Cable Operators

Knology Repricing Employee Stock Options

5/12/2004 3:56 AM Eastern

Newly public Knology Inc., the West Point, Ga.-based overbuilder, approved a plan to reprice stock options for its employees -- a move that will buoy hundreds of thousands of options that have sunk underwater since its December initial public offering, but that could dilute existing shareholders.

Knology approved the plan at its annual meeting of shareholders earlier this month. According to the plan, Knology repriced more than 900,000 option shares that were priced at $18.70 each -- substantially above Knology’s current trading price of $6.70 per share -- to the current value of the stock at the time the options are exercised. Of those option shares, 656,000 are currently exercisable.

Knology said in its proxy statement that the options were issued prior to the IPO and were priced at a level that was considered to be fair market value at the time.

Knology admitted in its proxy statement that the repricing would have a dilutive effect on shareholders.

“Following the option repricing, it will be more likely that a large number of these options will be exercised, which may result in dilution to our stockholders,” Knology said in the proxy statement. “In addition, the trading price of our common stock may decline due to the potential dilutive effects of the option repricing.”

Knology currently has about 21 million shares outstanding, so putting another 656,000 shares on the market would represent about 3% of its float. The stock has declined about 25% from its December IPO price of $9 per share.

For the first quarter ended March 31, Knology reported an 18% increase in revenue to $53.8 million and a 41% increase in cash flow to $9 million, but the operator lost about 5,000 cable customers, ending the period with 179,000 video subscribers.

Telephony subscriber rose by about 2,300 customers in the period to 127,000 and high-speed-Internet customers increased to 75,000, a gain of 1,700 subscribers.

Knology said the video losses were due mainly to a “cleanup” at its Pinellas County, Fla., systems -- which it acquired last year from Verizon Media Ventures Inc. -- and mainly involved nonpaying customers and customers with expired promotions.

Knology also said it is in negotiations to sell its Cerritos, Calif., system, also acquired from Verizon Media last year. In a statement, Knology said the sale would be for a substantially higher price than it paid for the systems, and proceeds could be used to fund capital expenditures and operating expenses for its other markets.

The Cerritos system has about 8,000 subscribers. Knology has not released how much it originally paid.

October