KNOLOGY INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

COMMISSION FILE NUMBER: 000-32647

KNOLOGY, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		58-2424258
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

KNOLOGY, INC. 1241 O.G. SKINNER DRIVE WEST POINT, GEORGIA		31833
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (706) 645-8553

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

As of April 30, 2003, we had 503,197 shares of common stock, 51,046,497 shares of Series A preferred stock, 21,180,131 shares of Series B preferred stock, 50,219,562 shares of Series C preferred stock, 10,684,751 shares of Series D preferred stock and 21,701,279 shares of Series E preferred stock outstanding.

KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED MARCH 31, 2003

INDEX

PART I	FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets.
	Condensed Consolidated Statements of Operations.
	Condensed Consolidated Statement of Cash Flows
	Notes to Condensed Consolidated Financial Statements
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4	CONTROLS AND PROCEDURES.

PART II	OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS.
ITEM 2	CHANGES IN SECURITIES AND USE OF PROCEEDS.
ITEM 3	DEFAULTS UPON SENIOR SECURITIES.
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5	OTHER INFORMATION.
ITEM 6	EXHIBITS AND REPORTS ON FORM 8-K

ITEM 1. FINANCIAL STATEMENTS

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(DOLLARS IN THOUSANDS)

	March 31, 2003			December 31, 2002

ASSETS

CURRENT ASSETS:
Cash and cash equivalents (Including $4,671 and $5,745 of restricted cash as of March 31, 2003 and December 31, 2002, respectively)	$	35,929		$	43,913
Accounts receivable, net	15,029			14,863
Affiliate receivable	73			72
Prepaid expenses and other	892			996
Total current assets	51,923			59,844

PROPERTY, PLANT AND EQUIPMENT, net	347,312			357,182

INVESTMENTS	12,580			12,580

GOODWILL	40,834			40,834

INTANGIBLE AND OTHER ASSETS, net	763			851
Total assets	$	453,412		$	471,291

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current portion of notes payable	$	3,469		$	3,406
Accounts payable	13,340			15,729
Accrued liabilities	6,346			8,441
Unearned revenue	9,426			8,268
Total current liabilities	32,581			35,844

NONCURRENT LIABILITIES:
Notes payable	49,607			50,490
Unamortized investment tax credits	93			110
Senior notes	204,781			198,455
Total noncurrent liabilities	254,481			249,055
Total liabilities	287,062			284,899

WARRANTS	1,861			1,861

COMMITMENTS AND CONTINGENGIES	0			0

STOCKHOLDERS’ EQUITY:
Convertible preferred stock	1,548			1,548
Common stock	5			5
Additional paid-in capital	493,473			493,046
Accumulated deficit	(330,537		)	(310,068		)
Total stockholders’ equity	164,489			184,531

Total liabilities and stockholders’ equity	$	453,412		$	471,291

See notes to condensed consolidated financial statements.

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months Ended March 31,
	2003			2002

OPERATING REVENUES	$	40,687		$	32,034

OPERATING EXPENSES:
Costs and expenses, excluding depreciation and amortization	34,329			28,498
Depreciation and amortization	19,420			18,601
Asset Impairment	0			852
Non-cash stock option compensation	427			0
Litigation fees	199			0
Total operating expenses	54,375			47,951

OPERATING LOSS	(13,688		)	(15,917		)

OTHER INCOME (EXPENSE):
Interest income	113			129
Interest expense	(6,980		)	(10,815		)
Other income (expense), net	86			24
Total other income and expense	(6,781		)	(10,662		)

LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	(20,469		)	(26,579		)
INCOME TAX PROVISION	0			(9		)

LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	(20,469		)	(26,588		)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	0			(1,294		)

NET LOSS	$	(20,469	)	$	(27,882	)

See notes to condensed consolidated financial statements.

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months Ended March 31,
	2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(20,469	)	$	(27,882	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	19,420			18,601
Non-cash stock options compensation	427			0
Asset impairment	0			852
Accretion of discounted debt	0			10,117
Non-cash bond interest expense	6,326			0
Provision for bad debt	1,166			664
Loss (gain) on disposition of assets	2			(12		)
Cumulative effect of change in accounting principle - Goodwill impairment	0			1,294
Changes in operating assets and liabilities:
Accounts receivable	(1,321		)	(1,511		)
Accounts receivable - affiliate	0			528
Prepaid expenses and other	79			(297		)
Accounts payable	(2,401		)	(2,523		)
Accrued liabilities	(2,095		)	(3,191		)
Unearned revenue	1,159			924
Total adjustments	22,762			25,446
Net cash provided by (used in) operating activities	2,293			(2,436		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements	(9,411		)	(10,060		)
Intangible cost expenditures	(48		)	(56		)
Proceeds from sale of assets	1			87
Net cash used in investing activities	(9,458		)	(10,029		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt	(819		)	0
Proceeds from exercised stock options	0			2
Net cash (used in) provided by financing activities	(819		)	2

NET DECREASE IN CASH	(7,984		)	(12,463		)

CASH AT BEGINNING OF PERIOD	43,913			38,074
CASH AT END OF PERIOD	$	35,929		$	25,611

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for interest	$	607		$	331

Cash received during the period for income taxes	$	0		$	456

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003

(UNAUDITED)

(DOLLARS IN THOUSANDS)

1. ORGANIZATION AND NATURE OF BUSINESS

Knology, Inc. (including its predecessors, “Knology” or the “Company”) offers residential and business customers broadband communications services, including analog and digital cable television, local and long distance telephone, high-speed Internet access service and broadband carrier services, using advanced interactive broadband networks. We own, operate and manage interactive broadband networks in seven metropolitan areas: Montgomery and Huntsville, Alabama; Columbus and Augusta, Georgia; Panama City, Florida; Charleston, South Carolina; and Knoxville, Tennessee. We also provide local telephone services in West Point, Georgia, and Lanett and Valley, Alabama. Our local telephone service in this area is provided over a traditional copper wire network while our cable and Internet services are provided over our broadband network. Subject to the availability of additional funding, we plan to expand to additional mid-to-large-sized cities in the southeastern United States.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts 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. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2003, or any other interim period.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction,” which provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting of certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. Effective December 31, 2002, the Company has adopted SFAS No. 145.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not expect SFAS No. 146 to have a material impact on our financial position and results of operations.

