**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.**

(Exactname 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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes ý   No o

 

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

Yes o   No ý

 

As of April 30, 2003, we had 503,197 shares of commonstock, 51,046,497 shares of Series A preferred stock, 21,180,131 shares ofSeries 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 Epreferred 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                                                           |

 

1

----

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**KNOLOGY,INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 

**(DOLLARSIN 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 condensedconsolidated financial statements.

 

2

----

 

**KNOLOGY,INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

**(DOLLARSIN 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 condensedconsolidated financial statements.

 

3

----

 

**KNOLOGY,INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

** **

**(DOLLARSIN 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 condensedconsolidated financial statements.

 

4

----

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**MARCH 31, 2003**

**(UNAUDITED)**

 

**(DOLLARS IN THOUSANDS)**

 

**1.             ORGANIZATION AND NATURE OF BUSINESS**

 

Knology, Inc. (includingits predecessors, “Knology” or the “Company”) offers residential and businesscustomers broadband communications services, including analog and digital cabletelevision, local and long distance telephone, high-speed Internet accessservice and broadband carrier services, using advanced interactive broadbandnetworks. We own, operate and manage interactive broadband networks in sevenmetropolitan 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, andLanett and Valley, Alabama. Our local telephone service in this area isprovided over a traditional copper wire network while our cable and Internetservices are provided over our broadband network. Subject to the availabilityof additional funding, we plan to expand to additional mid-to-large-sizedcities in the southeastern United States.

 

**2.             BASIS OF PRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, alladjustments considered necessary for the fair presentation of the financialstatements have been included, and the financial statements present fairly thefinancial position and results of operations for the interim periods presented.Operating results for the three months ended March 31, 2003 are not necessarilyindicative of the results that may be expected for the year ended December 31,2003. These financial statements should be read in conjunction with theconsolidated financial statements and notes thereto, together with management’sdiscussion and analysis of financial condition and results of operationscontained in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.The results of operations for the interim periods presented are not necessarilyindicative of the results to be expected for the year ending December 31, 2003,or any other interim period.

 

**3.             SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

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

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities,” which requires companies to recognize costs associated with exitor disposal activities when they are incurred rather than at the date of acommitment to an exit or disposal plan. SFAS No. 146 is to be appliedprospectively to exit or disposal activities initiated after December 31, 2002.We do not expect SFAS No. 146 to have a material impact on our financialposition and results of operations.

 

In November 2002, FASBInterpretation No. (“FIN”) 45, Guarantor’s Accounting and DisclosureRequirements for Guarantors, Including Indirect Guarantees of Indebtedness ofOthers, was issued. FIN 45 requires that upon issuance of a guarantee, the guarantormust recognize a liability for the fair value of the obligation it assumesunder the guarantee.  Guarantors willalso be required to meet expanded disclosure obligations. The initialrecognition and measurement provision of FIN 45 are effective for guaranteesissued after December 31, 2002. The disclosure requirements are effective forannual

 

5

----

 

and interim financial statements that end afterDecember 15, 2002, and had no impact on the Company’s financial position orresults of operations.

 

In December 2002, theFASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transitionand 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 voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation.  It also amends thedisclosure provisions of that Statement to require prominent disclosure aboutthe effects on reported net income (loss) of an entity’s accounting policydecisions with respect to stock-based employee compensation.  Finally, this Statement amends AccountingPrinciples Board (APB) Opinion No. 28, Interim Financial Reporting, to requiredisclosure about those effects in interim financial information.  Since the Company is continuing to accountfor the options for Series A preferred stock according to APB 25, adoption ofSFAS No. 148 requires the Company to provide prominent disclosures aboutthe effects of SFAS No. 123 on reported income (loss) in annual and interimfinancial statements.

 

**4.             GOODWILL AND INTANGIBLE ASSETS**

 

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

 

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

 
|                                       |   | **March  31, 2003**        |   | **December  31, 2002**        |   |
|--------------------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                                       |   | **GrossCarrying  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 nointangible assets reclassified to goodwill upon adoption of SFAS No. 142.

 

Amortization expenserelated to intangible assets was $114 and $197 for the three months ended March31, 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,” whichamends SFAS No. 123 to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, this Statement amends the disclosurerequirements of Statement 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee 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 endingafter December 15, 2002. In December 2002 the Company elected to adopt therecognition provisions of SFAS No. 123 which is considered the preferableaccounting method for stock-based employee compensation. The Company alsoelected to report the change in accounting principle using the prospectivemethod in accordance with SFAS No. 148. Under the prospective method, therecognition of compensation costs is applied to all employee awards granted,modified or settled after the beginning of the fiscal year in which therecognition provisions are first applied.

