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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549
 FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMMISSION FILE NUMBER: 000-32647 KNOLOGY, INC. (Exact name of registrant as specified in its charter) DELAWARE
    
    58-2424258(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)KNOLOGY, INC.
1241 O.G. SKINNER DRIVE
WEST POINT, GEORGIA
    
    31833(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (706) 645-8553 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Options to Purchase Shares of Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ The aggregate market value of the outstanding common equity held by non-affiliates of the
registrant at June 30, 2004, was approximately $66.2 million, computed based on the closing sale
price as quoted on the Nasdaq National Market on that date. As of January 31, 2005, we had 23,697,787 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Parts of the registrants proxy statement on Schedule 14A for its 2005 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.




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TABLE OF CONTENTS PAGEPART IITEM 1. BUSINESS
    
    
    1ITEM 2. PROPERTIES
    
    
    30ITEM 3. LEGAL PROCEEDINGS
    
    
    31ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    31PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    32ITEM 6. SELECTED FINANCIAL DATA
    
    
    33ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    34ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    45ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    45ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    45ITEM 9A. CONTROLS AND PROCEDURES
    
    
    45ITEM
9B. OTHER INFORMATION
    
    
    45PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    46ITEM 11. EXECUTIVE COMPENSATION
    
    
    46ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    46ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    46ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    46PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    47SIGNATURES
    
    
    47INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1EX-10.62 FORM OF STOCK OPTION AGREEMENTEX-21.1 SUBSIDIARIES OF KNOLOGY, INC.EX-23.1 CONSENT OF DELOITTE & TOUCHE LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT
INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF OUR SENIOR MANAGEMENT MAY, FROM TIME TO
TIME, MAKE CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING OUR OPERATIONS, PERFORMANCE AND OTHER
DEVELOPMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN ITEM 1 OF
PART I UNDER THE CAPTION BUSINESSRISK FACTORS AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K,
AS WELL AS FACTORS WHICH MAY BE IDENTIFIED FROM TIME TO TIME IN OUR OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION OR IN THE DOCUMENTS WHERE SUCH FORWARD-LOOKING STATEMENTS
APPEAR. 
 PART I For convenience in this annual report, Knology, we, us, and the Company refer to
Knology, Inc. and our consolidated subsidiaries, taken as a whole. 
 ITEM 1. BUSINESS We are a fully integrated provider of video, voice, data and advanced communications services
to residential and business customers in nine markets in the southeastern United States. As of and
for the year ended December 31, 2004, we had approximately 398,000 total connections, our revenues
were $211.5 million and we had a net loss of $75.6 million. Video, voice and data revenues
accounted for approximately 46%, 34% and 20%, respectively, of our consolidated revenues for the
year ended December 31, 2004. We provide our services over our wholly owned, fully upgraded 750 MHz interactive broadband
network. As of December 31, 2004, our network passed approximately 756,000 marketable homes. Our
network is designed with sufficient capacity to meet the growing demand for high-speed and
high-bandwidth video, voice and data services, as well as the introduction of new communications
services. We have operating experience in marketing, selling, provisioning, servicing and operating
video, voice and data systems and services. We have delivered a bundled service offering for seven
years, and we are supported by a management team with decades of experience operating video, voice
and data networks. We provide a full suite of video, voice and data services in Huntsville and
Montgomery, Alabama; Panama City and portions of Pinellas County, Florida; Augusta, Columbus and
West Point, Georgia; Charleston, South Carolina; and Knoxville, Tennessee. We began offering our
bundled service package in Pinellas County, Florida during 2004 on a limited basis. We plan to
complete the enhancement of our network assets in Pinellas County making the bundle offering
available to all of our marketable passings. We also provide video services in Cerritos, California, but do not currently intend to upgrade
or enhance this network to provide additional services. We have previously announced our intention
to sell our Cerritos, California operations, which we acquired as part of the Verizon Media
acquisition described below, but there can be no assurance that we will be able to do so on terms
that are attractive to us. We have built our company through:  
    acquisitions of other cable companies, networks and franchises;
    upgrades of acquired networks to introduce expanded broadband services, including bundled voice and data services;
    construction and expansion of our broadband network to offer integrated video, voice and data services; and
    organic growth of connections through increased penetration of services to new
marketable homes and our existing customer base, along with new service offerings. On December 23, 2003, we completed a public offering of our common stock. Including the
shares issued on January 13, 2004, pursuant to the exercise of the underwriters over-allotment
option, we issued approximately 6.9 million shares at a per share price to the public of $9.00, and
our net proceeds were approximately $56.3 million. In December 2003, we completed the acquisition from Verizon Media Ventures Inc., a wholly
owned subsidiary of Verizon Communications Inc., of substantially all of the assets of the cable
systems in Pinellas County, Florida and Cerritos, California operated by Verizon Media, including
all franchises, leases for real property, customer agreements, accounts receivable, prepaid
expenses, inventory and equipment. We also licensed certain intellectual property related to each
network and assumed liabilities 1




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under acquired contracts, certain current liabilities and certain operating liabilities to the
extent they related to the acquired network assets. We paid Verizon Media an aggregate of approximately $17.0 million in cash, which was funded
with the net proceeds of our common stock offering. In connection with the completion of this
acquisition, we also issued to a prior prospective purchaser and certain of its employees warrants
to purchase one million shares of our common stock with an exercise price of $9.00 per share in
exchange for the release of the prospective purchasers exclusivity rights with Verizon Media. In March 2005, we entered into a definitive asset purchase agreement to sell our cable assets
located in Cerritos, California to WaveDivision Holdings, LLC for $10.0 million in cash, subject to
customary closing adjustments. We expect the sale of the Cerritos system to close in the third
quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory
approvals with respect to the municipal franchise in Cerritos, California. However, there can be
no assurance that we will complete the sale of the Cerritos cable system or we may not complete the
sale in a timely manner. In the event the purchaser does not receive necessary regulatory or other
approvals or the other conditions to closing are not satisfied, the sale will not be completed. Our Industry In recent years, regulatory developments and advances in technology have substantially altered
the competitive dynamics of the communications industry and blurred the lines among traditional
video, voice and data providers. The Telecommunications Act of 1996 and its implementation through
FCC regulation have encouraged competition in these markets. Advances in technology have made the
transmission of video, voice and data on a single platform feasible and economical. Communications
providers seek to bundle products to leverage their significant capital investments, protect market
share in their core service offerings from new sources of competition, and achieve operating
efficiencies by providing more than one service over their networks at lower incremental costs
while increasing revenue from the existing customer base. Incumbent cable operators are working to expand their core services to begin offering a
bundled package of services. Many of the cable operators bundling strategies include the provision
of Internet based voice services for their customers. Most of the major providers have announced
plans to roll out Voice over Internet Protocol (VoIP) services in the next few years. Some
operators have circuit-switched networks in some of their markets that are capable of offering
voice services. According to the NCTA, as of December 31, 2004, there were approximately 3 million
cable voice customers in the United States. However, most cable providers will need to incur
additional capital costs to upgrade their existing networks for voice capability. In addition, they
will need to devote and develop significant management resources for the deployment of voice
services on a large scale. We believe the future of the industry will include a broader competitive landscape in which
communications providers will offer bundled video, voice and data services and compete with each
other based on scope and depth of the service offering, pricing and convenience. While many
competitors have begun to offer bundled services in response to these industry factors, few have
been able to offer a full suite of services on a large scale. Our Strategy Our goal is to be the leading provider of integrated broadband communications services to
residential and business customers in our target markets and to fully leverage the capacity and
capability of our interactive broadband network. The key components of our strategy include:  
    Focus on offering fully integrated bundles of video, voice and data services.We
provide video, voice and data services over our broadband network and promote the
adoption of these services by new and existing customers in bundled offerings. Bundling
is central to our operating strategy and provides us with meaningful revenue
opportunities, enables us to increase penetration and operating efficiencies,
facilitates customer service, and reduces customer acquisition and installation costs.
We believe that offering our customers a bundle of video, voice and data services allows
us to maximize the revenue generating capability of our network, increase revenue per
customer, provide greater pricing flexibility and promote customer retention.Leverage our broadband network to provide new services.We built our high-capacity,
interactive broadband network with fiber optics as close to the customer as economically
feasible. We have completed our network upgrade in all of our current markets (with the
exception of Cerritos, CA), which enables us to provide at least 750 MHz of capacity and
two-way capability to all of our homes passed in these markets. We have invested in
advanced technology platforms that support advanced communications services and multiple
emerging interactive services such as video-on-demand, subscriber video-on-demand,
digital video recorder, interactive television, high-definition television, Internet
Protocol Centrex services and passive optical network services in those markets. We have
begun to enhance our network assets in Pinellas County, Florida to provide voice services
and started offering these services in late 2004.
    Deliver industry-leading customer service.Outstanding customer service is a
critical element of our operating philosophy. Through our call center, which we operate
24 hours a day, seven days a week, we deliver personalized and 2