In November 2002, FASB Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of Others, was issued. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under the guarantee. Guarantors will also be required to meet expanded disclosure obligations. The initial recognition and measurement provision of FIN 45 are effective for guarantees issued after December 31, 2002. The disclosure requirements are effective for annual

and interim financial statements that end after December 15, 2002, and had no impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of SFAS No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income (loss) of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. Since the Company is continuing to account for the options for Series A preferred stock according to APB 25, adoption of SFAS No. 148 requires the Company to provide prominent disclosures about the effects of SFAS No. 123 on reported income (loss) in annual and interim financial statements.

4. GOODWILL AND INTANGIBLE ASSETS

The Company adopted SFAS No. 142 on January 1, 2002. The Company performs a goodwill impairment test in accordance with SFAS No. 142 annually on January 1. The Company recorded an impairment loss of $1,294 in the first quarter of 2002 as a cumulative effect of change in accounting principle. There was no impairment identified as a result of the January 1, 2003 impairment test.

Intangible assets as of March 31, 2003 and December 31, 2002 respectively, were as follows:

	March 31, 2003						December 31, 2002
	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
	(Thousands of Dollars)
Intangible assets subject to amortization	$	1,753	$	990	$	763	$	1,727	$	876	$	851

Goodwill					$	40,834					$	40,834

Total intangible assets					$	41,597					$	41,685

There were no intangible assets reclassified to goodwill upon adoption of SFAS No. 142.

Amortization expense related to intangible assets was $114 and $197 for the three months ended March 31, 2003 and 2002, respectively.

5. STOCK-BASED COMPENSATION

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. SFAS No. 148 is to be applied for financial statements for fiscal years ending after December 15, 2002. In December 2002 the Company elected to adopt the recognition provisions of SFAS No. 123 which is considered the preferable accounting method for stock-based employee compensation. The Company also elected to report the change in accounting principle using the prospective method in accordance with SFAS No. 148. Under the prospective method, the recognition of compensation costs is applied to all employee awards granted, modified or settled after the beginning of the fiscal year in which the recognition provisions are first applied.

The following table illustrates the effect on net loss if Knology had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

	THREE MONTHS ENDED MARCH 31,
	2003			2002
Net loss – as reported	$	(20,469	)	$	(27,882	)
Total stock-based employee compensation cost, net of related tax effects included in the determination of net income as reported	427			0
The stock-based employee compensation cost, net of related tax effects, that would have been included in the determination of net income if the fair value based method had been applied to all awards	(432		)	(825		)
Pro forma net loss	$	(20,474	)	$	(28,707	)

6. COMMITMENTS AND CONTINGENCIES

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.

7. SEGMENT INFORMATION

The Company follows 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 interactive broadband networks and provides residential and business customers broadband communications services, including analog and digital cable television, local and long distance telephone, and high-speed Internet access, which the Company refers to as video, voice, and data services. We also provide other services including broadband carrier services, which includes local transport services such as local Internet transport, special access, local private line, and local loop services.

While management of the Company monitors the revenue generated from each of the various broadband services, operations are managed and financial performance is evaluated based upon the delivery of multiple services to customers over a single network. As a result of multiple services being provided over a single network, many expenses and assets are shared 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 subjective and impractical.

Revenues by broadband communications service are as follows:

	THREE MONTHS ENDED MARCH 31,
	2003		2002
Video	$	17,177	$	14,150
Voice	16,564		13,330
Data and other	6,946		4,554
Consolidated revenues	$	40,687	$	32,034

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE MANAGEMENT’S DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS QUARTERLY REPORT INCLUDE “FORWARD-LOOKING” STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORS THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT OUR SUPPLIERS AND CUSTOMERS MAY REFUSE TO CONTINUE DOING BUSINESS WITH US OR MAY REFUSE TO EXTEND TRADE CREDIT TO US, (3) THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEW COMPETITORS, (4) THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS IMPACTING OUR INDUSTRY AND MARKETS, (5) THAT NEEDED FINANCING WILL NOT BE AVAILABLE TO US IF AND AS NEEDED, (6) THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT CONSUMER AND CORPORATE SPENDING ARE MATERIALLY IMPACTED, AND (7) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR, AS WELL AS THOSE RISKS SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, WHICH ARE INCORPORATED HEREIN BY REFERENCE. THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN.

The following is a discussion of our consolidated financial condition and results of operations for the three months ended March 31, 2003, and certain factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Form 10-Q.

Background

Knology, Inc. was formed in September 1998 to enable ITC Holding Company, Inc. to complete a reorganization of some of its subsidiaries, including Knology Broadband, Inc. or Broadband.

On November 6, 2002, Knology and Broadband completed a financial restructuring, pursuant to which the following transactions became effective:

• Knology received $39.0 million gross cash proceeds from the issuance of 13,000,000 shares of Series C preferred stock in a private placement to two existing investors. The proceeds were used to pay transaction expenses of approximately $1.7 million and will be used for general corporate purposes.

