Back to GetFilings.com

Table of Contents

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, 2005

COMMISSION FILE NUMBER: 000-32647

KNOLOGY, INC.

(Exact name of registrant as specified in its charter)

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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2005, Knology, Inc. had 23,697,787 shares of common stock issued and outstanding.

Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED MARCH 31, 2005

INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

See notes to condensed consolidated financial statements.

3

Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

See notes to condensed consolidated financial statements.

4

Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN THOUSANDS)

See notes to condensed consolidated financial statements

5

Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2005

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. ORGANIZATION AND NATURE OF BUSINESS

Knology, Inc. (including its predecessors, “Knology” or the “Company”) is a publicly traded company incorporated under the laws of the State of Delaware in September 1998.

Knology and its subsidiaries own and operate an advanced interactive broadband network 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.

Our telephone operations group, consisting of Interstate Telephone Company, Globe Telecommunications, Inc., ITC Globe, Inc., and Valley Telephone Co., LLC (our “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.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted (“GAAP”) 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. 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, 2004.

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, 2005, or any other interim period.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. 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. Because the fair value recognition provisions of SFAS No. 123 were adopted on January 1, 2003, the Company does not expect this revised standard to have a material impact on its financial statements.

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143.” FIN No. 47 clarifies

6

Table of Contents

SFAS No. 143, “Accounting for Asset Retirement Obligations,” such that conditional asset retirement obligations require recognition at fair value if they can be reasonably estimated. These rules are effective December 31, 2005; we are currently evaluating the impact, if any, on our results of operations and financial position.

4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents are highly liquid investments with a maturity of three months or less at the date of purchase and consist of time deposits, investment in money market funds with commercial banks and financial institutions, commercial paper and high-quality corporate and municipal bonds.

As of March 31, 2005, the Company has $7,025 of cash that is restricted in use. Of this amount, $2,000 and $2,000, respectively is held at Broadband and the Telephone Operations Group in accordance with certain debt covenants. Also, the Company has pledged $3,025 of cash as collateral for amounts potentially payable under certain insurance, lease and surety bond agreements.

5. SHORT TERM INVESTMENTS

The Company follows Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS No 115). SFAS No. 115 mandates that a determination be made of the appropriate classification for equity securities with a readily determinable fair value and all debt securities at the time of purchase and a re-evaluation of such designation as of each balance sheet date.

Short term investments consist of adjustable rate securities and are classified as available-for-sale. These investments are carried at fair value and any unrealized gains and losses are reported as a separate component of stockholders’ equity. Realized gains and losses are included in interest income. The cost of securities sold is based on the specific identification method. All adjustable rate securities held as of December 31, 2004 were sold with proceeds transferred to cash and cash equivalents prior to March 28, 2005.

The available-for-sale securities at December 31, 2004 and March 31, 2005 included the following:

7

Table of Contents

6. GOODWILL AND INTANGIBLE ASSETS

The Company performs a goodwill impairment test in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” annually on January 1. There was no impairment identified as a result of the January 1, 2005 impairment test.

Intangible assets as of December 31, 2004 and March 31, 2005, respectively, were as follows

Amortization expense related to intangible assets was $69 and $90 for the three months ended March 31, 2004 and 2005, respectively.

7. LONG-TERM DEBT

Long-term debt at December 31, 2004 and March 31, 2005 consists of the following:

As of March 31, 2005, the Company was in compliance with all of its debt covenants.

8

Table of Contents

8. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

In September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., our subsidiary, a cable television franchise. On November 2, 2000, Insight Communications Company, Inc. (“Insight”) filed a complaint against the City of Louisville in Kentucky Circuit Court in Jefferson County, Kentucky claiming that our franchise was more favorable than Insight’s franchise. Insight’s complaint suspended our franchise until there is a final, nonappealable order in Insight’s Kentucky Circuit Court case. In April 2001 the City of Louisville moved for summary judgment in Kentucky Circuit Court against Insight. In March 2002, the Kentucky Circuit Court ruled that Insight’s complaint had no merit and the Kentucky Circuit Court granted the City of Louisville’s motion to dismiss Insight’s complaint. Insight appealed the Kentucky Circuit Court order dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld the Kentucky Circuit Court ruling. Insight sought discretionary review of the Kentucky Court of Appeals ruling by the Kentucky Supreme Court and that request is pending.