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responsive customer care that promotes customer loyalty. Through our network operations
center, we monitor and evaluate network performance and quality of service. Our
philosophy is to be proactive in retaining customers rather than reactive, and we strive
to resolve service delivery problems prior to the customer becoming aware of them. As we
own our network and actively monitor our digital services from a centralized location to
the customer premises, we have greater control over the quality of the services we
deliver to our customers and, as a result, the overall customer experience. We have
introduced a new enterprise management system that enhances our service capability by
providing us with a single platform for sales, provisioning, customer care, trouble
ticketing, credit control, scheduling and dispatch of service calls, as well as providing
our customers with a single bill for all services.  
    Pursue expansion opportunities.We have a history of acquiring, integrating,
upgrading and expanding systems, enabling us to offer bundled video, voice and data
services and increasing our revenue opportunity, penetration and operating efficiency.
To augment our organic growth, we will pursue value-enhancing expansion opportunities
meeting our previously described target market criteria that allow us to leverage our
experience as a bundled broadband provider and endorse our operating philosophy of
delivering profitable growth. These opportunities include acquisitions and edge-out
expansion in new or existing markets. We will continue to evaluate growth opportunities
based on targeted return requirements. Our Interactive Broadband Network Our network is critical to the implementation of our operating strategy, allowing us to offer
bundled video, voice and data services to our customers in an efficient manner and with a high
level of service. In addition to providing high capacity and scalability, our network has been
specifically engineered to have increased reliability, including features such as:  
    redundant fiber routing and uses SONET protocol which enables the rapid, automatic
redirection of network traffic in the event of a fiber cut;
    back-up power supplies in our network which ensure continuity of our service in the event of a power outage; and
    network monitoring to the customer premises for all digital video, voice and data services. Technical overview Our interactive broadband network consists of fiber-optic cable, coaxial cable and copper
wire. Fiber-optic cable is a communications medium that uses hair-thin glass fibers to transmit
signals over long distances with minimum signal loss or distortion. In most of our network, our
systems main high capacity fiber-optic cables connect to multiple nodes throughout a network.
These nodes are connected to individual homes and buildings by coaxial cable and are shared by a
number of customers, generally 500 homes. We have sufficient fibers in our cables to further
subdivide our nodes to 125 homes if growth so dictates. Our network has excellent broadband
frequency characteristics and physical durability, which is conducive to providing video and data
transmission and telephone service. As of December 31, 2004, our network consisted of approximately 10,300 miles of network and
passed approximately 756,000 marketable homes and serving approximately 398,000 connections. Our
interactive broadband network is designed using redundant fiber-optic cables. Our fiber rings are
self-healing, which means that they provide for the very rapid, automatic redirection of network
traffic so that if there is a single point of failure on a fiber ring, our service will continue.
By comparison, most traditional cable television systems do not have redundant architectures. We provide power to our systems from locations along each network called hub sites, each of
which is equipped with a generator and battery back-up power source to allow service to continue
during a power outage. Additionally, individual nodes that are served by hubs are equipped with
back-up power. Our redundant fiber-optic cables and network powering systems allow us to provide
circuit-based voice services consistent with industry reliability standards for traditional
telephone systems. We monitor our network 24 hours a day, seven days a week from our network operations center in
West Point, Georgia. Technicians in each of our service areas schedule and perform installations
and repairs and monitor the performance of our interactive broadband network. We actively maintain
the quality of our network to minimize service interruptions and extend the networks operational
life. Video We offer video services over our network in the same way that traditional cable companies
provide cable TV service. Our network is designed for an analog and digital two-way interactive
transmission with fiber-optic cable carrying signals from the headend to the distribution point
within our customers neighborhoods, where the signals are transferred to our coaxial cable network
for delivery to our customers. 3




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Voice We offer telephone service over our broadband network in much the same way local phone
companies provide service. We install a network interface box outside a customers home to provide
dial tone service. Our network interconnects with those of other local phone companies. We provide
long-distance service using leased facilities from other telecommunications service providers. We
have two Class 5, full-featured Nortel DMS 500 switches located in West Point, Georgia and nearby
Huguley, Alabama that direct all of our voice traffic and allow us to provide enhanced custom
calling services including call waiting, call forwarding and three-way calling. We also operate a
telephone system in Valley, Alabama and West Point, Georgia, where we are the rural incumbent
telephone company. Data We provide Internet access using high-speed cable modems in much the same way customers
currently receive Internet services over modems linked to the local telephone network. The cable
modems we presently use are significantly faster than dial-up modems generally in use today. Our
customers Internet connections are always on, and there is no need to dial-up for access to the
Internet or wait to connect through a port leased by an Internet service provider. We provide our
customers with a high level of data transfer rates through multiple peering arrangements with
tier-one Internet facility providers. Our Bundled Service Offering We offer a complete solution of video, voice and data services in all of our markets, except
for Cerritos, CA. We have begun enhancing our network assets in Pinellas County, Florida that we
acquired from Verizon Media to provide voice services and offer these services to a portion of the
market. We offer a broad range of service bundles designed to address the varying needs and interests
of existing and potential customers. We sell individual services at prices competitive to those of
the incumbent providers, but attractively price additional services from our bundle. Bundling our
services enables us to increase penetration and operating efficiencies, facilitate customer
service, reduce customer acquisition and installation costs, and increase customer retention. Our bundled strategy means that we may deliver more than one service to each customer, and
therefore we report an aggregate number of connections for video, voice and data services. For
example, a single customer who purchases local video, voice and data services would count as three
connections. Video services We offer our customers a full array of video services and programming choices. Customers
generally pay initial connection charges and fixed monthly fees for video service. As of December
31, 2004, we provided video services to 177,323 customers. As of December 31, 2004, 31% of our
video customers subscribed for digital video. We offer only analog video service in Cerritos,
California and do not intend to upgrade that network to provide digital video services or other
enhanced services. Our analog video service offering comprises the following:  
    Basic Service:All of our video customers receive a package of basic programming,
which generally consists of local broadcast television and local community programming,
including public, government and educational access channels.
    Expanded Basic Service:This expanded programming level includes approximately 190
channels of satellite-delivered or non-broadcast channels, such as ESPN, MTV, USA, CNN,
The Discovery Channel, Nickelodeon and various home shopping networks.
    Premium Channels:These channels provide commercial-free movies, sports and other
special event entertainment programming, such as HBO, Showtime and Cinemax and are
available through our expanded basic and digital tiers of services. Our platform enables us to provide an attractive service offering of extensive programming as
well as interactive services. Our digital video service consists of approximately 190 digital
channels of programming, including our expanded basic cable service. We have recently introduced
new service offerings to strengthen our competitive position and generate additional revenues,
including video-on-demand and subscriber video-on-demand. Video-on-demand permits customers to
order movies and other programming on demand with VCR-like functions for a fee-per-viewing basis.
Subscriber video-on-demand is a similar service that has specific content available from our
premium channel offerings for an incremental charge. Voice services 4