• $379.9 million aggregate principal amount at maturity of Broadband 11 7/8% senior discount notes due 2007 were exchanged for $193.5 million of new Knology 12% senior notes due 2009, 10,618,352 shares of Series D preferred stock and 21,701,279 shares of Series E preferred stock.

• the $15.5 million, 4-year senior secured credit facility by and among Wachovia Bank, National Association, as lender, Broadband, as guarantor, and the subsidiaries of Broadband as borrowers, was amended and restated;

• the $40.0 million 10-year senior, secured credit facility by and among CoBank, ACB, as lender and Valley Telephone, Globe Telecommunications, Inc. and Interstate Telephone Company, as borrowers, was amended

• $64.2 million aggregate principal amount at maturity of Broadband discount notes held by Valley Telephone Co., Inc. were canceled in exchange for a limited guaranty by Broadband of the CoBank credit facility;

• $15.3 million owed to Knology by Broadband under two intercompany loan facilities were canceled in exchange for a limited guaranty by Broadband of the CoBank credit facility; and

• the Knology Stockholders Agreement was amended to provide the holders of Broadband discount notes who received new Knology preferred stock in the restructuring with registration rights and co-sale rights, as well to provide holders of the Series D preferred stock the right to nominate a director to be elected to Knology’s board of directors.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. We believe that the following may involve a higher degree of judgment and complexity.

Revenue Recognition. The Company generates recurring or multi-period operating revenues, as well as nonrecurring revenues. We recognize revenue in accordance with SEC Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB Nos. 101A and 101B. SAB No. 101 requires that the following four basic criteria must be satisfied before revenues can be recognized:

• There is persuasive evidence that an arrangement exists;

• Delivery has occurred or services rendered;

• The fee is fixed and determinable; and,

• Collectibility is reasonably assured.

In regard to the first and second bullet points, we believe that persuasive evidence of an arrangement and delivery has occurred upon installation.

We base our determination of the third and fourth criteria above on our judgment regarding the fixed nature of the fee we have charged for the services rendered and products delivered, and the prospect that those fees will be collected. If changes in conditions should cause us to determine that these criteria likely will not be met for certain future transactions, revenue recognized for any reporting period could be materially affected.

We generate recurring revenues for our broadband offerings of video, voice and data and other services. Revenues generated from these services primarily consist of a fixed monthly fee for access to cable programming, local phone services, enhanced phone services and access to the internet. Additional fees are charged for services including pay-per-view movies, events such as boxing matches and concerts, long distance service and cable modem rental. Revenues are recognized as services are provided and advance billings or cash payments received in advance of services performed are recorded as deferred revenue.

Allowance for Doubtful Accounts. We use estimates to determine our allowance for bad debts. These estimates are based on historical collection experience, current trends, credit policy and a percentage of our customer accounts receivable. In determining these percentages, we look at historical write-offs of our receivables.

Valuation of Long-Lived and Intangible Assets and Goodwill. We assess the impairment of identifiable long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with Statement of Financial Accounting Standards, or SFAS No. 144. Factors we consider important and that could trigger an impairment review include the following:

• Significant underperformance of our assets relative to historical or projected future operating results;

• Significant changes in the manner in which we use our asset or in our overall business strategy; and,

• Significant negative industry or economic trends.

We adopted SFAS No. 142 on January 1, 2002 and have performed a goodwill impairment test annually on January 1 in accordance with SFAS No. 142. Based on the results of the goodwill impairment test, we recorded an impairment loss of $1.3 million in the first quarter of 2002 as a cumulative effect of change in accounting principle. There was no impairment identified as of January 1, 2003.

In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. SFAS No. 148 is to be applied for financial statements for fiscal years ending after December 15, 2002. In December 2002, we elected to adopt the recognition provisions of SFAS No. 123. We also elected to report the change in accounting principle using the prospective method in accordance with SFAS No. 148. Under the prospective method, the recognition of compensation costs is applied to all employee awards granted, modified or settled after the beginning of the fiscal year in which the recognition provisions are first applied.

The foregoing list in not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto included elsewhere in this quarterly report, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.

Recent Accounting Pronouncements

Revenues and Expenses

We can group our revenues into the following categories:

• Video revenues. Our video revenues consist of fixed monthly fees for expanded basic, premium and digital cable television services, as well as fees from pay-per-view movies, fees for Video on Demand (VOD) and events such as boxing matches and concerts, that involve a charge for each viewing. Video revenues accounted for approximately 44.2% and 42.2% of our consolidated revenues for the three months ended March 31, 2002 and 2003, respectively. In providing video services we currently compete with Comcast, Time Warner Cable, Mediacom and Charter. We also compete with satellite television providers DirecTV and Echostar. Our other competitors include other cable television providers; broadcast television stations; and other satellite television companies. We expect in the future to compete with telephone companies providing cable television service within their service areas and with wireless cable companies.

• Voice revenues. Our voice 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. Voice revenues accounted for approximately 41.6% and 40.7% of our consolidated revenues for the three months ended March 31, 2002 and 2003, respectively. In providing local and long-distance telephone services, we compete with the incumbent local phone company and various long distance providers in each of our markets. BellSouth is the incumbent local and long distance phone company and is a particularly strong competitor in our current markets and throughout the southeastern United States. We also compete with long-distance phone companies such as AT&T, WorldCom, BellSouth and Sprint.