On November 8, 2000, we filed an action in the U.S. District Court for the Western District of Kentucky against Insight seeking monetary damages, declaratory and injunctive relief from Insight and the City arising out of Insight’s complaint and the suspension of our franchise. In March 2001, the U.S. District Court issued an order granting our motion for preliminary injunctive relief and denying Insight’s motion to dismiss. In June 2003 the U.S. District Court ruled on the parties’ cross motions for summary judgment, resolving certain claims and setting others down for trial. The U.S. District Court granted our motion for summary judgment based on causation on certain claims. In August 2003, the U.S. District Court granted Insight’s motion for an immediate interlocutory appeal on certain issues, which was accepted in October 2003 by the U.S. Court of Appeals for the Sixth Circuit.

On December 29, 2004, the Sixth Circuit reversed the U.S. District Court’s decision denying Insight’s Noerr-Pennington immunity and granting summary judgment to Knology on its First Amendment Section 1983 claim. The Sixth Circuit remanded to the U.S. District Court for further proceedings consistent with its Opinion. On January 12, 2005, we filed a Petition for Rehearing En Banc with the Sixth Circuit. On March 2, 2005, the Sixth Circuit denied our Petition for Rehearing. The parties dispute what remains, if any, of our case now that the Sixth Circuit has denied our Petition. We contend we are entitled to a trial on whether Insight’s state court action was protected by Noerr-Pennington immunity. Insight contends the Sixth Circuit’s Opinion requires a dismissal with prejudice of all of our claims. At this time it is impossible to determine with certainty the ultimate outcome of the litigation.

We are also subject to other 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 segments of the communications industry generally in which we engage in business.

9. BUSINESS HELD FOR SALE

During the second quarter 2004, the Company announced its intention to sell its cable assets in Cerritos, California. The Company acquired the Cerritos cable system in December 2003 from Verizon Media Ventures Inc. in conjunction with its acquisition of Verizon Media’s Pinellas County, Florida operations. In March 2005, the Company entered into a definitive asset purchase agreement to sell its cable assets located in Cerritos, California to WaveDivision Holdings, LLC for $10.0 million in cash, subject to customary closing adjustments. The Company expects the sale of the Cerritos system to close in the third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory approvals with respect to the municipal franchise in Cerritos, California. However, there can be no assurance that the Company will complete the sale of the Cerritos cable system or that it completes the sale in a timely manner. In the event the purchaser does not receive necessary regulatory or other approvals or the other conditions to closing are not satisfied, the sale will not be completed.

9

Table of Contents

Following the guidance of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective April 30, 2004, the Cerritos cable system was deemed to be a long-lived asset to be disposed of based on management’s commitment, plan, and actions taken to sell the property. Therefore, no depreciation expense related to the Cerritos assets will be recorded subsequent to April 30, 2004. The assets and liabilities related to the Cerritos system are separately stated on the Company’s balance sheet. The table below summarizes the major classes of assets and liabilities classified as held for sale.

The net income associated with the Cerritos cable system since April 30, 2004 is presented separately in the statement of operations as income from discontinued operations. The Cerritos cable system generated approximately $837 of revenue for the three months ended March 31, 2005.