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Our voice services include local and long-distance telephone services. Our telephone packages
can be customized to include different options of the following core services:  
    local area calling plans;
    flat-rate local and long-distance plans;
    a variety of calling features; and
    measured and fixed rate toll packages based on usage. For local service, our customers pay a fixed monthly rate, plus additional charges per month
for custom and advanced calling features such as call waiting, caller ID and voicemail. We provide
other telephone features for an additional charge. We also offer off-net voice services to a small
number of customers through an arrangement with a local utility provider in Newnan, Georgia. Data services We offer tiered data services to both residential and business customers that include
high-speed connections to the Internet using cable modems. Because a customers Internet service is
offered over the existing cable connection in the home, no second phone line is required and there
is no disruption of service when the phone rings or when the television is on. We offer IntroNet, a
high speed service aimed at first-time or dial-up Internet users. IntroNet is available at speeds
of 256k which is faster than traditional dial-up, but slower than our typical high-speed service,
and priced at a discount to our faster product. The IntroNet product has been successful in
capturing additional market share for us and providing a customer base to which higher speed data
services may be marketed. Our data packages generally include the following:  
    speed up to three megabits per second;
    specialized technical support 24 hours a day, seven days a week;
    access to exclusive local content, weather, national news, sports and financial reports;
    value-added features such as e-mail accounts, on-line storage, spam protection and parental controls; and
    a DOCSIS-compliant modem installed by a trained professional. Business services Our broadband network also supports services to business customers, and accordingly, we have
developed a full suite of products for small, medium and large enterprises. We offer the
traditional bundled product offering to these business customers. We also have developed new
products to meet the more complex voice and data needs of the larger business sector. We offer
passive optical network service, which enables our customers to have T-1 voice services and data
speeds of up to 100 megabits per second on our fiber network. We have introduced our Matrix product
offering, which can replace customers aging, low functionality PBX products with an IP Centrex
voice and data service that offers more flexible features at a lower cost. In addition, we offer a
virtual private network service to provide businesses with multiple sites the ability to exchange
information privately among their locations over our network. We serve our business customers from
locally based business offices with customer service and network support 24 hours a day, seven days
a week. Broadband carrier services We use extra, unused capacity on our network to offer wholesale services to other local and
long distance telephone companies, Internet service providers and other integrated services
providers. We call these services our broadband carrier services. While this is not a part of our
core strategy, we believe our interactive broadband network offers other service providers a
reliable and cost competitive alternative to other telecommunications service providers. Customer Service and Billing Customer service 5




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Customer service is an essential element of our operations and marketing strategy, and we
believe our quality of service and responsiveness differentiates us from many of our competitors. A
significant number of our employees are dedicated to customer service activities, including:  
    sales and service upgrades;
    customer activations and provisioning;
    service issue resolutions; and
    administration of our customer satisfaction programs. We provide customer service 24 hours a day, seven days a week. Our representatives are
cross-trained to handle customer service transactions for all of our products and currently exceed
the industry standards for call answer times. We operate a centralized customer call center in
Augusta, Georgia, which handles all customer service transactions. In addition, we provide our
business customers with local customer service, which we believe improves our responsiveness to
customer needs and distinguishes our product in the market. We believe it is a competitive
advantage to provide our customers with the convenience of a single point of contact for all
customer service issues for our video, voice and data service offerings and is consistent with our
bundling strategy. We monitor our network 24 hours a day, seven days a week. Through our network operations
center, we monitor our digital video, voice and data services to the customer level and our analog
video services to the node level. We strive to resolve service delivery problems prior to the
customer being aware of any service interruptions. Billing We are an early adopter of a single billing platform for video, voice and data services, which
is part of an enterprise management system that we have implemented system wide. This system, which
was developed to our specifications, enables us to send a single bill to our customers for video,
voice and data services. Sales and Marketing We believe that we are the first provider of a bundled video, voice and data communications
service package in our current markets. Our sales and marketing materials emphasize the
convenience, savings and improved service that can be obtained by subscribing to bundled services. We position ourselves as the local provider of choice in our markets, with a strong local
customer interface and community presence, while simultaneously taking advantage of economies of
scale from centralization of certain marketing functions. We have a sales staff in each of our markets including managers and direct sales teams for
both residential and business services. Our standard residential team consists of direct sales,
outbound sales, and front counter sales as well as support personnel. Our business services sales
team consists of our account executives, specialized business installation coordinators and
dedicated installation service teams. Our call center sales team handles all inbound telemarketing
sales. Our sales team is cross-trained on all our products to support our bundling strategy. Our
sales team is compensated based on connections and is therefore motivated to sell more than one
product to each customer. Our marketing and advertising strategy is to target bundled service
prospects utilizing a broad mix of media tactics including broadcast television, cross channel
cable spots, radio, newspaper, outdoor space, Internet and direct mail. We have utilized
database-marketing techniques to shape our offers, segment and target our prospect base to increase
response and reduce acquisition costs. We have implemented several retention and customer referral tactics including customer
newsletters, personalized e-mail communications and loyalty programs. These programs are designed
to increase loyalty, retention and up sell among our current base of customers. Pricing for Our Products and Services We attractively price our services to promote sales of bundled packages. We offer bundles of
two or more services with tiered features and prices to meet the demands of a variety of customers.
We also sell individual services at prices competitive to those of the incumbent providers. An
installation fee, which is often waived during certain promotional periods for a bundled
installation, is charged to new and reconnected customers. We charge monthly fees for cable
customer premise equipment. Programming 6




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We purchase our programming directly from the program networks by entering into affiliation
agreements with the programming suppliers. We also benefit from our membership with the National
Cable Television Cooperative, which enables us to take advantage of volume discounts. As of
December 31, 2004, approximately 68% of our programming is sourced from the cooperative which also
handles our contracting and billing arrangements on this programming. Markets Current Markets We currently serve the following markets with our interactive broadband network: Total HomesIn Franchise
    
    
    Year Services First Offered By KnologyYear Added
    
    Source
    
    Market
    
    Area
    
    
    Video
    
    
    Voice
    
    
    Data1995
    
    Acquired
    
    Montgomery, AL
    
    
    94,000
    
    
    
    1995
    
    
    
    1997
    
    
    
    19971995
    
    Acquired
    
    Columbus, GA
    
    
    62,000
    
    
    
    1995
    
    
    
    1998
    
    
    
    19981997
    
    Acquired
    
    Panama City, FL
    
    
    66,000
    
    
    
    1997
    
    
    
    1998
    
    
    
    19981998
    
    Acquired
    
    Huntsville, AL
    
    
    80,000
    
    
    
    1998
    
    
    
    1999
    
    
    
    19991998
    
    Built
    
    Charleston, SC
    
    
    140,000
    
    
    
    1998
    
    
    
    1998
    
    
    
    19981998
    
    Built
    
    Augusta, GA
    
    
    96,000
    
    
    
    1998
    
    
    
    1998
    
    
    
    19981999
    
    Acquired
    
    West Point, GA
    
    
    12,000
    
    
    
    1999
    
    
    
    1999
    
    
    
    19992000
    
    Built
    
    Knoxville, TN
    
    
    95,000
    
    
    
    2001
    
    
    
    2001
    
    
    