• Data revenues and other revenues. Our data revenues consist primarily of fixed monthly fees for Internet access service and rental of cable modems. Other revenues result principally from broadband carrier services and video production services. These combined revenues accounted for approximately 14.2% and 17.1% of our consolidated revenues for the three months ended March 31, 2002 and 2003, respectively. Providing data services is a rapidly growing business and competition is increasing in each of our markets. Some of our competitors, traditional dial up providers in particular, have competitive advantages such as greater experience, resources, marketing capabilities and stronger name recognition. In providing data services, we compete with traditional dial-up Internet service providers; incumbent local exchange providers that provide digital subscriber lines, or DSL; providers of satellite-based Internet access services; long-distance telephone companies; and cable television companies. We also expect to compete in the future with providers of wireless high-speed data services.

As we continue to sell bundled services, we expect that our voice and data and other revenues will continue to increase at a higher rate compared to video revenues. Accordingly, we expect that our voice and data and other revenues will represent a higher percentage of consolidated revenues in the future.

Our operating expenses include cost of services, selling, operations and administrative expenses and depreciation and amortization.

Cost of services include:

• Video cost of services. Video cost of services consists 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 as a percentage of video revenue were approximately 47.7% and 47.9% for the three months ended March 31, 2002 and 2003, respectively. Programming costs are our largest single cost and we expect this to continue. Since programming cost is partially based on numbers of subscribers, it will increase as we add more subscribers. Additionally, programming cost will increase as costs per channel increase over time.

• Voice cost of services. Voice cost of services consists primarily of transport cost and network access fees. The voice cost of services as a percentage of voice revenues were approximately 18.4% and 17.7% for the three months ended March 31, 2002 and 2003, respectively.

• Data and other cost of services. Data and other cost of services consist primarily of transport cost and network access fees. The data and other cost of services as a percentage of data and other revenue were 7.2% and 5.8% for the months ended March 31, 2002 and 2003, respectively.

We expect the growth of new video connections to decrease as the video segment matures in our current markets. While the number of new video connections may decrease, management feels that opportunity to increase revenue and video margins is available with the introduction of new products and new technology. New voice and data connections are expected to increase with sales and marketing efforts directed at selling customers a bundle of services, penetrating untapped market segments and offering new services. Relative to our current product mix, voice and data revenue will become larger percentages of our overall revenue, and potentially will provide higher margins. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of our consolidated revenues will decrease.

Selling, operations and administrative expenses include:

• Sales and marketing expenses. Sales and marketing expenses 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, maintenance monitoring and maintenance.

• Service and installation expenses. Service and installation expenses include payroll and departmental cost incurred for customer installation and service personnel.

• 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

management and administrative costs.

Depreciation and amortization expenses include depreciation of our interactive broadband networks and equipment and amortization of costs in excess of net assets and other intangible assets related to acquisitions. For periods beginning after January 1, 2002, we no longer amortize goodwill related to acquisitions in accordance with SFAS 142.

As our sales and marketing efforts continue and our networks expand, we expect to add customer connections resulting in increased revenue. We also expect our operating expenses, including depreciation and amortization, to increase as we expand our networks and business.

We have experienced operating losses as a result of the expansion of our advanced broadband communications networks and services into new and existing markets. We expect to continue to focus on increasing our customer base and expanding our broadband operations. Accordingly, we expect that our operating expenses and capital expenditures will continue to increase as we extend our interactive broadband networks in existing and new markets in accordance with our business plan.

Connections

The following table sets forth the number of connections and marketable homes passed as of March 31, 2003 and 2002. The information provided in the table reflects revenue-generating connections. Because we deliver multiple services to our customers, we report the total number of revenue-generating service connections for video, voice and data rather than the total number of customers. For example, a single customer who purchases cable television, local telephone and Internet access services would count as three connections.

	As of March 31,
	2003	2002
Connections:(1)
Video	132,385	122,823
Voice:
On-net	113,899	89,747
Off-net	5,268	6,254
Data	55,000	37,829

Total connections	306,552	256,653

Marketable homes passed(2)	439,025	425,197

(1) All of our video and data connections are provided over our networks. Our voice connections consist of both “On-net” and “Off-net” connections. On-net refers to lines provided over our networks. It includes and 26,018 and 23,733 lines as of March 31, 2003 and 2002, respectively, using traditional copper telephone lines. Off-net refers to telephone connections provided over telephone lines leased from third parties.

(2) Marketable homes passed are the number of business and residential units, such as single residence homes, apartments and condominium units, passed by our broadband networks and listed in our records database other than those we believe are covered by exclusive arrangements with other providers of competing services.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

The following table sets forth financial data as a percentage of operating revenues for the three months ended March 31, 2003 and 2002.

	Three Months Ended March 31,
	2003		2002
Operating revenues:
Video	42	%	44	%
Voice	41		42
Data	17		14

Total	100		100
Cost of Service:
Video	20		21
Voice	7		8
Data	1		1

Total	28		30
Margin
Video	22		23
Voice	34		34
Data	16		13

Total	72		70
Operating expenses:
Selling, operating and administrative	56		59
Depreciation and amortization	48		58
Non-cash stock option compensation	0		0
Litigation fees	1		0

Total	105		117

Operating loss	(33	)	(47	)
Other income and (expense)	(17	)	(36	)

Loss before income taxes and cumulative effect of change in accounting principle	(50	)	(83	)

Income tax benefit (provision)	0		0

Cumulative effect of change in accounting principle	0		(4	)

Net loss	(50	)	(87	)

Revenues. Operating revenues increased 27.0% from $32.0 million for the three months ended March 31, 2002, to $40.7 million for the three months ended March 31, 2003. Operating revenues from video services increased 21.4% from $14.1 million for the three months ended March 31, 2002 to $17.2 million for the same period in 2003. Operating revenues from voice services increased 24.3% from $13.3 million for the three months ended March 31, 2002 to $16.6 million for the same period in 2003. Operating revenue from data and other services increased 52.5% from $4.6 million for the three months ended March 31, 2002 to $6.9 million for the same period in 2003, $6.7 million of which were revenues from data services.

