related Option
Certificate, but no Option Certificate shall
-5-
<PAGE> 12
(1) make an Option exercisable before the date such
Option is granted or
(2) make an Option exercisable after the earlier of
(a) the date such Option is exercised in full,
(b) the date which is the tenth anniversary of
the date such Option is granted, if such
Option is an ISO granted to a non-Ten Percent
Shareholder, or the date which is the fifth
anniversary of the date such Option is
granted, if such Option is an ISO granted to
a Ten Percent Shareholder, or
(c) the date which is one day after the tenth
anniversary of the date such Option is
granted, if such Option is a Non-ISO.
An Option Certificate may provide for the exercise of an Option after the
employment of an Employee has terminated for any reason whatsoever, including
death or disability.
10. NONTRANSFERABILITY
No Option granted under this Plan shall be transferable by an
Optionee and such Option shall be exercisable during an Optionee's lifetime
only by the Optionee. If the Option Certificate provides for the exercise of
an Option after the death of an Optionee, the personal representative of the
Optionee's estate thereafter shall be treated as the Optionee.
11. SURRENDER OF OPTIONS
11.1. GENERAL RULE
The Board acting in its absolute discretion may incorporate a
provision in an Option Certificate to allow an Optionee to surrender his or her
Option in whole or in part in lieu of the exercise in whole or in part of that
Option on any date that
(1) the Fair Market Value of the Stock subject to such
Option exceeds the Option Price for such Stock and
(2) the Option to purchase such Stock is otherwise
exercisable.
11.2. PROCEDURE
The surrender of an Option in whole or in part shall be
effected by the delivery of the Option Certificate to the Board (or to its
delegate) together with a
-6-
<PAGE> 13
statement signed by the Optionee which specifies the number of shares of Stock
as to which the Optionee surrenders his or her Option and how he or she desires
payment be made for such Surrendered Shares.
11.3. PAYMENT
An Optionee in exchange for his or her Surrendered Shares
shall receive payment in cash or in Stock, or in a combination of cash and
Stock, equal in amount on the date such surrender is effected to the excess of
the Fair Market Value of the Surrendered Shares on such date over the Option
Price for the Surrendered Shares. The Board acting in its absolute discretion
can approve or disapprove an Optionee's request for payment in whole or in part
in cash and can make that payment in cash or in such combination of cash and
Stock as the Board deems appropriate. A request for payment only in Stock
shall be approved and made in Stock to the extent payment can be made in whole
shares of Stock and (at the Board's discretion) in cash in lieu of any
fractional share of Stock.
11.4. RESTRICTIONS
Any Option Certificate which incorporates a provision to allow
an Optionee to surrender his or her Option in whole or in part also shall
incorporate such additional restrictions on the exercise or surrender of such
Option as the Board deems necessary to satisfy the conditions to the exemption
under Rule 16b-3.
12. SECURITIES REGISTRATION
Each Option Certificate may provide that, upon the receipt of
shares of Stock as a result of the surrender or exercise of an Option, the
Optionee shall, if so requested by the Company, hold such shares of Stock for
reinvestment and not with a view to resale or distribution to the public and,
if so requested by the Company, shall deliver to the Company a written
statement satisfactory to the Company to that effect. Each Option Certificate
also may provide that, if so requested by the Company, the Optionee shall make
a written representation to the Company that he or she will not sell or offer
to sell any of such Stock unless a registration statement shall be in effect
with respect to such Stock under the Securities Act of 1933, as amended ("1933
Act"), and any applicable state securities law or unless he or she shall have
furnished to the Company an opinion, in form and substance satisfactory to the
Company, of legal counsel acceptable to the Company, that such registration is
not required. Certificates representing the Stock transferred upon the
exercise or surrender of an Option granted under this Plan may at the
discretion of the Company bear a legend to the effect that such Stock has not
been registered under the 1933 Act or any applicable state securities law and
that such Stock may not be sold or offered for sale in the absence of an
effective registration
-7-
<PAGE> 14
statement as to such Stock under the 1933 Act and any applicable state
securities law or an opinion, in form and substance satisfactory to the
Company, of legal counsel acceptable to the Company, that such registration is
not required.
13. LIFE OF PLAN
No Option shall be granted under this Plan on or after the
earlier of
(1) the tenth anniversary of the effective date of this
Plan (as determined under Section 4 of this Plan), in
which event this Plan thereafter shall continue in
effect until all outstanding Options have been
surrendered or exercised in full or no longer are
exercisable, or
(2) the date on which all of the Stock reserved under
Section 3 of this Plan has (as a result of the
surrender or exercise of Options granted under this
Plan) been issued or no longer is available for use
under this Plan, in which event this Plan also shall
terminate on such date.