    20012003
    
    Acquired
    
    Cerritos, CA
    
    
    15,000
    
    
    
    2003
    
    
    
    
    
    
    
    2003
    
    Acquired
    
    Pinellas, FL
    
    
    415,000
    
    
    
    2003
    
    
    
    2004
    
    
    
    2003
 New Markets We plan to evaluate expansion of our operations to southeastern or other markets that have the
size, market conditions, demographics and geographical location suitable for our business strategy.
We plan to evaluate target cities that have the following characteristics, among others:  
    targeted return requirements;
    an average of at least 70 homes per mile;
    competitive dynamics that allow us to be the leading provider of integrated
video, voice and data services; and
    conditions that will afford us the opportunity to capture a substantial number
of customers. Competition We compete with a variety of communications companies because of the broad number of video,
voice and data services we offer. Competition is based on service, content, reliability, bundling,
value, and convenience. Virtually all markets for video, voice and data services are extremely
competitive, and we expect that competition will intensify in the future. Our competitors are often
larger, better-financed companies with greater access to capital resources. These incumbents
presently have numerous advantages as a result of their historic monopolistic control of their
respective markets, economies of scale and scope, and control of limited conduit relationships. Video services Cable television providers.Cable television systems are operated under non-exclusive
franchises granted by local authorities, which may result in more than one cable operator providing
video services in a particular market. Other cable television operations exist in each of our
current markets, and many of those operations have long-standing customer relationships with the
residents in those markets. Our competitors currently include Bright House, Charter, Comcast,
Mediacom and Time Warner. We also encounter competition from direct broadcast satellite systems,
including DirecTV and Echostar, that transmit signals to small dish antennas owned by the end-user. 7




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According to industry sources, satellite television providers presently serve approximately
19.7% of pay television customers in the United States; however, the satellite provider penetration
in our markets is substantially less. Competition from direct broadcast satellites could become
significant as developments in technology increase satellite transmitter power and decrease the
cost and size of equipment. Additionally, providers of direct broadcast satellites are not required
to obtain local franchises or pay franchise fees. The Intellectual Property and Communications
Omnibus Reform Act of 1999 permits satellite carriers to carry local television broadcast stations
and is expected to enhance satellite carriers ability to compete with us for customers. As a
result, we expect competition from these companies to increase. Other television providers.Cable television distributors may, in some markets, compete for
customers with other video programming distributors and other providers of entertainment, news and
information. Alternative methods of distributing the same or similar video programming offered by
cable television systems exist. Congress and the FCC have encouraged these alternative methods and
technologies in order to offer services in direct competition with existing cable systems. These
competitors include satellite master antenna television systems and local telephone companies. We compete with systems that provide multichannel program services directly to hotel, motel,
apartment, condominium and other multiunit complexes through a satellite master antennaa single
satellite dish for an entire building or complex. These systems are generally free of any
regulation by state and local governmental authorities. Pursuant to the Telecommunications Act of
1996, these systems, called satellite master antenna television systems, are not commonly owned or
managed and do not cross public rights-of- way and, therefore, do not need a franchise to operate. The Telecommunications Act of 1996 eliminated many restrictions on local telephone companies
offering video programming, and we may face increased competition from them. Several major local
telephone companies, including BellSouth, have announced plans to provide video services to homes. In addition to other factors, we compete with these companies using programming content,
including the number of channels and the availability of local programming. We obtain our
programming by entering into contracts or arrangements with video programming suppliers. A
programming supplier may enter into an exclusive arrangement with one of our video competitors,
creating a competitive disadvantage for us by restricting our access to programming. Voice services In providing local and long-distance voice services, we compete with the incumbent local phone
company, various long-distance providers and VoIP telephone providers in each of our markets.
BellSouth and Verizon are the incumbent local phone companies in our current markets and are
particularly strong competitors. We also compete with a number of providers of long-distance
telephone services, such as AT&T, BellSouth, MCI, Sprint and Verizon. We expect to continue to face intense competition in providing our telephone and related
telecommunications services. The Telecommunications Act of 1996 allows service providers to enter
markets that were previously closed to them. Incumbent local telephone carriers are no longer
protected from significant competition in local service markets. We are anticipating an increase in the deployment of VoIP telephone services. Following years
of development, VoIP has been deployed by a variety of service providers including other Multiple
Service Operators (MSOs) such as Cox Communications and Comcast and independent service providers
such as Vonage Holding Corporation. Unlike circuit switched technology, this technology does not
require ownership of the last mile and eliminates the need to rent the last mile from the Regional
Bell operating companies (RBOCs). VoIP is essentially a data service and can be more feature rich
than traditional circuit-switched telephone service. The VoIP providers will have differing levels
of success based on their brand recognition, financial support, technical abilities, and legal and
regulatory decisions. We believe that wireless telephone service, such as cellular and personal communication
services, or PCS, currently is viewed by most consumers as a supplement to, not a replacement for,
traditional telephone service. Wireless service generally is more expensive than traditional local
telephone service and is priced on a usage-sensitive basis. However, there is evidence to indicate
that wireless is gaining consideration as a replacement service, and the rate differential between
wireless and traditional telephone service has begun to decrease and is expected to further
decrease and lead to more competition between providers of these two types of services. Data services Providing data services is a rapidly growing business and competition is increasing in each of
our markets. Some of our competitors benefit from greater experience, resources, marketing
capabilities and name recognition. Cable television companies have entered the Internet access
market. The incumbent cable television company in each of our markets currently offers high-speed
Internet access services. 8




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Other competitive high-speed data providers include:  
    incumbent local exchange carriers that provide dial-up and DSL services;
    traditional dial-up Internet service providers;
    competitive local exchange carriers; and
    providers of satellite-based Internet access services. A large number of companies provide businesses and individuals with direct access to the
Internet and a variety of supporting services. In addition, many companies such as AOL and
Microsoft Corporation offer online services consisting of access to closed, proprietary information
networks with services similar to those available on the Internet, in addition to direct access to
the Internet. These companies generally offer data services over telephone lines using computer
modems. Some of these data service providers also offer high-speed integrated services using
digital network connections and DSL connections to the Internet, and the focus on delivering
high-speed services is expected to increase. Bundled Services Several of our competitors have initiated business plans to deploy their own versions of the
triple-play bundle in our markets. Comcast, Charter, Brighthouse, and other MSOs are in varying
stages of launching Voice over Internet Protocol (VoIP) and thereby enabling their third service
offering. Brighthouse launched VoIP in the Pinellas County market in mid-2004. Comcast and
Charter have made numerous announcements about launching voice services and have done so in some of
their markets. It is inevitable that these providers will launch VoIP in all of their markets in
the not too distant future. BellSouth and Verizon have each initiated agreements / partnerships with satellite providers
enabling their third service offering (video). The Bell companies each have facilities-based
initiatives to construct broadband (last-mile) networks in several markets nationwide. None of
these networks currently overlap with Knology. The RBOCs ability to provide the three services
will increase competition for subscribers within Knologys markets. Knology believes that its emphasis on proven technology for deploying telephone service
enhances its product offering relative to the MSOs for the near future. Additionally, our direct
relationship with the programmers and National Cable Television Cooperative (NCTC) for video
content and control of our channel line-up provides an advantage for our video offering relative to
the RBOCs for the foreseeable future. Legislation and regulation The cable television industry is regulated by the FCC, some state governments and most local
governments. Telecommunications carriers are regulated by the FCC and state public utility
commissions. Providers of Internet services generally are not subject to regulation. Federal
legislative and regulatory proposals under consideration may materially affect the cable
television, telecommunications services, and Internet services industries. The following is a
summary of federal laws and regulations affecting the growth and operation of the cable television
and telecommunications industries and a description of relevant state and local laws. Future federal and state legislative and regulatory changes may affect our operations and the
impact of such legislative or regulatory actions on our operations may be beneficial or adverse.
The following description of certain major regulatory factors does not purport to be a complete
summary of all present and proposed legislation and regulations pertaining to our operations. Federal Regulation Cable Television Consumer Protection and Competition Act of 1992 The Cable Television Consumer Protection and Competition Act of 1992, or the 1992 Cable Act,
increased the regulation of the cable industry by imposing rules governing, among other things:  
    rates for tiers of cable video services;
    access to programming by competitors of cable operators and restrictions on certain
exclusivity arrangements by cable operators; 9