10. SUBSEQUENT EVENTS

In May 2005, the Company received commitments from new investors and certain existing investors to provide approximately $9.2 million of funding in a convertible preferred private equity transaction. Subsequent to the close of the private equity transaction, a portion of those shares will be reoffered to the rest of the Company’s existing shareholders, so all shareholders will have the opportunity to purchase the new convertible preferred stock on the same terms. In addition, the Company’s board of directors is considering authorizing up to an additional approximately $11 million “rights offering” of convertible preferred stock, which would also be made available to all of the existing shareholders. The Company would be able to commence the rights reoffering and any additional rights offering once a registration statement was filed with the SEC and the SEC declares it effective. In May 2005, the Company also entered into an agreement with Credit Suisse First Boston that provides a commitment for a fully underwritten $305.0 million senior secured debt financing. The proceeds from the debt and equity financing transactions will be used to fully repay the amounts outstanding under the existing senior notes and the two bank facilities and for general corporate purposes. While the Company has entered into commitments with respect to the debt and equity financing transactions discussed herein, such transactions are subject to the execution of definitive documentation and customary closing conditions and may not be completed, or may not be completed on terms favorable to the Company or in a timely manner.

10

Table of Contents

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, (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, (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, (7) THAT WE WILL NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS, THAT WE MAY HAVE DIFFICULTIES INTEGRATING ACQUIRED BUSINESSES, OR THAT THE COST OF SUCH INTEGRATION WILL BE GREATER THAN WE EXPECT, (8) THAT WE MAY NOT COMPLETE THE SALE OF THE CERRITOS CABLE SYSTEM OR WE MAY NOT COMPLETE THE SALE IN A TIMELY MANNER, OR IN THE EVENT WE DO NOT RECEIVE NECESSARY REGULATORY OR OTHER APPROVALS OR FAIL TO SATISFY THE CONDITIONS TO CLOSING, THE TRANSACTION WILL TERMINATE, AND (9) 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, 2004, 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, 2005, 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.

For convenience in this quarterly report, “Knology,” “we,” “us,” and “the Company” refer to Knology, Inc. and our consolidated subsidiaries, taken as a whole.

Overview

We are a fully integrated provider of video, voice, data and advanced communications services to residential and business customers in nine markets in the southeastern United States. We provide a full suite of video, voice and data services in Huntsville and Montgomery, Alabama; Panama City and a portion of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South Carolina; and Knoxville, Tennessee. We provide video services in Cerritos, California, but, as discussed below, we have entered into an agreement to sell these assets. Our primary business is the delivery of bundled communication services over our own network. In addition to our bundled package offerings, we sell these services on an unbundled basis.

We have built our business through:

To date, we have experienced operating losses as a result of the expansion of our service territories and the construction of our network. We expect to continue to focus on increasing our customer base and expanding our broadband operations. Our ability to generate profits will depend in large part on our ability to increase revenues to offset the costs of construction and operation of our business.

Recent Transactions

In March 2005, we entered into a definitive asset purchase agreement to sell our cable assets located in Cerritos, California to WaveDivision Holdings, LLC for $10.0 million in cash, subject to customary closing adjustments. We expect the sale of the Cerritos system to close in the third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory approvals

11

Table of Contents

with respect to the municipal franchise in Cerritos, California. However, there can be no assurance that we will complete the sale of the Cerritos cable system or we may not complete the sale in a timely manner. In the event the purchaser does not receive necessary regulatory or other approvals or the other conditions to closing are not satisfied, the sale will not be completed.

In May 2005, we received commitments from new investors and certain existing investors to provide approximately $9.2 million of funding in a convertible preferred private equity transaction. Subsequent to the close of the private equity transaction, a portion of those shares will be reoffered to the rest of our existing shareholders, so all of our shareholders will have the opportunity to purchase the new convertible preferred stock on the same terms. In addition, our board of directors is considering authorizing up to an additional approximately $11 million “rights offering” of convertible preferred stock, which would also be made available to all of our existing shareholders. We would be able to commence the rights reoffering and any additional rights offering once we are able to file a registration statement with the SEC and the SEC declares it effective. In May 2005, we also entered into an agreement with Credit Suisse First Boston that provides a commitment for a fully underwritten $305.0 million senior secured debt financing. The proceeds from the debt and equity financing transactions will be used to fully repay the amounts outstanding under the existing senior notes and the two bank facilities and for general corporate purposes. While we have entered into commitments with respect to the debt and equity financing transactions discussed herein, such transactions are subject to the execution of definitive documentation and customary closing conditions and may not be completed, or may not be completed on terms favorable to us or in a timely manner.