 

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

 

6

----

 
|                                                                                                                                                                                                     |   | **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.****                                      COMMITMENTSAND CONTINGENCIES**

 

###### **LEGAL PROCEEDINGS**

 

In the normal course ofbusiness, the Company is subject to various litigation; however, in management’sopinion, there are no legal proceedings pending against the Company, whichwould have a material adverse effect on the financial position, results ofoperations, or liquidity of the Company.

 

**7.             SEGMENT INFORMATION**

 

The Company follows SFASNo. 131, “Disclosures about Segments of an Enterprise and Related Information,”which established revised standards for the reporting of financial anddescriptive information about operating segments in financial statements.

 

The Company owns andoperates advanced interactive broadband networks and provides residential andbusiness customers broadband communications services, including analog anddigital cable television, local and long distance telephone, and high-speedInternet access, which the Company refers to as video, voice, and dataservices. 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 theCompany monitors the revenue generated from each of the various broadbandservices, operations are managed and financial performance is evaluated basedupon the delivery of multiple services to customers over a single network. As aresult of multiple services being provided over a single network, many expensesand assets are shared related to providing the various broadband services tocustomers. Management believes that any allocation of the shared expenses orassets to the broadband services would be subjective and impractical.

 

Revenues by broadbandcommunications 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 |   |

 

7

----

 

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

THE MANAGEMENT’SDISCUSSION 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 ARESUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUALRESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORSTHAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TODIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WEWILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT OUR SUPPLIERS AND CUSTOMERSMAY REFUSE TO CONTINUE DOING BUSINESS WITH US OR MAY REFUSE TO EXTEND TRADECREDIT TO US, (3) THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEWCOMPETITORS, (4) THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICALDEVELOPMENTS IMPACTING OUR INDUSTRY AND MARKETS, (5) THAT NEEDED FINANCING WILLNOT BE AVAILABLE TO US IF AND AS NEEDED, (6) THAT A SIGNIFICANT CHANGE IN THEGROWTH RATE OF THE OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT CONSUMER ANDCORPORATE SPENDING ARE MATERIALLY IMPACTED, AND (7) THAT SOME OTHER UNFORESEENDIFFICULTIES OCCUR, AS WELL AS THOSE RISKS SET FORTH IN OUR ANNUAL REPORT ONFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, WHICH ARE INCORPORATEDHEREIN BY REFERENCE. THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THEPRINCIPAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN.

 

The following is adiscussion of our consolidated financial condition and results of operationsfor the three months ended March 31, 2003, and certain factors that areexpected to affect our prospective financial condition. The followingdiscussion and analysis should be read in conjunction with the financialstatements and related notes included elsewhere in this Form 10-Q.

 

**Background**

 

Knology, Inc. wasformed in September 1998 to enable ITC Holding Company, Inc. to complete areorganization of some of its subsidiaries, including Knology Broadband, Inc.or Broadband.

 

On November 6, 2002, Knology and Broadband completed afinancial restructuring, pursuant to which the following transactions becameeffective:

 

•                                          Knologyreceived $39.0 million gross cash proceeds from the issuance of 13,000,000shares of Series C preferred stock in a private placement to two existinginvestors.  The proceeds were used topay transaction expenses of approximately $1.7 million and will be used forgeneral corporate purposes.

 

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

 

•                                          the$15.5 million, 4-year senior secured credit facility by and among WachoviaBank, National Association, as lender, Broadband, as guarantor, and thesubsidiaries 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 InterstateTelephone Company, as borrowers, was amended

 

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

 

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

 

8

----

 

•                                          theKnology Stockholders Agreement was amended to provide the holders of Broadbanddiscount notes who received new Knology preferred stock in the restructuringwith registration rights and co-sale rights, as well to provide holders of theSeries D preferred stock the right to nominate a director to be elected toKnology’s board of directors.