The increased revenues for video, voice and data and other services are primarily due to rate increases and an increase in the number of connections, from 256,653 as of March 31, 2002 to 306,283 as of March 31, 2003. The additional connections resulted primarily from:

• New plans specifically marketed to increase sales from existing customers. Penetration increased 9.4% from 60.4% at March 31, 2002 to 69.8% at March 31, 2003.

• Sales of voice and data services accounted for approximately 80% of the additional connections added from March 31, 2002 through March 31, 2003. We gained these connection by offering more competive plans with the focus on bundling customers. In addition, we launched the new “IntroNet” product in March, 2002, which is exclusively available to bundle customers.

• The continued construction of the broadband network in the Knoxville market.

We expect the growth in the number of new video connections to decrease as the video segment matures in our current markets. While the number of new video connections may decrease, we believe that the opportunity to increase revenue and video margins is available with the introduction of new products and new technology. New voice and data connections are expected to increase with sales and marketing efforts directed at selling customers a bundle of services, penetrating untapped market segments and offering new services. Relative to our current product mix, voice and data revenue will become larger percentages of our overall revenue, and potentially will provide higher margins. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of consolidated revenues will decrease.

Cost of Services. Cost of services increased 21.3% from $9.5 million for the three months ended March 31, 2002, to $11.5 million for the three months ended March 31, 2003. Cost of services for video services increased 21.9% from $6.7 million for the three months ended March 31, 2002, to $8.2 million for the same period in 2003. Cost of services for voice services increased 19.4% from $2.5 million for the three months ended March 31, 2002, to $2.9 million for the same period in 2003. Cost of services for data and other services increased 24.1% from $327,000 for the three months ended March 31, 2002, to $405,000 for the same period in 2003. We expect our cost of services to continue to increase as we add more connections. Programming costs, which are our largest single expense item, have been increasing over the last several years on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. We expect this trend to continue. We may not be able to pass these higher costs on to customers because of competitive forces, which would adversely affect our cash flow and operating margins.

Operating Margins. Margins increased 29.4% from $22.5 million for the three months ended March 31, 2002, to $29.1 million for the three months ended March 31, 2003. Margins for video services increased 20.9% from $7.4 million for the three months ended March 31, 2002, to $9.0 million for the same period in 2003. Margins for voice services increased 25.4% from $10.9 million for the three months ended March 31, 2002, to $13.6 million for the same period in 2003. Margins for data and other services increased 54.7% from $4.2 million for the three months ended March 31, 2002, to $6.5 million for the same period in 2003.

Operating Expenses. Operating expenses, excluding depreciation and amortization, increased 20.0% from $19.0 million for the three months ended March 31, 2002, to $22.8 million for the three months ended March 31, 2003. The increase in our operating expenses is consistent with the growth in revenues and connections, and is a result of the continued expansion of our operations. Selling, operations and administrative expenses will increase operating expenses as we expand our markets.

Depreciation and amortization increased from $18.6 million for the three months ended March 31, 2002, to $19.4 million for the three months ended March 31, 2003. We expect depreciation and amortization expense to increase as we make capital expenditures to extend our existing networks and build additional networks. We have ceased amortization of goodwill in accordance with the adoption of SFAS No. 142.

We recognized $852,000 in asset impairment for the three months ended March 31, 2002. We adopted SFAS No. 123 and recorded a non-cash stock option compensation expense of $427,000 for the three months ended March 31, 2003. We expensed $199,000 for the three months ended March 31, 2003 in litigation fees arising from a federal court action against Insight Communications Company, Inc.

Other Income and Expense, Including Interest Income and Interest Expense. Our total other expense decreased from $11.5 million for the three months ended March 31, 2002 to $6.8 million for the three months ended March 31, 2003. Interest income was $129,000 for the three months ended March 31, 2002, compared to $113,000 for the same period in 2003. The decrease in interest income primarily reflects the lower average cash balances in interest bearing accounts for the three months

ended March 31, 2003 compared to the three months ended March 31, 2002. Interest expense decreased from $10.8 million for the three months ended March 31, 2002, to $7.0 million for the three months ended March 31, 2003. The interest expense is principally the in-kind interest on the new Knology notes. We expect interest expense in 2003 to be significantly lower than in prior years as a result of our financial restructuring. Although the interest rate payable on the new Knology notes is comparable to the rate payable on the canceled Broadband notes, the aggregate amount of the notes outstanding is substantially lower. Other income/expenses, net increased from income of $24,000 for the three months ended March 31, 2002 to income of $86,000 for the three months ended March 31, 2003.

Income Tax Provision. We recorded a tax provision of $9,000 for the three months ended March 31, 2002, compared to no income tax provision for the same period in 2003, representing a state tax provision related to the telephone operations group subsidiaries.

Loss Before Cumulative Effect of Change in Accounting Principle. We incurred a loss before cumulative effect of change in accounting principle of $26.6 million for the three months ended March 31, 2002, compared to income before cumulative effect of change in accounting principle of $20.5 million for the three months ended March 31, 2003.

Cumulative Effect of Change in Accounting Principle. We adopted SFAS No. 142 on January 1, 2002. We performed a goodwill impairment test in accordance with SFAS 142 and based on the results of this test we recorded an impairment loss of $1.3 million for the three months ended March 31, 2002.

Net Loss. We incurred a net loss of $27.9 million for the three months ended March 31, 2002, compared to a net loss of $20.5 million for the three months ended March 31, 2003. We expect net losses to continue.