14. ADJUSTMENT
The number of shares of Stock reserved under Section 3 of this
Plan and the number of shares of Stock subject to Options granted under this
Plan and the Option Price of such Options shall be adjusted by the Board in an
equitable manner to reflect any change in the capitalization of the Company,
including, but not limited to, such changes as stock dividends or stock splits.
Furthermore, the Board shall have the right to adjust (in a manner which
satisfies the requirements of Section 425(a) of the Code) the number of shares
subject to Options granted under this Plan and the Option Price of such Options
and to issue options under this Plan in the event of any corporate transaction
described in Section 425(a) of the Code which provides for the substitution or
assumption of such Options. If any adjustment under this Section 14 would
create a fractional share of Stock or a right to acquire a fractional share of
Stock, such fractional share shall be disregarded and the number of shares of
Stock reserved under this Plan and the number subject to any Options granted
under this Plan shall be the next lower number of shares of Stock, rounding all
fractions downward. An adjustment made under this Section 14 by the Board
shall be conclusive and binding on all affected persons and, further, shall not
constitute an increase in "the number of shares reserved under Section 3"
within the meaning of Section 16(a) of this Plan.
-8-
<PAGE> 15
15. SALE OR MERGER
If the Company agrees to sell substantially all of its assets
for cash or property or for a combination of cash and property or agrees to any
merger, consolidation, reorganization, division or other corporate transaction
in which Stock is converted into another security or into the right to receive
securities or property and such agreement does not provide for the assumption
or substitution of the Options granted under this Plan, each then outstanding
Option at the direction and discretion of the Board may be cancelled
unilaterally by the Company as of any date before the effective date of such
transaction in exchange for the same consideration which each Optionee
otherwise would receive as a shareholder of the Company in connection with such
transaction if he or she had (notwithstanding the terms of his or her Option
Certificate) the right to surrender his or her Option (to the extent then
outstanding) under Section 11 of this Plan and he or she exercised that right
exclusively for Stock on such date.
16. AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the
extent that the Board deems necessary or appropriate; provided, however, in
accordance with Section 422A of the Code, no such amendment shall be made
absent the approval of the shareholders of the Company (a) to increase the
number of shares reserved under Section 3, or (b) to change the class of
Optionees eligible for Options under Section 6. In the event the Company
becomes subject to the reporting requirements under Section 16(b) of the
Exchange Act, the Board shall not amend the Plan absent the approval of the
shareholders of the Company (a) to materially modify (within the meaning of
Rule 16b-3) the requirements as to eligibility for participation in this Plan,
(b) to extend the maximum life of the Plan under Section 13 or the maximum
exercise period under Section 9, (c) to decrease the minimum Option Price under
Section 8, or (d) to otherwise materially increase (within the meaning of Rule
16b-3) the benefits accruing to Optionees under this Plan. Any amendment,
however, which specifically applies to Non-ISOs shall not require shareholder
approval unless such approval is necessary to comply with Section 16(b) of the
Exchange Act. The Board also may suspend the granting of Options under this
Plan at any time and may terminate this Plan at any time; provided, however,
the Company shall not have the right unilaterally to modify, amend or cancel
any Option granted before such suspension or termination unless (1) the
Optionee consents in writing to such modification, amendment or cancellation or
(2) there is a dissolution or liquidation of the Company or a transaction
described in Section 14 or Section 15 of this Plan.
-9-
<PAGE> 16
17. MISCELLANEOUS
17.1. NO SHAREHOLDER RIGHTS
No Optionee shall have any rights as a shareholder of the
Company as a result of the grant of an Option to him or to her under this Plan
or his or her exercise or surrender of such Option pending the actual delivery
of Stock subject to such Option to such Optionee.
17.2. NO CONTRACT OF EMPLOYMENT
The grant of an Option to an Optionee under this Plan shall
not constitute a contract of employment and shall not confer on an Optionee any
rights upon his or her termination of employment in addition to those rights,
if any, expressly set forth in the Option Certificate which evidences his or
her Option.
17.3. WITHHOLDING
The exercise or surrender of any Option granted under this
Plan shall constitute an Employee's full and complete consent to whatever
action the Board directs to satisfy the federal and state tax withholding
requirements, if any, which the Board in its discretion deems applicable to
such exercise or surrender. The Board also shall have the right to provide in
an Option Certificate that an Employee may elect to satisfy federal and state
withholding requirements through a reduction in the number of shares of Stock
actually transferred to him or her under this Plan, and if the Company is
subject to the reporting requirements under Section 16(b) of the Exchange Act,
any such election and any such reduction shall be effected so as to satisfy the
conditions to the exemption under Rule 16b-3.