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*.The Company generates recurring or multi-period operating revenues, as well asnonrecurring revenues. We recognize revenue in accordance with SEC StaffAccounting Bulletin, or SAB, No. 101, “Revenue Recognition in FinancialStatements,” as amended by SAB Nos. 101A and 101B. SAB No. 101 requires thatthe following four basic criteria must be satisfied before revenues can berecognized:

 

**•****                      **There is persuasive evidencethat an arrangement exists;

 

**•****                      **Delivery has occurred orservices rendered;

 

**•****                      **The fee is fixed anddeterminable; and,

 

**•****                      **Collectibility is reasonablyassured.

 

In regard to the first and second bullet points, webelieve that persuasive evidence of an arrangement and delivery has occurredupon installation.

 

We base our determination of the third and fourthcriteria above on our judgment regarding the fixed nature of the fee we havecharged for the services rendered and products delivered, and the prospect thatthose fees will be collected. If changes in conditions should cause us todetermine that these criteria likely will not be met for certain futuretransactions, revenue recognized for any reporting period could be materiallyaffected.

 

We generate recurring revenues for our broadbandofferings of video, voice and data and other services. Revenues generated fromthese services primarily consist of a fixed monthly fee for access to cableprogramming, local phone services, enhanced phone services and access to theinternet. Additional fees are charged for services including pay-per-viewmovies, events such as boxing matches and concerts, long distance service andcable modem rental. Revenues are recognized as services are provided andadvance billings or cash payments received in advance of services performed arerecorded as deferred revenue.

 

*Allowance for Doubtful Accounts.*Weuse estimates to determine our allowance for bad debts. These estimates arebased on historical collection experience, current trends, credit policy and apercentage of our customer accounts receivable. In determining thesepercentages, we look at historical write-offs of our receivables.

 

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

 

**•****                      **Significant underperformanceof our assets relative to historical or projected future operating results;

 

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

 

**•****                      **Significant negativeindustry or economic trends.

 

We adopted SFAS No. 142 on January 1, 2002 and haveperformed a goodwill impairment test annually on January 1 in accordance withSFAS No. 142. Based on the results of the goodwill impairment test, we recordedan impairment loss of $1.3 million in the first quarter of 2002 as a cumulativeeffect of change in accounting principle. There was no impairment identified as of January 1, 2003.

 

9

----

 

In December 2002, the FASB issued SFAS No. 148“Accounting for Stock-Based Compensation-Transition and Disclosure,” whichamends FASB Statement No. 123 to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee 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 endingafter December 15, 2002. In December 2002, we elected to adopt the recognition provisionsof SFAS No. 123. We also elected to report the change in accounting principleusing the prospective method in accordance with SFAS No. 148. Under theprospective method, the recognition of compensation costs is applied to allemployee awards granted, modified or settled after the beginning of the fiscalyear in which the recognition provisions are first applied.

 

The foregoing list in not intended to be acomprehensive list of all of our accounting policies. In many cases, theaccounting treatment of a particular transaction is specifically dictated byaccounting principles generally accepted in the United States, with no need forus to judge the application. There are also areas in which our judgment inselecting any available alternative would not produce a materially differentresult. See our consolidated financial statements and related notes theretoincluded elsewhere in this quarterly report, which contain accounting policiesand other disclosures required by accounting principles generally accepted inthe United States.

 

**RecentAccounting Pronouncements**

 

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

 

## **Revenues andExpenses**

 

We can group our revenuesinto the following categories:

 

**•****                      ***Video revenues*.  Ourvideo revenues consist of fixed monthly fees for expanded basic, premium anddigital 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 forapproximately 44.2% and 42.2% of our consolidated revenues for the three monthsended March 31, 2002 and 2003, respectively. In providing video services wecurrently compete with Comcast, Time Warner Cable, Mediacom and Charter. Wealso compete with satellite television providers DirecTV and Echostar. Ourother competitors include other cable television providers; broadcasttelevision stations; and other satellite television companies. We expect in thefuture to compete with telephone companies providing cable television servicewithin their service areas and with wireless cable companies.

 

**•****                      ***Voice revenues*.  Ourvoice revenues consist primarily of fixed monthly fees for local service,enhanced services, such as call waiting and voice mail, and usage fees forlong-distance service. Voice revenues accounted for approximately 41.6% and40.7% of our consolidated revenues for the three months ended March 31, 2002and 2003, respectively. In providing local and long-distance telephoneservices, we compete with the incumbent local phone company and various longdistance providers in each of our markets. BellSouth is the incumbent local andlong distance phone company and is a particularly strong competitor in ourcurrent markets and throughout the southeastern United States. We also competewith long-distance phone companies such as AT&T, WorldCom, BellSouth andSprint.