Liquidity and Capital Resources

As of March 31, 2003, we had net working capital of $19.3 million, compared to net working capital of $24.0 million as of December 31, 2002. The change in working capital from December 31, 2002, to March 31, 2003, is primarily due to a decrease in cash and an increase in unearned revenue partially offset by a decrease in accrued liabilities and accounts payable.

Net cash used by operations totaled $2.4 million and operations provided net cash of $2.3 million for the three months ended March 31, 2002 and 2003, respectively. The net cash flow activity related to operations consists primarily of changes in operating assets and liabilities and adjustments to net income for non-cash transactions including:

• depreciation and amortization;

• non-cash stock options compensation;

• non-cash bond interest expense;

• cumulative effect of change in accounting principle;

• deferred income taxes; and

• loss on disposition of assets.

Net cash used for investing activities was $10.0 million and $9.5 million for the three months ended March 31, 2002 and 2003, respectively. Our investing activities for the three months ended March 31, 2002, consisted of $10.1 million of capital expenditures and $56,000 of franchise expenditures partially offset by $87,000 in proceeds from the sale of assets. Investing activities for the three months ended March 31, 2003, consisted of $9.4 million of capital expenditures and $48,000 of franchise expenditures.

Net cash provided by financing activities was $2,000 and financing activities used $819,000 for the three months ended March 31, 2002 and 2003, respectively. Financing activities for the three months ended March 31, 2002, consisted of $2,000 of proceeds from exercised stock options. Financing activities for the three months ended March 31, 2003, consisted of $819,000 of principal payments on debt.

Funding to Date

Knology has raised equity capital and borrowed money to finance a significant portion of its operating, investing and financing activities in the development of its business.

Debt Financings. On October 22, 1997, Broadband received net proceeds of $242.4 million from the offering of units consisting of the Broadband discount notes and warrants to purchase Broadband preferred stock. The Broadband discount notes were sold at a substantial discount from their principal amount at maturity, and there was no payment of cash interest on the Broadband discount notes scheduled prior to April 15, 2003. The Broadband discount notes outstanding (excluding those held by Valley Telephone) fully accreted to a face value of $379.9 million on October 15, 2002. From and after October 15, 2002, the Broadband discount notes bore interest, which would have been 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. In November 1999, Knology completed an exchange in which Knology received the Broadband warrants, issued in connection with the Broadband discount notes in 1997, in exchange for warrants to purchase shares of Knology Series A preferred stock.

In September 2001, Knology’s subsidiary, Valley Telephone, repurchased Broadband discount notes with a face amount of $58.5 million and a carrying amount of $50.5 million as of the repurchase date for approximately $20.3 million in cash. The transaction resulted in a gain of $29.4 million, consisting of a gain of $30.2 million due to the discount, offset by the write-off of $0.8 million in issue costs associated with the original issuance of the Broadband discount notes in October 1997. In October 2001, Valley Telephone repurchased Broadband discount notes with a face amount of $5.7 million for approximately $2.5 million in cash. Valley Telephone used funds borrowed by its telephone operations group under the CoBank credit facility to purchase the Broadband discount notes. In total, Valley Telephone used approximately $22.8 million in cash to repurchase $64.2 million aggregate principal amount, at maturity, of Broadband discount notes during 2002.

On November 6, 2002, Knology and Broadband completed the financial restructuring pursuant to a prepackaged plan of reorganization. Under the plan, $379.9 million aggregate principal amount at maturity of Broadband discount notes were exchanged for $193.5 million of new Knology notes, 10,618,352 shares of Series D preferred stock and 21,701,279 shares of Series E preferred stock. The $64.2 million of Broadband discount notes held by Valley Telephone were canceled in exchange for a limited guaranty by Broadband of the CoBank credit facility.

The completion of the restructuring enabled Knology to significantly lower its debt service requirements, which has improved its liquidity and financial condition. After giving effect to the completion of the restructuring, Knology’s first interest payment on the new Knology notes will be due two years after issuance (Knology presently intends to pay interest incurred for the first 18 months in kind through the issuance of additional notes) in the amount of $14.1 million, with consistent semiannual interest payments due through the seventh anniversary of the issuance of the new Knology notes. The old Broadband discount notes would have matured on October 15, 2007 with an aggregate amount due at maturity of $444.1 million. The new Knology notes will increase to the amount due of $235.5 million, assuming payment in kind of interest incurred during the first 18 months of the new notes.

The indenture governing the new Knology notes places certain restrictions on the ability of Knology and its subsidiaries to take certain actions including the following:

• pay dividends or make other restricted payments;

• incur additional debt or issue mandatorily redeemable equity;

• create or permit to exist certain liens;

• incur restrictions on the ability of its subsidiaries to pay dividends or other payments;

• consolidate, merge or transfer all or substantially all its assets;

• enter into transactions with affiliates;

• utilize revenues except for specified uses;

• utilize excess liquidity except for specified uses;

• make capital expenditures for Knology of Knoxville, Inc.; and

• permit the executive officers of Knology to serve as executive officers or employees of other entities in competition with Knology.

These covenants are subject to a number of exceptions and qualifications.

On December 22, 1998, Broadband entered into a $50 million four-year senior secured credit facility with Wachovia Bank, National Association (formerly First Union National Bank). The Wachovia credit facility, as amended and restated pursuant to the restructuring, allows Broadband to borrow approximately $15.5 million. The Wachovia credit facility may be used for working capital and other purposes, including capital expenditures and permitted acquisitions. At Broadband’s 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 4.0% for Base Rate Loans to 5.0% for LIBOR Rate Loans. The Wachovia credit facility contains a number of covenants that restrict the ability of Broadband and its subsidiaries to take many actions, including the ability to:

• incur indebtedness;

• create liens;

• pay dividends;

• make distributions or stock repurchases;

• make investments;

• engage in transactions with affiliates;

• sell assets; and

• engage in mergers and acquisitions.