The shares of convertible preferred stock discussed in this Form 10Q as issuable pursuant to the proposed equity financing transaction will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This Form 10Q does not constitute an offer of any shares of convertible preferred stock discussed in this Form 10Q as issuable pursuant to the proposed rights reoffering or any additional rights offering.

Highlights and Outlook

Highlights of the quarter ended March 31, 2005 include the following:

Homes Passed and Connections

We report homes passed as the number of residential and business units, such as single residence homes, apartments and condominium units, passed by our broadband network and listed in our database. Marketable homes passed are homes passed other than those we believe are covered by exclusive arrangements with other providers of competing services. Because we deliver multiple services to our customers, we report the total number of connections for video, voice and data rather than the total number of customers. We count each video, voice or data purchase as a separate connection. For example, a single customer who purchases cable television, local telephone and Internet access services would count as three connections. We do not record the purchase of digital video services by an analog video customer as an additional connection. As we continue to sell bundled services, we expect more of our video customers to purchase voice, data and other enhanced services in addition to video services. Accordingly, we expect that our number of voice and data connections will grow faster than our video connections and will represent a higher percentage of our total connections in the future.

12

Table of Contents

The following table summarizes the number of marketable homes passed and connections as of March 31, 2004 and 2005.

Critical Accounting Policies

Our condensed 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, of our significant accounting policies described in Note 2 to our audited consolidated financial statements included in Item 8 of our Annual Report on Form 10-K, 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. 104, “Revenue Recognition,” which requires that the following four basic criteria must be satisfied before revenues can be recognized:

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 and enhanced 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.

13

Table of Contents

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 delinquent customer accounts receivable.

Capitalization of labor and overhead costs. Our business is capital intensive, and a large portion of the capital we have raised to date has been spent on activities associated with building, extending, upgrading and enhancing our network. As of March 31, 2005 and 2004, the net carrying amount of our property, plant and equipment was approximately $317.5 million, 78% of total assets, and $329.6 million, 71% of total assets, respectively. Total capital expenditures for the three months ended March 31, 2005 and 2004 were approximately $8.8 million and $12.9 million, respectively.

Costs associated with network construction, network enhancements and initial customer installation are capitalized. Costs capitalized as part of the initial customer installation includes materials, direct labor, and certain indirect costs. These indirect costs are associated with the activities of personnel who assist in connecting and activating the new service and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service at a customer’s premise or reconnecting service to a previously installed premise are charged to operating expense in the period incurred. Costs for repairs and maintenance are charged to operating expense as incurred, while equipment replacement and significant enhancements, including replacement of cable drops from the pole to the premise, are capitalized.

We make judgments regarding the installation and construction activities to be capitalized. We capitalize direct labor and certain indirect costs (“overhead”) using standards developed from time costs studies and operational data. We calculate standards for items such as the labor rates, overhead rates and the actual amount of time required to perform a capitalizable activity. Overhead rates are established based on an analysis of the nature of costs incurred in support of capitalizable activities and a determination of the portion of costs that is directly attributable to capitalizable activities.

Judgment is required to determine the extent to which overhead is incurred as a result of specific capital activities, and therefore should be capitalized. The primary costs that are included in the determination of the overhead rate are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, consisting primarily of installation costs, (iii) the cost of support personnel that directly assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities.

While we believe our existing capitalization policies are reasonable, a significant change in the nature or extent of our system activities could affect management’s judgment about the extent to which we should capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization policies, and perform updates to our internal studies on an ongoing basis to determine whether facts or circumstances warrant a change to our capitalization policies.

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. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and beginning January 1, 2002 SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Factors we consider important and that could trigger an impairment review include the following:

Significant and Subjective Estimates The following discussion and analysis of our results of operations and financial condition is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and contingent liabilities. 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. We base our judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See our condensed consolidated financial statements and related notes thereto included elsewhere in this Form 10Q, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.