 

10

----

 

**•****                      ***Data revenues and other revenues.*Our data revenues consistprimarily of fixed monthly fees for Internet access service and rental of cablemodems. Other revenues result principally from broadband carrier services andvideo production services. These combined revenues accounted for approximately14.2% and 17.1% of our consolidated revenues for the three months ended March31, 2002 and 2003, respectively. Providing data services is a rapidly growingbusiness and competition is increasing in each of our markets. Some of ourcompetitors, traditional dial up providers in particular, have competitiveadvantages such as greater experience, resources, marketing capabilities andstronger name recognition. In providing data services, we compete withtraditional dial-up Internet service providers; incumbent local exchangeproviders that provide digital subscriber lines, or DSL; providers of satellite-basedInternet access services; long-distance telephone companies; and cabletelevision companies. We also expect to compete in the future with providers ofwireless high-speed data services.

 

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

 

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

 

Cost of services include:

 

**•****                      ***Video cost of services.*Video cost of services consistsprimarily of monthly fees to the National Cable Television Cooperative andother programming providers and are generally based on the average number ofsubscribers to each program. Programming costs as a percentage of video revenuewere approximately 47.7% and 47.9% for the three months ended March 31, 2002and 2003, respectively. Programming costs are our largest single cost and weexpect this to continue. Since programming cost is partially based on numbersof 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 consistsprimarily of transport cost and network access fees. The voice cost of servicesas a percentage of voice revenues were approximately 18.4% and 17.7% for thethree months ended March 31, 2002 and 2003, respectively.

 

**•****                      ***Data and other cost of services.*Data and other cost ofservices consist primarily of transport cost and network access fees. The dataand 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 ofnew video connections to decrease as the video segment matures in our currentmarkets. While the number of new video connections may decrease, managementfeels that opportunity to increase revenue and video margins is available withthe introduction of new products and new technology. New voice and dataconnections are expected to increase with sales and marketing efforts directedat selling customers a bundle of services, penetrating untapped market segmentsand offering new services. Relative to our current product mix, voice and datarevenue will become larger percentages of our overall revenue, and potentiallywill provide higher margins. Based on the anticipated changes in our revenuemix, we expect that our consolidated cost of services as a percentage of ourconsolidated revenues will decrease.

 

Selling, operations and administrative expensesinclude:

 

**•****                      ***Sales and marketing expenses*. Sales and marketing expensesinclude the cost of sales and marketing personnel and advertising andpromotional expenses.

 

**•****                      ***Network operations and maintenance expenses*. Networkoperations and maintenance expenses include payroll and departmental costs incurredfor network design, maintenance monitoring and maintenance.

 

**•****                      ***Service and installation expenses*. Service and installationexpenses include payroll and departmental cost incurred for customerinstallation and service personnel.

 

**•****                      ***Customer service expenses*. Customer service expenses includepayroll and departmental costs incurred for customer service representativesand management.

 

**•****                      ***General and administrative expenses*. General andadministrative expenses consist of corporate and subsidiary

 

11

----

 

management and administrative costs.

 

Depreciation and amortization expenses includedepreciation of our interactive broadband networks and equipment andamortization of costs in excess of net assets and other intangible assetsrelated to acquisitions. For periods beginning after January 1, 2002, we nolonger amortize goodwill related to acquisitions in accordance with SFAS 142.

 

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

 

We have experienced operating losses as a result ofthe expansion of our advanced broadband communications networks and servicesinto new and existing markets. We expect to continue to focus on increasing ourcustomer base and expanding our broadband operations. Accordingly, we expectthat our operating expenses and capital expenditures will continue to increaseas we extend our interactive broadband networks in existing and new markets inaccordance with our business plan.

 

## **Connections**

 

The following table sets forth the number ofconnections and marketable homes passed as of March 31, 2003 and 2002. Theinformation provided in the table reflects revenue-generating connections.Because we deliver multiple services to our customers, we report the totalnumber of revenue-generating service connections for video, voice and datarather than the total number of customers. For example, a single customer whopurchases cable television, local telephone and Internet access services wouldcount 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 providedover 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 and26,018 and 23,733 lines as of March 31, 2003 and 2002, respectively, usingtraditional copper telephone lines. Off-net refers to telephone connectionsprovided over telephone lines leased from third parties.