The Wachovia credit facility also includes covenants requiring compliance with operating and financial ratios on a consolidated basis, including total leverage ratio and debt service coverage ratio. Broadband is currently in compliance with these covenants. Should Broadband not be in compliance with the covenants, Broadband would be in default and would require a waiver from the lender. In the event the lender would not provide a waiver, amounts outstanding under the Wachovia credit facility could be payable to the lender on demand. A change of control of Broadband, as defined in the Wachovia credit facility, would constitute a default under the covenants. The Wachovia credit facility allows Knology to make scheduled quarterly principal payments beginning in the third quarter of 2004 with a final payment due in the second quarter of 2006.

The maximum amount available under the Wachovia credit facility as of March 31, 2003, was approximately $15.5 million. As of March 31, 2003, approximately $15.5 million had been drawn against the facility.

Knology obtained an aggregate of approximately $39.4 million in loans from ITC Holding and its subsidiary InterCall during November 1999 and January 2000. Approximately $9.6 million was advanced to Knology in November 1999. This loan was converted into 2,029,724 shares of Series A preferred stock in November 1999. Another $29.7 million loan was made in January 2000. The loan bore interest at an annual rate of 11 7/8% and had a maturity date of March 31, 2000. In February 2000, the loan was converted into options to purchase up to 6,258,036 shares of Series A preferred stock, and Knology issued to ITC Holding a note under which it will pay ITC Holding any proceeds from option exercises received by Knology, including an amount equal to the exercise price for cashless exercises. The options were distributed to ITC Holding’s option holders on February 4, 2000.

On June 29, 2001, Knology through its wholly owned subsidiaries, Globe Telecommunications, Interstate Telephone and Valley Telephone, entered into the credit facility with CoBank, a $40 million, 10-year, secured master loan agreement. The CoBank credit facility, as amended pursuant to the restructuring, allows the borrowers to make one or more advances in an amount not to exceed $38 million. The loan proceeds may be used to finance capital expenditures, working capital and for general corporate purposes of the borrowers. Interest is payable quarterly and will accrue, at Knology’s option, based on either a

variable rate established by CoBank, a fixed quoted rate established by CoBank or a LIBOR rate plus applicable margin. The applicable margin may vary from 1.50% to 3.00% based on the leverage ratio of the borrowers. The amended CoBank credit facility contains a number of covenants that restrict the ability of the borrowers to take many actions, including the ability to:

• incur indebtedness;

• create liens;

• merge or consolidate with any other entity;

• make distributions or stock repurchases;

• make investments;

• engage in transactions with affiliates; and

• sell or transfer assets.

The CoBank credit facility also includes covenants requiring compliance with certain operating and financial ratios of the borrowers on a consolidated basis, including a total leverage ratio and a debt service coverage ratio. The borrowers are currently in compliance with these covenants, but there can be no assurances that the borrowers will remain in compliance. Should the borrowers not be in compliance with the covenants, the borrowers would be in default and would require a waiver from CoBank. In the event CoBank would not provide a waiver, amounts outstanding under the CoBank credit facility could be payable on demand.

As of March 31, 2003, Knology had $37.1 million outstanding under the CoBank credit facility.

On January 1, 2002, Knology extended to Broadband a $34.5 million subordinated intercompany loan facility. The intercompany loan facility was guaranteed by the subsidiaries of Broadband and secured by a second-priority lien and security interest in substantially all of the assets of Broadband and its subsidiaries. The intercompany loan facility was subordinated to the Wachovia credit facility. As a part of the restructuring, all indebtedness and obligations owing by Broadband to Knology, including all principal of, and accrued and unpaid interest on, the intercompany loan facility and the unsecured note, was discharged and extinguished in full in exchange for a limited guaranty by Broadband of the CoBank credit facility.

Equity Financings . In connection with Knology’s spin-off from ITC Holding in February 2000, Knology entered into an agreement with ITC Holding in which Knology agreed to covenants that restricted its ability to issue additional shares of capital stock. In connection with its private placement of 31,166,667 shares of its Series C preferred stock in January, 2001, ITC Holding agreed to release Knology from these covenants pursuant to the agreement. Accordingly, Knology is no longer restrained by the ITC Holding agreement with respect to the issuance of additional shares of capital stock.

In February 2000, Knology issued to accredited investors in a private placement 21,180,131 shares of its Series B preferred stock at a purchase price of $4.75 per share, for aggregate proceeds of $100.6 million.

On January 12, 2001, Knology issued to a group of accredited investors in a private placement 31,166,667 shares of its Series C preferred stock at a purchase price of $3.00 per share, for aggregate proceeds of $93.5 million. On March 30, 2001, Knology completed another private placement of 1,885,996 shares of Series C preferred stock to a group of accredited investors for approximately $5.7 million. On April 13, 2001, Knology completed another private placement of 2,621,930 shares of Series C preferred stock to a group of accredited investors for approximately $7.9 million. On June 29, 2001, Knology completed another private placement of 1,544,970 shares of Series C preferred stock to a group of accredited investors for approximately $4.6 million. In connection with the completion of these private placements, Knology amended its amended and restated certificate of incorporation to adjust the ratios at which Series A preferred stock and Series B preferred stock convert into common stock. Prior to the completion of the private placements of Series C preferred stock, both the shares of Series A preferred stock and shares of Series B preferred stock converted into shares of common stock on a one-to-one basis. As amended, the conversion ratio for each share of Series A preferred stock was adjusted to one-to-1.0371 and the conversion ratio for each share of Series B preferred stock was adjusted to one-to-1.4865, subject to further customary anti-dilution adjustments. With respect to the amendment of the conversion prices of the Series A preferred stock and Series B preferred stock, Knology recognized a non-cash dividend in the approximate amount of $36.6 million in the first quarter of 2001.