The foregoing list of critical accounting policies 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

14

Table of Contents

alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K, which contains accounting policies and other disclosures required by accounting principles generally accepted in the United States.

Revenues

Our operating revenues are primarily derived from monthly charges for video, voice and Internet data services and other services to residential and business customers. We provide these services over our network. Our products and services involve different types of charges and in some cases a different method of accounting for or recording revenues. Below is a description of our significant sources of revenue:

We expect to add new video connections in the future, but as our video segment matures in our current markets, we expect our video product to grow at a decreasing rate compared to our historical experience. While the number of new video connections may grow at a declining rate, we believe that the opportunity to increase revenue and video gross profits is available through price increases and 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. Our ability to increase the number of our connections and, as a result, our revenues is directly affected by the level of competition we face in each of our markets with respect to each of our service offerings:

15

Table of Contents

Costs and Expenses

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

Costs of services includes:

Relative to our current product mix, we expect voice and data revenue will become larger percentages of our overall revenue, and potentially will provide higher gross profits. 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:

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.

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 cost of services and operating expenses to increase as we add connections and grow our business.

16

Table of Contents

Results of Operations

The following table sets forth financial data as a percentage of operating revenues for the three months ended March 31, 2004 and 2005.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2005

Revenues. Operating revenues increased 2.3% from $53.8 million for the three months ended March 31, 2004, to $55.0 million for three months ended March 31, 2005. Operating revenues from video services decreased 2.7% from $25.4 million for the three months ended March 31, 2004, to $24.7 million for the same period in 2005. Operating revenues from voice services increased 4.7% from $18.0 million for the three months ended March 31, 2004, to $18.9 million for the same period in 2005. Operating revenues from data and other services increased 10.2% from $10.3 million for the three months ended March 31, 2004, to $11.4 million for the same period in 2005.

The increased revenues are due primarily to an increase in the number of connections, from 380,684 as of March 31, 2004, to 413,022 as of March 31, 2005. The additional connections resulted primarily from:

Cost of Services. Cost of services increased 2.1% from $15.8 million for the three months ended March 31, 2004, to $16.1 million for the three months ended March 31, 2005. Cost of services for video services increased 1.6% from $12.4 million for the three months ended March 31, 2004, to $12.6 million for the same period in 2004. Cost of services for voice services increased 8.3%

17

Table of Contents

from $2.9 million for the three months ended March 31, 2004, to $3.1 million for the same period in 2005. Cost of services for data and other services decreased 21.5% from $500,000 for the three months ended March 31, 2004, to $400,000 for the same period in 2005. The decrease in data and other cost of services is primarily due to efficiency gains in our network architecture. We expect our cost of services to increase as we add more connections. Programming costs, which are one of our largest single expense items, have been increasing over the last several years on an aggregate basis due to an increase in subscribers, as a result of internal growth and acquisitions, 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 factors, which could adversely affect our cash flow and gross profit.

Gross Profit. Gross profit increased 2.4% from $38.0 million for the three months ended March 31, 2004, to $38.9 million for the three months ended March 31, 2005. Gross profit for video services decreased 6.7% from $13.0 million for the three months ended March 31, 2004, to $12.1.million for the same period in 2005. Gross profit for voice services increased 4.1% from $15.2 million for the three months ended March 31, 2004, to $15.8 million for the same period in 2005. Gross profit for data and other services increased 11.8% from $9.8 million for the three months ended March 31, 2004, to $11.0 million for the same period in 2005. The increase in gross profit is primarily a result of the changes in revenues and cost of services as described above.

Operating Expenses. Our operating expenses, excluding depreciation and amortization, decreased 1.2% from $29.9 million for the three months ended March 31, 2004, to $29.5 million for the three months ended March 31, 2005. The decrease in our operating expenses was primarily due to lower charges related to non-cash stock-based compensation, special litigation and capital markets activities during the first quarter of 2005 compared to the same period in 2004. During the first quarter of 2005 we incurred a one-time charge of approximately $197,000 for certain severance expenses related to a reduction in our workforce.