 

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

 

12

----

 

**RESULTS OF OPERATIONS**

 

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

 

The following table sets forth financial data as apercentage of operating revenues for the three months ended March 31, 2003 and2002.

 
|                                                                              |   | **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.*    Operatingrevenues increased 27.0% from $32.0 million for the three months ended March31, 2002, to $40.7 million for the three months ended March 31, 2003.  Operating revenues from video servicesincreased 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 $13.3million for the three months ended March 31, 2002 to $16.6 million for the sameperiod 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 forthe same period in 2003, $6.7 million of which were revenues from dataservices.

 

13

----

 

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

 

•      New plans specificallymarketed 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 dataservices accounted for approximately 80% of the additional connections addedfrom March 31, 2002 through March 31, 2003. We gained these connection by offering more competive plans with thefocus on bundling customers.  Inaddition, we launched the new “IntroNet” product in March, 2002, which isexclusively available to bundle customers.

 

•      The continued constructionof the broadband network in the Knoxville market.

 

We expect thegrowth in the number of new video connections to decrease as the video segmentmatures in our current markets. While the number of new video connections maydecrease, we believe that the opportunity to increase revenue and video marginsis available with the introduction of new products and new technology. Newvoice and data connections are expected to increase with sales and marketingefforts directed at selling customers a bundle of services, penetratinguntapped market segments and offering new services. Relative to our currentproduct mix, voice and data revenue will become larger percentages of ouroverall revenue, and potentially will provide higher margins. Based on theanticipated changes in our revenue mix, we expect that our consolidated cost ofservices as a percentage of consolidated revenues will decrease.

 

*Costof Services*.    Cost of servicesincreased 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 servicesincreased 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 millionfor the three months ended March 31, 2002, to $2.9 million for the same periodin 2003.  Cost of services for data andother services increased 24.1% from $327,000 for the three months ended March31, 2002, to $405,000 for the same period in 2003. We expect our cost ofservices to continue to increase as we add more connections. Programming costs,which are our largest single expense item, have been increasing over the lastseveral years on an aggregate basis due to an increase in subscribers and on aper subscriber basis due to an increase in costs per program channel. We expectthis trend to continue. We may not be able to pass these higher costs on tocustomers because of competitive forces, which would adversely affect our cashflow and operating margins.

 

*OperatingMargins*.    Margins increased 29.4% from$22.5 million for the three months ended March 31, 2002, to $29.1 million forthe three months ended March 31, 2003. Margins for video services increased 20.9% from $7.4 million forthe three months ended March 31, 2002, to $9.0 million for the same period in2003.  Margins for voice servicesincreased 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 millionfor the three months ended March 31, 2002, to $6.5 million for the same periodin 2003.

 

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

 

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

 

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

 

*OtherIncome and Expense, Including Interest Income and Interest Expense.*    Ourtotal other expense decreased from $11.5 million for the three months endedMarch 31, 2002 to $6.8 million for the three months ended March 31, 2003.  Interest income was $129,000 for the threemonths ended March 31, 2002, compared to $113,000 for the same period in 2003.  The decrease in interest income primarilyreflects the lower average cash balances in interest bearing accounts for thethree months

 

14

----

 

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 forthe three months ended March 31, 2003. The interest expense is principally the in-kind interest on the newKnology notes.  We expect interestexpense in 2003 to be significantly lower than in prior years as a result ofour financial restructuring.  Althoughthe interest rate payable on the new Knology notes is comparable to the ratepayable on the canceled Broadband notes, the aggregate amount of the notesoutstanding is substantially lower. Other income/expenses, net increased from income of $24,000 for thethree months ended March 31, 2002 to income of $86,000 for the three monthsended March 31, 2003.

 

*IncomeTax Provision.*    We recorded a taxprovision of $9,000 for the three months ended March 31, 2002, compared to noincome tax provision for the same period in 2003, representing a state taxprovision related to the telephone operations group subsidiaries.

 

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

 

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

 

*NetLoss.*   We incurred a net loss of $27.9million 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 workingcapital 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 incash and an increase in unearned revenue partially offset by a decrease inaccrued liabilities and accounts payable.

 

Net cash used by operations totaled $2.4 million andoperations provided net cash of $2.3 million for the three months ended March31, 2002 and 2003, respectively.  Thenet cash flow activity related to operations consists primarily of changes inoperating assets and liabilities and adjustments to net income for non-cashtransactions including:

 

•                       depreciationand amortization;

 

•                       non-cashstock options compensation;

 

•                       non-cashbond interest expense;

 

•                       cumulativeeffect of change in accounting principle;

 

•                       deferredincome taxes; and

 

•                       loss ondisposition of assets.