On November 6, 2002, Knology received $39.0 million gross cash proceeds from the issuance of 13 million shares of

Series C preferred stock in a private placement to two existing investors. Also on November 6, 2002, Knology issued 10,618,352 shares of Series D preferred stock and 21,701,279 shares of Series E preferred stock in exchange for a portion of the old Broadband discount notes and issued 66,399 shares of Series D preferred stock in payment to the financial advisor to the former holders of the Broadband discount notes.

Future Funding

In 2003 Knology expects to spend approximately $40.0 million for capital expenditures, of which $14.1 million relates to network construction and the remainder relates to the purchase of customer premise equipment, such as cable set-top boxes and cable modems, network equipment, including switching and transport equipment, and billing and information systems. Knology has sufficient cash to cover its planned operating expenses and capital expenditures during 2003. If Knology decides to build additional or new broadband network, this would require additional funding for the capital expenditures necessary to finance the construction and purchase of subscriber equipment.

Based on the $39.0 million cash infusion and the reduction of, and the delay in, principal and interest payments as described under “Funding to Date,” Knology believes that the restructuring transactions have resulted in a fully funded business plan. Further, Knology should be able to meet its obligations and operate as a going concern through 2003.

Following are the cash obligations for maturities of long-term debt for each of the next five years as of March 31, 2003:

	In millions
2003	$	3.9
2004	23.3
2005	42.1
2006	39.1
2007	33.8
Thereafter	260.0
Total maturities of long-term debt	$	402.2

Knology 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 non-cancelable lease terms in excess of one year as of March 31, 2003 are as follows:

	In millions
2003	$	1.2
2004	1.3
2005	1.3
2006	1.1
2007	0.7
Thereafter	2.4
Total minimum lease payments	$	8.0

Knology has received franchises to build networks in Nashville, Tennessee and Louisville, Kentucky, although its franchise in Louisville is currently being contested by the incumbent cable provider. Knology spent approximately $6.6 million to obtain franchise agreements and perform preliminary construction activity in Nashville and Louisville. Among the covenants included in the indenture governing the new Knology notes is a covenant limiting the ability of Knology to fund expansion into new markets, including Nashville and Louisville, from operating cash flows or new borrowings. Knology does not intend to expand into Nashville, Louisville or other markets until the required funding is available. Knology estimates the cost of constructing networks and funding initial subscriber equipment in these new cities as well as others at approximately $750 to $1,000 per home. 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, population density, 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 Knology pays for or finances, utility requirements and other factors.

Knology has entered into contracts with various entities to provide programming to be aired on Knology’s networks. We pay 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. We estimate that we will pay approximately $34.7 million in programming fees under these contracts during 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates. We manage our exposure to this market risk through our regular operating and financing activities. Derivative instruments are not currently used and, if used, 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 facilities, 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 facilities. A hypothetical 10% increase in interest rates on our variable rate bank debt for the duration of one year would increase interest expense by an immaterial amount.

ITEM 4. CONTROL AND PROCEDURES

Within 90 days prior to the date of this report, Knology carried out an evaluation, under the supervision and with the participation of Knology’s management, including Knology’s President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Knology’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their last evaluation.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We are subject to litigation in the normal course of our business. 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 a party to regulatory proceedings affecting the relevant segments of the communications industry generally.

ITEM 2. Changes in Securities and Use of Proceeds

None

ITEM 3. Default upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(A) EXHIBITS

Exhibit No.		Exhibit Description

2.1		Joint Plan of Reorganization of Knology Broadband, Inc. filed with the United States Bankruptcy Court for the Northern District of Georgia, Newnan Division, by Knology, Inc. and Knology Broadband, Inc., on September 18, 2002, confirmed on October 22, 2002 and effective on November 6, 2002 (Incorporated herein by reference to Exhibit 2.1 to Knology, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002).

3.1		Amended and Restated Certificate of Incorporation of Knology, Inc. (Incorporated herein by reference to Exhibit 4.1 to Knology Inc.’s Registration Statement on Form S-8 (File No. 333-103248)).

3.2		Bylaws of Knology, Inc. (Incorporated herein by reference to Exhibit 3.2 to Knology Inc. Registration Statement on Form S-1 (File No. 333-89179)).

99.1		Statement of the Chief Executive Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.

99.2		Statement of the Chief Financial Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.

(B) REPORTS ON FORM 8-K

On March 20, 2003, Knology filed a Current Report on Form 8-K, a press release announcing its 2002 fourth quarter and year-end results.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KNOLOGY, INC.

May 14, 2003	By:	/s/ Rodger L. Johnson
		Rodger L. Johnson
		President and Chief Executive Officer


May 14, 2003	By:	/s/ Robert K. Mills
		Robert K. Mills
		Chief Financial Officer
		(Principal Financial Officer)

CERTIFICATIONS

I, Rodger L. Johnson, President and Chief Executive Officer of Knology, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Knology, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (“Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 14, 2003	/s/ Rodger L. Johnson
	Rodger L. Johnson
	President and Chief Executive Officer

I, Robert K. Mills, Chief Financial Officer of Knology, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Knology, Inc.;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (“Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

May 14, 2003	/s/ Robert K. Mills
	Robert K. Mills
	Chief Financial Officer