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
    access to cable channels by unaffiliated programming services;
    terms and conditions for the lease of channel space for commercial use by parties unaffiliated with the cable operator;
    ownership of cable systems;
    customer service requirements;
    mandating carriage of certain local television broadcast stations by cable systems
and the right of television broadcast stations to withhold consent for cable systems to
carry their stations;
    technical standards; and
    cable equipment compatibility. The legislation also encouraged competition with existing cable television systems by:  
    allowing municipalities to own and operate their own cable television systems without a franchise;
    preventing franchising authorities from granting exclusive franchises or unreasonably
refusing to award additional franchises covering an existing cable systems service
area; and
    prohibiting the common ownership of cable systems and other types of multichannel
video distribution systems. Telecommunications Act of 1996 The Telecommunications Act of 1996 and the FCC rules implementing this Act radically altered
the regulatory structure of telecommunications markets by mandating that states permit competition
for local telephone services. The Act placed certain requirements on most incumbent local exchange
carriers to open their networks to competitors, resell their services at a wholesale discount, and
permit other carriers to collocate equipment on incumbent local exchange carrier premises. Rural
carriers may be exempt from these incumbent local exchange carrier requirements, as currently is
the case with our incumbent local exchange carrier subsidiaries, Interstate Telephone and Valley
Telephone. The following is a summary of the interconnection and other rights granted by this Act
that are most important for full local telecommunications competition, and our belief as to the
effect of the requirements, assuming vigorous implementation.  
    interconnection of competitors with the networks of incumbents and other carriers,
which permits customers of competitors to exchange traffic with customers connected to
other networks;
    local loop unbundling, which allows competitors to selectively gain access to
incumbent carriers facilities and wires that connect the incumbent carriers central
offices with customer premises, thereby enabling competitors to serve customers on a
facilities basis not directly connected to their networks;
    reciprocal compensation, which mandates arrangements for local traffic exchange
between both incumbent and competitive carriers and compensation for terminating local
traffic originating on other carriers networks, thereby improving competitors margins
for local service;
    number portability, which allows customers to change local carriers without changing
telephone numbers, thereby removing a significant barrier for a potential customer to
switch to a different carriers local voice services; and
    dialing parity, which enables competitors to provide telephone numbers to new
customers on the same basis as the incumbent carrier. This Act also permitted regional Bell operating companies under certain conditions to apply to
the FCC for authority to provide long-distance services. The Act also included significant changes in the regulation of cable operators. For example,
the FCCs authority to regulate the rates for cable programming service tiers, that is all tiers
other than the lowest level basic service tier, of all cable operators expired on March 31, 1999.
The legislation also: 10




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
    repealed the anti-trafficking provisions of the 1992 Cable Act, which required cable
systems to be owned by the same person or company for at least three years before they
could be sold to a third party;
    allows cable operators to enter telecommunications markets which historically have
been closed to them;
    limits the rights of franchising authorities to require certain technology or to
prohibit or condition the provision of telecommunications services by the cable
operator;
    adjusts the favorable pole attachment rates afforded cable operators under federal
law such that they may be increased, beginning in 2001, if the cable operator also
provides telecommunications services over its network; and
    allows some telecommunications providers to begin providing competitive cable service
in their local service areas. Regulation of Cable Services The FCC, the principal federal regulatory agency with jurisdiction over cable television, has
promulgated regulations covering many aspects of cable television operations. The FCC may enforce
its regulations through the imposition of fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC licenses. A brief
summary of certain key federal regulations follows. Rate regulation. The 1992 Cable Act authorized rate regulation for certain cable services and
equipment. It requires communities to certify with the FCC before regulating basic cable rates.
Cable service rate regulation does not apply where a cable operator demonstrates to the FCC that it
is subject to effective competition in the community. To the extent that any municipality attempts
to regulate our basic rates or equipment, we believe we could demonstrate to the FCC that our
systems all face effective competition and, therefore, are not subject to rate regulation. Program access. To promote competition with incumbent cable operators by independent cable
programmers, the 1992 Cable Act placed restrictions on dealings between cable programmers and cable
operators. Satellite video programmers affiliated with cable operators are prohibited from
favoring those cable operators over competing distributors of multichannel video programming, such
as satellite television operators and competitive cable operators such as us. These restrictions
are designed to limit the ability of vertically integrated satellite cable programmers from
offering exclusive programming arrangements or preferred pricing or non-price terms to cable
operators. Congress and the FCC have considered, but not adopted, proposals to expand the program
access rights of cable competitors such as us, including the possibility of applying all program
access requirements to terrestrially delivered video programming and all video programmers. The
program access rules will sunset on October 5, 2007, unless further extended by the FCC. If the
exclusivity restrictions are allowed to sunset, this could have a materially adverse impact on us
if incumbent cable operators use the greater flexibility to deny important programming to our
systems. Carriage of broadcast television signals. The 1992 Cable Act established broadcast signal
carriage requirements that allow local commercial television broadcast stations to elect every
three years whether to require the cable system to carry the station (must-carry) or whether to
require the cable system to negotiate for consent to carry the station (retransmission consent).
Stations are generally considered local to a cable system where the system is located in the
stations Nielsen designated market area. Cable systems must obtain retransmission consent for the
carriage of all distant commercial broadcast stations, except for certain superstations, that are
commercial satellite-delivered independent stations such as WGN. Pursuant to the Satellite Home
Viewer Improvement Act, the FCC enacted rules governing retransmission consent negotiations between
broadcasters and all distributors of multichannel video programming (including cable operators).
Local non-commercial television stations are also given mandatory carriage rights, subject to
certain exceptions, within a certain limited radius. Non-commercial stations are not given the
option to negotiate for retransmission consent. Must-carry requests may decrease the
attractiveness of the cable operators overall programming offerings by including less popular
programming on the channel line-up, while retransmission consent elections may involve cable
operator payments (or other concessions) to the programmer. We carry some stations pursuant to
retransmission consent agreements and pay fees for such consents or have agreed to carry additional
services. We carry other stations pursuant to must-carry elections. The rules the FCC has adopted for the carriage of digital broadcast signals do not require
cable systems to carry both the analog and digital signals of television broadcast stations
entitled to must-carry rights during those stations transition to full digital operations. The
FCC has also ruled that a cable operator need only carry a broadcasters primary video service
(rather than all of the digital broadcasters multi-cast services). Registration procedures and reporting requirements. Before beginning operation in a
particular community, all cable television systems must file a registration statement with the FCC
listing the broadcast signals they will carry and certain other information. Additionally, cable
operators periodically are required to file various informational reports with the FCC. Cable
operators that operate in certain frequency bands, including us, are required on an annual basis to
file the results of their periodic 11