 

Net cash used forinvesting activities was $10.0 million and $9.5 million for the three monthsended March 31, 2002 and 2003, respectively. Our investing activities for thethree months ended March 31, 2002, consisted of $10.1 million of capitalexpenditures and $56,000 of franchise expenditures partially offset by $87,000in 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 franchiseexpenditures.

 

Net cash providedby financing activities was $2,000 and financing activities used $819,000 forthe three months ended March 31, 2002 and 2003, respectively.  Financing activities for the three monthsended March 31, 2002, consisted of $2,000 of proceeds from exercised stockoptions.  Financing activities for thethree months ended March 31, 2003, consisted of $819,000 of principal paymentson debt.

 

15

----

 

**Fundingto Date**

 

Knology has raised equitycapital 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 theoffering of units consisting of the Broadband discount notes and warrants topurchase Broadband preferred stock. The Broadband discount notes were sold at asubstantial discount from their principal amount at maturity, and there was nopayment of cash interest on the Broadband discount notes scheduled prior toApril 15, 2003. The Broadband discount notes outstanding (excluding those heldby Valley Telephone) fully accreted to a face value of $379.9 million onOctober 15, 2002. From and after October 15, 2002, the Broadband discount notesbore interest, which would have been payable in cash, at a rate of 11 7/8% perannum on April 15 and October 15 of each year, commencing April 15, 2003. InNovember 1999, Knology completed an exchange in which Knology received theBroadband warrants, issued in connection with the Broadband discount notes in1997, in exchange for warrants to purchase shares of Knology Series A preferredstock.

 

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

 

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

 

The completion of the restructuring enabled Knology tosignificantly lower its debt service requirements, which has improved itsliquidity and financial condition. After giving effect to the completion of therestructuring, Knology’s first interest payment on the new Knology notes willbe due two years after issuance (Knology presently intends to pay interestincurred for the first 18 months in kind through the issuance of additional notes)in the amount of $14.1 million, with consistent semiannual interest paymentsdue 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 anaggregate amount due at maturity of $444.1 million. The new Knology notes willincrease to the amount due of $235.5 million, assuming payment in kind ofinterest incurred during the first 18 months of the new notes.

 

The indenture governing the new Knology notes places certainrestrictions on the ability of Knology and its subsidiaries to take certainactions including the following:

 

•                       paydividends or make other restricted payments;

 

•                       incuradditional debt or issue mandatorily redeemable equity;

 

•                       create orpermit to exist certain liens;

 

**•****                      **incur restrictions on theability of its subsidiaries to pay dividends or other payments;

 

**•****                      **consolidate, merge ortransfer all or substantially all its assets;

 

**•****                      **enter into transactions withaffiliates;

 

**•****                      **utilize revenues except forspecified uses;

 

**•****                      **utilize excess liquidityexcept for specified uses;

 

**•****                      **make capital expendituresfor Knology of Knoxville, Inc.; and

 

16

----

 

**•****                      **permit the executiveofficers of Knology to serve as executive officers or employees of otherentities in competition with Knology.

 

These covenants are subject to a number of exceptionsand qualifications.

 

On December 22, 1998, Broadband entered into a $50million four-year senior secured credit facility with Wachovia Bank, NationalAssociation (formerly First Union National Bank). The Wachovia credit facility,as amended and restated pursuant to the restructuring, allows Broadband toborrow approximately $15.5 million. The Wachovia credit facility may be used forworking capital and other purposes, including capital expenditures andpermitted acquisitions. At Broadband’s option, interest will accrue based oneither the prime or federal funds rate plus applicable margin or the LIBOR rateplus applicable margin. The applicable margin may vary from 4.0% for Base RateLoans to 5.0% for LIBOR Rate Loans. The Wachovia credit facility contains anumber of covenants that restrict the ability of Broadband and its subsidiariesto take many actions, including the ability to:

 

**•****                      **incur indebtedness;

 

**•****                      **create liens;

 

**•****                      **pay dividends;

 

**•****                      **make distributions or stockrepurchases;

 

**•****                      **make investments;

 

**•****                      **engage in transactions withaffiliates;

 

**•****                      **sell assets; and

 

**•****                      **engage in mergers andacquisitions.

 

The Wachovia credit facility also includes covenantsrequiring compliance with operating and financial ratios on a consolidatedbasis, including total leverage ratio and debt service coverage ratio.Broadband is currently in compliance with these covenants. Should Broadband notbe in compliance with the covenants, Broadband would be in default and wouldrequire a waiver from the lender. In the event the lender would not provide awaiver, amounts outstanding under the Wachovia credit facility could be payableto the lender on demand. A change of control of Broadband, as defined in theWachovia credit facility, would constitute a default under the covenants. TheWachovia credit facility allows Knology to make scheduled quarterly principalpayments beginning in the third quarter of 2004 with a final payment due in thesecond quarter of 2006.