17.4. OTHER CONDITIONS
Each Option Certificate may require that Optionees (as a
condition to the exercise or surrender of an Option) enter into any agreement
or make such representations prepared by the Company, including any agreement
which restricts the transfer of Stock acquired pursuant to the exercise or
surrender of such Option and provides for the repurchase of such Stock by the
Company under certain circumstances.
17.5. TRANSFER
The transfer of an Employee between or among the Company, a
Subsidiary, or a Parent Corporation shall not be treated as a termination of
employment under this Plan.
-10-
<PAGE> 17
17.6. CONSTRUCTION
This Plan shall be construed under the laws of the State of
Delaware.
IN WITNESS WHEREOF, the Company caused its duly authorized
officer to execute this Plan as of the 17th day of January, 1991 to evidence
its adoption of this Plan, and the Company has caused its duly authorized
officer to execute this Amended and Restated Plan as of September ___, 1994.
ITC HOLDING COMPANY, INC.
By:
----------------------
-11-
<PAGE> 1
Exhibit 12.1
KNOLOGY, INC.
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
YEAR ENDED Nine Months Nine Months
-------------------------------------------------------------------- Ended Ended
December 31, December 31, December 31, December 31, December 31, September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS:
Income (Loss) cumulative
effect of change in accounting
principle and (provision) benefit
for income taxes per statement
of operations................. $3,399,595 $1,047,874 $2,802,056 $ 183,438 $(27,608,378) $(13,092,380) $(54,736,288)
ADD:
Portion of rents
representative of the
interest factor .............. 0 0 0 0 86,192 88,000 126,500
Interest on indebtedness ..... 149,717 555,815 9,933 12,431 29,033,088 21,477,687 24,287,041
Amortization of debt discount. 0 0 0 0 13,651,778 9,948,239 11,665,498
Fixed charges of
unconsolidated subsidiary..... 0 0 1,078,831 6,249,356 0 0 0
---------- ---------- ---------- ---------- ------------ ------------ ------------
Income as adjusted ........... $3,549,312 $1,603,689 $3,890,820 $6,445,225 $ 15,162,680 $ 18,421,546 $(18,657,249)
========== ========== ========== =========== ============== ============== ============
FIXED CHARGES:
Portion of rents
representative of the
interest factor .............. 0 0 0 0 86,192 88,000 126,500
---------- ---------- ---------- ---------- ------------ ------------ ------------
Interest on indebtedness ..... 149,717 555,815 9,933 12,431 29,033,088 21,477,687 24,287,041
Amortization of debt discount. 0 0 0 0 13,651,778 9,948,239 11,665,498
Fixed charges of
unconsolidated subsidiary..... 0 0 1,078,831 6,249,356 0 0 0
---------- ---------- ---------- ---------- ------------ ------------ ------------
Fixed charges ................ $ 149,717 $ 555,815 $1,088,764 $6,261,787 $ 42,771,058 $ 31,513,926 $ 36,079,039
========== ========== ========== ========== ============= ============= ============
Ratio of earnings to fixed
charges ...................... 23.71 2.89 3.57 1.03 -- -- --
Insufficient earnings to
cover fixed charges .......... -- -- -- -- 27,608,378 13,092,380 54,736,288
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of this registration
statement.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 17, 2000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 5 to the Registration Statement of
Knology, Inc. on Form S-1 (No. 333-89179) of our report dated December 7,
1998 on the financial statements of Cable Alabama Corp. appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 14, 2000
<PAGE> 1
EXHIBIT 23.3
[MORGAN STANLEY LETTERHEAD]
January 14, 2000
We hereby consent to the filing of the letter issued by us to ITC Holding
Company, Inc., dated August 22, 1999, as an exhibit to the registration
statement on Form S-1 of KNOLOGY, Inc., filed with the Securities and Exchange
Commission (the "Registration Statement"). We further consent to the references
to our name in the Registration Statement and to the discussion regarding Morgan
Stanley & Co. Incorporated in the Registration Statement section entitled
"Background and Reasons for the Distribution." In giving the foregoing consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended (the
"Securities Act"), or the rules and regulations promulgated thereunder, nor do
we admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "experts" as used in the Securities Act
or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ JOHN F. LAMBROS
John F. Lambros
Vice President
MORGAN STANLEY & CO. INCORPORATED