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cumulative leakage testing measurements. Operators that fail to make this filing or who
exceed the FCCs allowable cumulative leakage index risk being prohibited from operating in those
frequency bands in addition to other sanctions. Customer equipment regulation. As noted, cable customer equipment is subject to rate
regulation unless the FCC deems the cable system to face effective competition. The FCC has also
required that cable customers be permitted to purchase cable converters and other navigation device
equipment from third parties, such as retailers. It developed a multiyear phase-in period during
which security functions (which remain in the exclusive control of the cable operator) would be
unbundled from non-security functions, which then could be supplied by third-party vendors. The separate security module requirement applies to all digital devices as well as to devices
that access both analog and digital services (hybrid devices), although it does not apply to
analog-only devices. As long as cable operators subject to the rules comply with the separate
security module requirement, they may continue to provide their customers with devices that contain
both embedded security and nonsecurity functions (integrated devices) until July 1, 2006, at which
time they will be prohibited from placing these devices in service. The FCC wants consumers to be able to directly connect their retail equipment, i.e.,
television receivers, digital recorders, video cassette recorders, etc., with cable television
systems. In order to facilitate this connectivity, the FCC established rules requiring that,
beginning April 1, 2004 all cable operators must replace or upgrade subscriber-leased high
definition set-top boxes, upon customer request, to ensure that customers are able to access
advanced, interactive cable services. The set-top boxes must be capable of meeting certain
industry-established technical standards which will enable connectivity between customer equipment
and cable systems. Starting on July 1, 2005, all high definition set-top boxes acquired by cable
operators for distribution to subscribers must meet certain advanced industry-established
standards. The FCC also recently issued regulations requiring all digital cable systems to separate out
from its navigation equipment the security functions which control access to paid subscription
programming. Unaffiliated manufacturers, retailers and vendors will be allowed to make the
equipment commercially available and it will be integrated into or used in conjunction with
subscriber-purchased navigation devices to allow access to all cable system features previously
available only by using cable system provided-equipment. By July 1, 2004, all digital cable
systems must maintain an adequate supply of the security equipment and must ensure that subscribers
have convenient access to it. The FCC restrictions could negatively affect how we develop and
market new services and equipment to our customers. Franchise authority. Cable television systems operate pursuant to franchises issued by local
franchising authorities (which are the cities, counties or political subdivisions in which a cable
operator provides cable service). Local franchising authority is premised upon the cable
operators facilities crossing the public rights-of-way. Franchises are typically of fixed
duration with the prospect for renewal. These franchises must be nonexclusive. The terms of local
franchises vary by community, but typically include requirements concerning service rates,
franchise fees, construction timelines, mandated service areas, customer service standards,
technical requirements, public, educational and government access channels, and channel capacity.
Franchises often may be terminated, or penalties may be assessed, if the franchised cable operator
fails to adhere to the conditions of the franchise. Although largely discretionary, the exercise
of local franchise authority is limited by federal law. For example, local franchise authorities
may not issue exclusive franchises, may not require franchise fees that exceed 5% of gross revenues
from the provision of cable services, and may not mandate the use of a particular technology.
Local franchise authorities are permitted to charge fees other than cable franchise fees, such as
fees for a telecommunications providers use of public rights-of-way. We hold cable franchises in
all of the franchise areas in which we provide service. We believe that the conditions in our
franchises are fairly typical for the industry. Our franchises generally provide for the payment
of fees to the municipality ranging from 3% to 5% of revenues from telephone and cable television
service, respectively. The Telecommunications Act of 1996 exempted those telecommunications
services provided by a cable operator or its affiliate from cable franchise requirements, although
municipalities retain authority to regulate the manner in which a cable operator uses the public
rights-of-way to provide telecommunications services. Franchise renewal. Franchise renewal, or approval for the sale or transfer of a franchise,
may involve the imposition of additional requirements not present in the initial franchise (such as
facility upgrades or funding for public, educational, and government access channels). Although
franchise renewal is not guaranteed, federal law imposes certain standards to prohibit the
arbitrary denial of franchise renewal. Our franchises generally have 10 to 15 year terms, and we
expect our franchises to be renewed by the relevant franchising authority before or upon
expiration. Franchise transfer. Local franchise authorities are required to act on a cable operators
franchise transfer request within 120 days after receipt of all information required by FCC
regulations and the franchising authority. Approval is deemed granted if the franchising authority
fails to act within such period. Pole attachments. Federal law requires utilities, defined to include all local telephone
companies and electric utilities except those owned by municipalities and co-operatives, to provide
cable operators and telecommunications carriers with nondiscriminatory access to poles, ducts,
conduit and rights-of-way at just and reasonable rates. The right to access is beneficial to
facilities-based providers such as us. Federal law also establishes principles to govern the
pricing of and terms of such access. Utilities may charge 12




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telecommunications carriers (and cable operators providing both cable television service and
telecommunications service, such as us) a different (often higher) rate for pole attachments than
they charge cable operators providing solely cable service. The FCC has adopted rules implementing
the two different statutory formulas for pole attachment rates. These regulations became effective
on February 8, 2001, and increases in attachment rates relative to rates for providers that
exclusively provide cable service resulting from the regulations are being phased-in in equal
annual increments over a period of five years beginning on the effective date of the new FCC
regulations. The federal pole attachment access and rate provisions apply only in those states
that have not certified to the FCC that they regulate pole attachment rates. Currently, 18 states
plus the District of Columbia have certified to the FCC, leaving pole attachment matters to be
regulated by those states. Of the states in which we operate, none has certified to the FCC. The
FCC has clarified that the provision of Internet services by a cable operator does not affect the
agencys jurisdiction over pole attachments by that cable operator, nor does it affect the rate
formula otherwise applicable to the cable operator. The U.S. Court of Appeals for the Eleventh
Circuit overturned the FCCs conclusion. However, the U.S. Supreme Court has upheld the FCCs
decision by reversing the decision of the U.S. Court of Appeals for the Eleventh Circuit and
confirming the FCCs authority. Inside wiring of multiple dwelling units. FCC rules provide generally that, in cases where
the cable operator owns the wiring inside a multiple dwelling unit but has no right of access to
the premises, the multiple dwelling unit owner may give the cable operator notice that it intends
to permit another cable operator to provide service there. The cable operator then must elect
whether to remove the inside wiring, sell the inside wiring to the multiple dwelling unit owner at
a price not to exceed the replacement cost of the wire on a per-foot basis, or abandon the inside
wiring. The FCC also adopted rules that, among other things, require utilities (including
incumbent local exchange carriers and other local exchange carriers) to provide telecommunications
carriers and cable operators with reasonable and nondiscriminatory access to utility-owned or
controlled conduits and rights-of-way in all multiple tenant environments (including, for
example, apartment buildings, office buildings, campuses, etc.) in those states where the FCC
possesses authority to regulate pole attachments, i.e., in those states where the state government
has not certified to the FCC that it regulates utility pole attachments and rights-of-way matters. Access to and competition in multiple dwelling units by and among video operators. The FCC
has preempted laws and rules that restrict occupants of multiple dwelling units from placing small
satellite antennas on their balconies (or areas under the occupants exclusive use). The FCCs
action increases the ability of satellite television operators such as DirecTV to compete with us
in certain multiple dwelling units. The FCC recently decided not to abrogate or restrict existing
or future exclusive video multiple dwelling unit access contracts by multichannel video programming
distributors. The decision not to abrogate existing exclusive multiple dwelling unit access
contracts may restrict us in competing with the incumbent cable operator (or other video
competitors) in those multiple dwelling units where another cable operator has obtained an
exclusive access arrangement. Privacy. Federal law restricts the manner in which cable operators can collect and disclose
data about individual system customers. Federal law also requires that the cable operator
periodically provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under federal law and their
enforcement rights. Cable operators must also take such actions as are necessary to prevent
unauthorized access to personally identifiable information. Failure to adhere to these
requirements subjects the cable operator to payment of damages, attorneys fees and other costs. Copyright. Cable television systems are subject to federal compulsory copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal
copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory
license to retransmit broadcast signals. The amount of the royalty payment varies, depending on
the amount of system revenues from certain sources, the number of distant signals carried, and the
location of the cable system with respect to over-the-air television stations. Adjustments in copyright royalty rates are made through an arbitration process supervised by
the U.S. Copyright Office. The modification or elimination of the compulsory copyright licensing
scheme could adversely affect our ability to provide our customers with their desired broadcast
programming. Internet service. The FCC rejected requests by some Internet service providers to require
cable operators to provide unaffiliated Internet service providers with direct access to the
operators broadband facilities. A contrary decision may have facilitated greater competition by
non-facilities-based Internet service providers with our broadband service offerings. In addition,
the FCC recently sought comment on the scope of its jurisdiction to regulate cable modem service
and the extent to which state and local governments may regulate cable modem service. Although the
FCC has indicated a clear preference for minimizing regulation of broadband services, future
regulation of cable modem service by federal, state or local government entities remains possible.
The FCC also sought comment on whether it should resolve any disputes that may arise over cable
operators previous collection of franchise fees from their customers based, in part, on cable
modem service revenues, or whether the FCC should leave such matters to the courts. There remains
a risk that we will confront litigation on this issue. See also Regulatory treatment of cable
modem service. Regulatory fees. The FCC requires payment of annual regulatory fees by the various industries
it regulates, including the cable television industry. Regulatory fees may be passed on to
customers as external cost adjustments to rates for basic cable service. 13