 

The maximum amount available under the Wachovia creditfacility 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 $39.4million in loans from ITC Holding and its subsidiary InterCall during November1999 and January 2000. Approximately $9.6 million was advanced to Knology inNovember 1999. This loan was converted into 2,029,724 shares of Series Apreferred stock in November 1999. Another $29.7 million loan was made inJanuary 2000. The loan bore interest at an annual rate of 11 7/8% and had amaturity date of March 31, 2000. In February 2000, the loan was converted intooptions to purchase up to 6,258,036 shares of Series A preferred stock, andKnology issued to ITC Holding a note under which it will pay ITC Holding anyproceeds from option exercises received by Knology, including an amount equalto the exercise price for cashless exercises. The options were distributed toITC Holding’s option holders on February 4, 2000.

 

On June 29, 2001, Knology through its wholly ownedsubsidiaries, Globe Telecommunications, Interstate Telephone and ValleyTelephone, entered into the credit facility with CoBank, a $40 million,10-year, secured master loan agreement. The CoBank credit facility, as amendedpursuant to the restructuring, allows the borrowers to make one or moreadvances in an amount not to exceed $38 million. The loan proceeds may be usedto finance capital expenditures, working capital and for general corporatepurposes of the borrowers. Interest is payable quarterly and will accrue, atKnology’s option, based on either a

 

17

----

 

variable rateestablished by CoBank, a fixed quoted rate established by CoBank or a LIBORrate 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 covenantsthat restrict the ability of the borrowers to take many actions, including theability to:

 

**•****                      **incur indebtedness;

 

**•****                      **create liens;

 

**•****                      **merge or consolidate withany other entity;

 

**•****                      **make distributions or stockrepurchases;

 

**•****                      **make investments;

 

**•****                      **engage in transactions withaffiliates; and

 

**•****                      **sell or transfer assets.

 

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

 

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

 

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

 

*Equity Financings*.   In connection with Knology’s spin-off from ITC Holding in February2000, Knology entered into an agreement with ITC Holding in which Knologyagreed to covenants that restricted its ability to issue additional shares ofcapital stock. In connection with its private placement of 31,166,667 shares ofits Series C preferred stock in January, 2001, ITC Holding agreed torelease Knology from these covenants pursuant to the agreement. Accordingly,Knology is no longer restrained by the ITC Holding agreement with respect tothe issuance of additional shares of capital stock.

 

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

 

On January 12, 2001, Knology issued to a group ofaccredited investors in a private placement 31,166,667 shares of its Series Cpreferred stock at a purchase price of $3.00 per share, for aggregate proceedsof $93.5 million. On March 30, 2001, Knology completed another privateplacement of 1,885,996 shares of Series C preferred stock to a group ofaccredited investors for approximately $5.7 million. On April 13, 2001, Knologycompleted another private placement of 2,621,930 shares of Series C preferredstock to a group of accredited investors for approximately $7.9 million. OnJune 29, 2001, Knology completed another private placement of 1,544,970 sharesof Series C preferred stock to a group of accredited investors forapproximately $4.6 million. In connection with the completion of these privateplacements, Knology amended its amended and restated certificate ofincorporation to adjust the ratios at which Series A preferred stock and SeriesB preferred stock convert into common stock. Prior to the completion of theprivate placements of Series C preferred stock, both the shares of Series Apreferred stock and shares of Series B preferred stock converted into shares ofcommon stock on a one-to-one basis. As amended, the conversion ratio for eachshare of Series A preferred stock was adjusted to one-to-1.0371 and theconversion ratio for each share of Series B preferred stock was adjusted toone-to-1.4865, subject to further customary anti-dilution adjustments. Withrespect to the amendment of the conversion prices of the Series Apreferred stock and Series B preferred stock, Knology recognized a non-cashdividend in the approximate amount of $36.6 million in the first quarter of2001.