Our depreciation and amortization decreased from $19.3 million for the three months ended March 31, 2004, to $18.6 million for the three months ended March 31, 2005. The decrease in depreciation and amortization resulted from a combination of lower spending for additions in property, plant, equipment and intangible assets, and a portion of our long-lived assets becoming fully depreciated. We expect depreciation and amortization expense to continue to decrease as our overall capital expenditures decrease and existing long-lived assets become fully depreciated.

Other Income and Expense, Including Interest Income and Interest Expense. Our total other expense increased from $7.3 million for the three months ended March 31, 2004, to $7.5 million for the three months ended March 31, 2005. Interest income was $159,000 for the three months ended March 31, 2004, compared to $204,000 for the same period in 2005. The increase in interest income primarily reflects an increased activity in short-term investment for the three months ended March 31, 2005. Interest expense was $7.8 million for the three months ended March 31, 2004, and $7.8 million for the three months ended March 31, 2005.

During the first quarter of 2004 and 2005, we adjusted the carrying value of the outstanding warrants to purchase our common stock to market value based on the published market per share value of our common stock. The published market per share value of our common stock on March 31, 2004 was $6.89 resulting in a $221,000 gain on the adjustment of warrants to market value. The published market per share value of our common stock on March 31, 2005 was $2.37 resulting in a $139,000 gain on the adjustment of warrants to market value. Other expenses, net decreased from $129,000 for three months ended March 31, 2004 to $3,000 for the three months March 31, 2005.

Income Tax Provision. We recorded no income tax benefit for the three months ended March 31, 2004 and 2005, respectively, as our net operating losses are fully offset by a valuation allowance.

Loss Before Discontinued Operations. We incurred a loss before discontinued operations of $18.4 million for the three months ended March 31, 2004, compared to a loss before discontinued operations of $16.9 million for the three months ended March 31, 2005.

Net income from discontinued operations. Effective April 30, 2004, following the guidance of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we deemed the Cerritos, California cable system to be a long-lived asset to be disposed of based on our actions taken to sell the property. The $44,500 recorded in the first quarter of 2005 represents the income from our Cerritos operations.

Net Loss Attributable to Common Stockholders. We incurred a net loss attributable to common stockholders of $18.4 million and $16.9 million for the three months ended March 31, 2004 and 2005, respectively. The decrease in net loss is a result of the changes in revenues and expenses as described above.

18

Table of Contents

Liquidity and Capital Resources

Overview.

We currently expect to spend approximately $28.0 million during 2005 to expand and upgrade our networks in the markets where we currently provide service, including our network in Pinellas County, Florida. Under the terms of the indenture for our existing 12% senior notes due 2009, capital expenditures to complete the buildout of our network in Pinellas County, Florida must be funded by cash flow from operations in that market or from additional equity financings or proceeds from the sale of our Cerritos division. Through 2004, the Pinellas operation was funded by the proceeds from our initial public offering. In March 2005, we entered into a definitive asset purchase agreement to sell our cable assets located in Cerritos, California to WaveDivision Holdings, LLC for $10.0 million in cash, subject to customary closing adjustments. We expect the sale of the Cerritos system to close in the third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory approvals with respect to the municipal franchise in Cerritos, California. However, there can be no assurance that we will complete the sale of the Cerritos cable system or that we will complete the sale in a timely manner. In the event the purchaser does not receive necessary regulatory or other approvals or the other conditions to closing are not satisfied, the sale will not be completed. If the Cerritos sale or an equity offering is not completed, we expect the cash available to fund the Pinellas operation under our indenture to be exhausted before the end of the third quarter 2005, and we may not be able to complete our buildout in Pinellas County and grow our Pinellas County operations in accordance with our business plan, which may have any adverse impact on our financial condition.