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Fees are also assessed for other FCC licenses, including licenses for business radio, cable
television relay systems and earth stations. These fees, however, may not be collected directly
from customers as long as the FCCs rate regulations remain applicable to the cable system. Tier buy through. Federal law requires cable operators to allow customers to purchase premium
services or pay-per-view video programming offered by the cable operator on a per-channel or per
program basis without the need to subscribe to any tier of service except the basic service tier
unless the cable systems lack of addressable converter boxes or other technological limitations
prohibit it from doing so. The exemption for cable operators lacking the technological ability to
comply expired in October 2002, although the FCC may extend that period on a case-by-case basis as
necessary pursuant to an appropriate waiver request. Our systems currently comply with these
requirements and we do not avail ourselves of the technological exemption. Potential regulatory change. The regulation of cable television systems at the federal,
state, and local levels is subject to the political process and has seen constant change over the
past decade. Material changes in the law and regulatory requirements must be anticipated, and our
business could be adversely affected by future legislation or new regulations. Regulation of Telecommunications Services Our telecommunications services are subject to varying degrees of federal, state and local
regulation. Pursuant to the Communications Act of 1934, as amended by the Telecommunications Act
of 1996, the FCC generally exercises jurisdiction over the facilities of, and the services offered
by, telecommunications carriers that provide interstate or international communications services.
Barring federal preemption, State regulatory authorities retain jurisdiction over the same
facilities to the extent that they are used to provide intrastate communications services, as well
as facilities solely used to provide intrastate services. Local regulation is largely limited to
management of the occupation and use of county or municipal public rights-of-way. Various
international authorities may also seek to regulate the provision of certain services. As explained above, incumbent local exchange carriers are subject to obligations (under
Section 251(c) of the federal Communications Act) to open their networks to competitive access,
including both unbundling and collocation obligations, as well as heightened interconnection
obligations and a duty to make their services available to resellers at a wholesale discount rate.
The Communications Act includes an exemption from Section 251(c) requirements for rural telephone
companies, absent a finding by the appropriate state commission that the request is not unduly
economically burdensome. Both Interstate Telephone and Valley Telephone are rural telephone
companies as defined by the federal Communications Act. With respect to Valley Telephone, the
Alabama Public Service Commission and, with respect to Interstate Telephone, the Georgia Public
Service Commission have determined that these companies should be exempt from the incumbent local
exchange carrier interconnection requirements under Section 251(c) of the Communications Act. In
the event the circumstances upon which these determinations are based change in the future, it is
possible these conclusions could be revisited and reversed, exposing either company to the
incumbent local exchange carrier interconnection, unbundling, wholesale discount, and/or
collocation obligations. Tariffs and detariffing. Our subsidiary, Knology Broadband, Inc., or Broadband, is classified
by the FCC as a non-dominant carrier with respect to both its domestic interstate and international
long-distance carrier services and its competitive local exchange carrier services. As a
non-dominant carrier, its rates presently are not generally regulated by the FCC, although the
rates are still subject to general requirements that they be just, reasonable, and
nondiscriminatory. The FCC has ordered mandatory detariffing of non-dominant carriers interstate
and international interexchange services, except in very limited circumstances. Rather, we must
post standard rates, terms, and conditions on the web and negotiate and/or execute individual
agreements with each of our customers to cover the rates, terms and conditions for our provision of
such services, including limitations on liability. The FCCs detariffing regime has no impact on
our tariffs for intrastate services, nor does it affect the federal access charge tariff system.
However, it is uncertain whether we will be able to execute individual agreements with each of our
long-distance customers on favorable terms going forward and whether the additional costs of having
to comply with the new regime will have an adverse effect on our revenues. There is also some
uncertainty about whether, in the absence of a tariff, such carrier protections such as strict
limitations on liability, can be negotiated with the end users and, if they are, whether they are
enforceable. Non-dominant local exchange carriers are not permitted to file tariffs with the FCC for their
interstate access services if the charges for such services are higher than FCC benchmarks
established in 2001. If a non-dominant carriers charges for interstate access services are equal
to or below the FCC-established benchmark, it is permitted, but not required, to file tariffs with
the FCC for such services. Our interstate access services fall within the FCC-established
benchmark and we have a tariff on file with the FCC for those services. Over time, we can be
expected to face downward pressure on our switched access rates because of the FCCs regulations
which require a phase-down to incumbent local exchange carrier access charge level by 2005 and to
the extent incumbent local exchange carrier switched access rates are reduced from current levels. Interstate Telephone and Valley Telephone are regulated by the FCC as dominant carriers in the
provision of interstate-switched access services. As dominant carriers, Interstate Telephone and
Valley Telephone must file tariffs with the FCC and must provide the FCC with notice prior to
changing their rates, terms or conditions of interstate access services. Interstate Telephone has
its own tariffs on file with the FCC, while Valley Telephone concurs in tariffs filed by the
National Exchange Carrier Association. 14