 

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

 

18

----

 

Series C preferred stock in a private placement to two existinginvestors. Also on November 6, 2002, Knology issued 10,618,352 shares of SeriesD preferred stock and 21,701,279 shares of Series E preferred stock in exchangefor a portion of the old Broadband discount notes and issued 66,399 shares ofSeries D preferred stock in payment to the financial advisor to the formerholders of the Broadband discount notes.

 

**FutureFunding**

 

In 2003 Knology expects to spend approximately$40.0 million for capital expenditures, of which $14.1 million relates tonetwork construction and the remainder relates to the purchase of customerpremise equipment, such as cable set-top boxes and cable modems, networkequipment, including switching and transport equipment, and billing andinformation systems. Knology has sufficient cash to cover its planned operatingexpenses and capital expenditures during 2003. If Knology decides to build additional or new broadband network, thiswould require additional funding for the capital expenditures necessary tofinance the construction and purchase of subscriber equipment.

 

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

 

Following are the cash obligations for maturities oflong-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 otherassets for varying periods. Leases that expire are generally expected to berenewed or replaced by other leases. Future minimum rental payments requiredunder the operating leases that have initial or remaining non-cancelable leaseterms 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    |   |

 

19

----

 

Knology hasreceived franchises to build networks in Nashville, Tennessee and Louisville,Kentucky, although its franchise in Louisville is currently being contested bythe incumbent cable provider. Knology spent approximately $6.6 million toobtain franchise agreements and perform preliminary construction activity inNashville and Louisville. Among the covenants included in the indenturegoverning the new Knology notes is a covenant limiting the ability of Knologyto fund expansion into new markets, including Nashville and Louisville, fromoperating cash flows or new borrowings. Knology does not intend to expand intoNashville, Louisville or other markets until the required funding isavailable.  Knology estimates the costof constructing networks and funding initial subscriber equipment in these newcities as well as others at approximately $750 to $1,000 per home. The actualcosts of each new market may vary significantly from this range and will dependon the number of miles of network to be constructed, the geographic anddemographic characteristics of the city, population density, costs associatedwith the cable franchise in each city, the number of subscribers in each city,the mix of services purchased, the cost of subscriber equipment Knology paysfor or finances, utility requirements and other factors.

 

Knology hasentered into contracts with various entities to provide programming to be airedon Knology’s networks. We pay a monthly fee as cost for the programmingservices, generally based on the number of average subscribers to the program,although some fees are adjusted based on the total number of subscribers to thesystem and/or the system penetration percentage. Certain contracts have minimummonthly fees. We estimate that we will pay approximately $34.7 million inprogramming fees under these contracts during 2003.

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed tomarket risk from changes in interest rates. We manage our exposure to thismarket risk through our regular operating and financing activities. Derivativeinstruments are not currently used and, if used, are employed as riskmanagement tools and not for trading purposes.

 

We have noderivative financial instruments outstanding to hedge interest rate risk. Ouronly borrowings subject to market conditions are our borrowings under ourcredit facilities, which are based on either a prime or federal funds rate plusapplicable margin or LIBOR plus applicable margin. Any changes in these rateswould affect the rate at which we could borrow funds under our bank creditfacilities. A hypothetical 10% increase in interest rates on our variable ratebank debt for the duration of one year would increase interest expense by animmaterial amount.

 

**ITEM4. CONTROL AND PROCEDURES**

 

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

 

There have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of their lastevaluation.

 

20

----

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. Legal Proceedings**

 

We are subject to litigation in the normal course ofour business. However, in our opinion, there is no legal proceeding pendingagainst us which would have a material adverse effect on our financialposition, results of operations or liquidity. We are also a party to regulatoryproceedings affecting the relevant segments of the communications industrygenerally.

 

**ITEM2. Changes in Securities and Use of Proceeds**

 

None

 

**ITEM3. Default upon Senior Securities**

 

None

 

**ITEM4. Submission of Matters to a Vote of Security Holders**

 

None.

 

**ITEM 5. Other Information**

 

None

 

**ITEM6. 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 pressrelease announcing its 2002 fourth quarter and year-end results.

 

21

----

 

**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 theundersigned 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) |

 

22

----

 

##### **CERTIFICATIONS**

 

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

 

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

 

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

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

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

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

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

 

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

 

23

----

 

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

 

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

 

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

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

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

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

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

 

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

 

24

----