In May 2005, we received commitments from new investors and certain existing investors to provide approximately $9.2 million of funding in a convertible preferred private equity transaction. Subsequent to the close of the private equity transaction, a portion of those shares will be reoffered to the rest of our existing shareholders, so all of our shareholders will have the opportunity to purchase the new convertible preferred stock on the same terms. In addition, our board of directors is considering authorizing up to an additional approximately $11 million “rights offering” of convertible preferred stock, which would also be made available to all of our existing shareholders. We would be able to commence the rights reoffering and any additional rights offering once we are able to file a registration statement with the SEC and the SEC declares it effective. In May 2005, we also entered into an agreement with Credit Suisse First Boston that provides a commitment for a fully underwritten $305.0 million senior secured debt financing. The proceeds from the debt and equity financing transactions will be used to fully repay the amounts outstanding under the existing senior notes and our two bank facilities and for general corporate purposes. While we have entered into commitments with respect to the debt and equity financing transactions discussed herein, such transactions are subject to the execution of definitive documentation and customary closing conditions and may not be completed, or may not be completed on terms favorable to us or in a timely manner.

The shares of convertible preferred stock discussed in this Form 10Q as issuable pursuant to the proposed equity financing transaction will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This Form 10Q does not constitute an offer of any shares of convertible preferred stock discussed in this Form 10Q as issuable pursuant to the proposed rights reoffering or any additional rights offering.

Operating, Investing and Financing Activities.

As of March 31, 2004, we had a net working capital deficit of $3.7 million, compared to net working capital of $3.2 million as of December 31, 2004. The decrease in working capital from December 31, 2004 to March 31, 2005 is primarily due to the use of the cash proceeds from our initial public offering to enhance the network and fund operations in the Pinellas County market and the accrual of cash interest payable during the second quarter of 2005.

Net cash provided by operating activities from continuing operations totaled $13.8 million and $10.5 million for the three months ended March 31, 2004 and 2005, respectively, and operating activities from discontinued operations used $0.1 million for the three months ended March 31, 2005. 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:

Net cash used for investing activities was $8.9 million for the three months ended March 31, 2004 and net cash provided by investing activities was $3.8 million for the three months ended March 31, 2005. Our investing activities for the three months ended March 31, 2004, consisted of $12.9 million of capital expenditures, $76.0 million for the purchase of short term investments and

19

Table of Contents

$144,000 of organizational and franchise expenditures partially offset by $80.0 million from the sale of short term investments and $140,000 of proceeds from the sale of property. Investing activities for the three months ended March 31, 2005 consisted of $8.8 million of capital expenditures, $4.0 million for the purchase of short term investments and $43,000 of organizational and franchise expenditures partially offset by $16.6 million from the sale of short term investments and $17,000 of proceeds from the sale of property.

We received net cash flow from financing activities of $6.0 million and $316,000 for the three months ended March 31, 2004 and 2005, respectively. Financing activities for the three months ended March 31, 2004 consisted primarily of $7.3 million of net proceeds from the fulfillment of the over allotment option of our initial public offering of common stock partially offset by $883,000 in principal payments on debt and $400,000 of cash pledged as security. For the three months ended March 31, 2005, financing activities primarily consisted of reductions in cash pledged as security of $340,000 partially offset by $24,000 in principal payments on debt.

Capital Expenditures

We spent approximately $8.8 million in capital expenditures during the first quarter of 2005, of which approximately $4.5 million related to network construction and enhancement and the remainder related 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.

We expect to spend approximately $28.0 million in capital expenditures during 2005. We believe if we complete the sale of our Cerritos, California operations or complete the equity and debt transactions described above we will have sufficient cash available and cash from internally generated cash flow to cover our planned operating expenses and capital expenditures during 2005.

We do not intend to expand into other markets until the required funding is available. We estimate the cost of constructing our network and funding initial customer premise equipment in new markets to be approximately $750 to $1,000 per home passed. 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 customers in each city, the mix of services purchased, the cost of customer premise equipment we pay for or finance, utility requirements and other factors.

Contractual Obligations

The amounts disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004, include our contractual cash obligations. Contractual cash obligations include our long-term debt obligations and interest, capital lease obligations, operating lease obligations and programming contracts. During the three months ended March 31, 2005, no material changes occurred in our contractual obligations

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first annual period after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. In December 2002, we elected to adopt the recognition provisions of SFAS No. 123 which is considered the preferable accounting method for stock-based employee compensation. 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. Because we adopted the fair value recognition provisions of SFAS No. 123 on January 1, 2002, we do not expect this revised standard to have a material impact on our financial statements.

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143.” FIN No. 47 clarifies SFAS No. 143, “Accounting for Asset Retirement Obligations,” such that conditional asset retirement obligations require recognition at fair value if they can be reasonably estimated. These rules are effective December 31, 2005; we are currently evaluating the impact, if any, on our results of operations and financial position.

20

Table of Contents

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 credit facilities. A hypothetical 10% increase in interest rates on our variable rate bank debt for a duration of one year would increase interest expense by an immaterial amount.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2005, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., our subsidiary, a cable television franchise. On November 2, 2000, Insight Communications Company, Inc. (“Insight”) filed a complaint against the City of Louisville in Kentucky Circuit Court in Jefferson County, Kentucky claiming that our franchise was more favorable than Insight’s franchise. Insight’s complaint suspended our franchise until there is a final, nonappealable order in Insight’s Kentucky Circuit Court case. In April 2001 the City of Louisville moved for summary judgment in Kentucky Circuit Court against Insight. In March 2002, the Kentucky Circuit Court ruled that Insight’s complaint had no merit and the Kentucky Circuit Court granted the City of Louisville’s motion to dismiss Insight’s complaint. Insight appealed the Kentucky Circuit Court order dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld the Kentucky Circuit Court ruling. Insight sought discretionary review of the Kentucky Court of Appeals ruling by the Kentucky Supreme Court and that request is pending.

On November 8, 2000, we filed an action in the U.S. District Court for the Western District of Kentucky against Insight seeking monetary damages, declaratory and injunctive relief from Insight and the City arising out of Insight’s complaint and the suspension of our franchise. In March 2001, the U.S. District Court issued an order granting our motion for preliminary injunctive relief and denying Insight’s motion to dismiss. In June 2003 the U.S. District Court ruled on the parties’ cross motions for summary judgment, resolving certain claims and setting others down for trial. The U.S. District Court granted our motion for summary judgment based on causation on certain claims. In August 2003, the U.S. District Court granted Insight’s motion for an immediate interlocutory appeal on certain issues, which was accepted in October 2003 by the U.S. Court of Appeals for the Sixth Circuit.

On December 29, 2004, the Sixth Circuit reversed the U.S. District Court’s decision denying Insight’s Noerr-Pennington immunity and granting summary judgment to Knology on its First Amendment Section 1983 claim. The Sixth Circuit remanded to the U.S. District Court for further proceedings consistent with its Opinion. On January 12, 2005, we filed a Petition for Rehearing En Banc with the Sixth Circuit. On March 2, 2005, the Sixth Circuit denied our Petition for Rehearing. The parties dispute what remains, if any, of our case now that the Sixth Circuit has denied our Petition. We contend we are entitled to a trial on whether Insight’s state court action was protected by Noerr-Pennington immunity. Insight contends the Sixth Circuit’s Opinion requires a dismissal with prejudice of all of our claims. At this time it is impossible to determine with certainty the ultimate outcome of the litigation.

We are also subject to other 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 segments of the communications industry generally in which we engage in business.

ITEM 2. UNREGISTERED SALES OF EQUITY 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

Effective April 1, 2005, the Compensation Committee recommended and the Board of Directors of the Company approved the compensation arrangements for the Company’s Chief Executive Officer and its four other most highly paid officers and the compensation arrangements to be paid to its directors for service on the Board of Directors and its committees. A description of these compensation arrangements is set forth in Exhibit 10.3 to this Form 10-Q.

22

Table of Contents

ITEM 6. Exhibits

23

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

24

Table of Contents

25