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Interstate Telephone and Valley Telephone are both classified as non-dominant in the provision
of interstate and international interexchange services, rendering them subject to mandatory
detariffing at the FCC for such services, as described above. Interconnection and compensation for transport and termination. The Telecommunications Act of
1996 established a national policy of permitting the development of local telephone competition.
This Act preempts laws that prohibit competition for local telephone services and establishes
requirements and standards for local network interconnection, unbundling of network elements and
resale. The Telecommunications Act of 1996 also requires incumbent local telephone carriers to
enter into mutual compensation arrangements with competitive local telephone companies for
transport and termination of local calls on each others networks. The interconnection, unbundling
and resale standards were developed by the FCC through several iterations and have been further
implemented by the states and reviewed by the federal courts of appeals. The terms of
interconnection agreements among the carriers have been, and are likely to continue to be, overseen
by the states. Although a panel of judges from the U.S. Court of Appeals for the Eleventh Circuit
(the jurisdiction in which many of our markets are located), previously concluded that state public
service commissions lack the authority under Section 252 of the federal Communications Act to
interpret and enforce interconnection agreements, the court en banc has reversed that conclusion
and agreed with at least six other federal circuits that the states do have such authority. We have executed local network interconnection agreements with BellSouth and Verizon for,
among other things, the transport and termination of local telephone traffic. These agreements
have been filed with, and approved by, the applicable regulatory authority in each state in which
we conduct our operations and in which the agreements apply. These agreements are subject to
changes as a result of changes in laws and regulations, and there is no guarantee that the
interconnection agreement rates and terms under which we operate today will be available in the
future. The FCC has concluded that calls to Internet service providers are jurisdictionally interstate
and the exchange of ISP-bound traffic is not subject to the reciprocal compensation requirements of
the Communications Act. The FCC established an interim scheme, however, whereby traffic below a
3:1 originating-to-terminating ratio is presumed to be reciprocal compensation traffic and traffic
above 3:1 is presumed to be ISP-bound. While the FCC decision was remanded by the U.S. Court of
Appeals for the D.C. Circuit to the FCC for further elaboration and as to the legal basis for its
decision, the Court let the interim scheme remain in effect. Until the FCC addresses the issue
again, ISP-bound traffic is generally being exchanged at a lower rate than reciprocal compensation
traffic. Under our interconnection agreements, we exchange local traffic with incumbent carriers
on a bill-and-keep basis (in which no compensation is actually paid). In March 2005, the FCC issued a further notice of proposed rulemaking requesting comment on
various proposals to replace the existing intercarrier compensation regimes with a unified regime
designed for the developing marketplace. As part of the proceeding, the FCC will review numerous
aspects of intercarrier compensation, including transport and termination. The FCCs decision will
impact the amounts that we both pay and receive from all carriers with whom we are interconnected,
both directly and indirectly. Access to unbundled network elements. Until March 2005, the FCCs rules had required
incumbent local telephone carriers to provide an unbundled network element platform that included
all of the network elements required by a competitor to provide a retail local telecommunications
service, including mass market circuit switching. Competitors using such platforms had the
opportunity to provide retail local services entirely through the use of the local telephone
carriers facilities at lower discounts than those available for local resale. In the FCCs
Triennial Review Order, effective October 2, 2003, the FCC determined that certain network elements
would no longer be subject to unbundling, while other elements must continue to be offered subject
to further, detailed review by the state public utility commissions. On March 2, 2004, the Court
vacated and remanded much of the FCCs Triennial Review Order. In the FCCs Triennial Review
Remand Order, effective March 11, 2005, the agency fundamentally changed its unbundling rules,
adopting materially significant limits on the availability of unbundled network elements. Although
the FCC adopted transition plans for competing carriers to transition away from use of the delisted
network elements to alternative facilities or arrangements, the plans apply only to the embedded
customer base and do not permit competitive carriers to add new customers or capacity to delisted
network elements. The rules are subject to further clarification and reconsideration by the FCC,
and review on appeal by the D.C. Circuit. In view of the uncertainty surrounding the FCCs rules
adopted in the Triennial Review Remand Order, we cannot at this time state with any certainty the
impact of that Order upon our business. The availability of a wide variety of unbundled network
elements could benefit those of our local telecommunications competitors who, unlike us, do not
provide service entirely over their own facilities; conversely, the limiting of network elements
available on an unbundled basis may discourage potential competitors who cannot, or do not wish to
expend the capital required to build out their own facilities, and strengthen the positions of
incumbent carriers such as BellSouth and Verizon. Any material change in the FCCs regulations
upon further review or appeal of the Triennial Review Remand Order could have a significant impact
on competition. Unbundled network element pricing. In September 2003, the FCC commenced a rulemaking
proceeding, which is still pending, to review globally the pricing principles that states must use
to set rates for unbundled network elements. This proceeding ultimately could lead to significant
changes in the pricing of unbundled network elements, which could in turn lead to significant
changes in the relative competitive position of our competitors. Apart from this proceeding, the
FCC, in its Triennial Review Remand Order, effective March 11, 2005, adopted pricing rules that, in
the absence of negotiated alternative commercial arrangements, will 15




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apply to the dedicated transport, high-capacity loop, and mass market circuit switching
elements of the incumbent local exchange carrier networks during specifically defined transition
periods. The state commissions have significant responsibility for the implementation of the FCCs
rules, including the actual setting of rates for unbundled network elements. The availability of a
wide variety of available unbundled network elements at attractive prices could benefit those of
our local telecommunications competitors who, unlike us, do not provide service entirely over their
own facilities; conversely, the limiting of elements available on an unbundled basis or a relative
increase in the prices of such elements and platforms may discourage potential competitors who
cannot, or do not wish to expend the capital required to build out their own facilities. Number portability. All providers of telecommunications services must offer service provider
local number portability, which the FCC has defined as the ability to retain, at the same location,
existing telephone numbers when switching local telephone companies without impairment of quality,
reliability or convenience. Number portability is intended to remove one barrier to entry faced by
new competitors, which would otherwise have to persuade customers to switch local service providers
despite having to change telephone numbers. Although number portability benefits our competitive
local exchange carrier operations, it represents a burden to Valley Telephone and Interstate
Telephone. Moreover, wireline-to-wireless number portability is likely to have an adverse impact
on all wireline carriers because end users are expected to port more numbers from wireline to
wireless carriers for some time, than vice versa. Universal service. The FCC has adopted rules implementing the universal service requirements
of the Telecommunications Act of 1996. The federal universal service fund is the support mechanism
established by the FCC to ensure that high quality, affordable telecommunications service is
available to all Americans. Pursuant to the FCCs universal service rules, all telecommunications
providers must contribute a percentage of their telecommunications revenues to the federal
universal service fund. As a telecommunications carrier, we are required to contribute to the
federal universal service fund on the basis of our projected, collected interstate and
international end user telecommunications revenues. The FCC devises a quarterly factor for
contribution to the federal universal service fund based on the ratio of total projected demand for
universal service support as compared to total end user interstate and international revenue for a
given quarter. The contribution factor for the first quarter of 2005 is 10.7%. Accordingly, we
presently contribute almost eleven percent of our combined interstate and international end user
telecommunications revenues to the federal universal service fund. Carriers may assess a federal universal service surcharge on their customers, either as a flat
amount or a percentage of a customers revenue; however, this amount may not exceed the total
amount of the universal service contribution factor currently in effect. As a result, we are
precluded from assessing a federal universal service-related charge on our end user customers in
excess of the relevant interstate and international telecommunications portion of each customers
bill times the relevant contribution factor. We remain able to recover legitimate administrative
costs relating to our contribution to the federal universal service fund, provided that such cost
recovery is made through areas other than our universal service line item surcharge. The FCC currently is conducting a comprehensive review of the rules governing contributions to
the federal universal service fund. The FCC is considering the adoption of a connection-based
universal service contribution methodology in which entities would contribute to the federal
universal service fund based on either the number of end user connections, the number of working
telephone numbers, or the amount of capacity per connection. The FCC is also considering the issue
of broadband providers contribution to universal service and whether and how connections that
provide broadband Internet accessincluding those using cable modem technologywould be assessed
for federal universal service fund purposes. Although the outcome of this proceeding and its
effect on our business cannot be predicted, if any of these proposals are implemented, the amount
of our contributions to the federal universal service fund may increase, and could negatively
impact our business, prospects, gross profits, cash flows and financial condition. Changes to
federal universal service funding obligations could adversely affect us by increasing the payments
owed to support the fund. Access charge reform. The FCC has adopted several orders in recent years having the effect of
reducing switched access charges imposed by local telephone companies for origination and
termination of interstate long-distance traffic. Overall decreases in local telephone carriers
access charges as contemplated by the FCCs access reform policies would likely put downward
pricing pressure on our charges to domestic interstate and international long-distance carriers for
comparable access. Changes to the federal access charge regime could adversely affect us by
reducing the revenues that we generate from charges to domestic interstate and international
long-distance carriers for originating and terminating interstate traffic over our
telecommunications facilities. The FCC has adopted an order, the MAG Plan, to reform interstate access charges and universal
service support for rate-of-return incumbent local exchange carriers such as Valley Telephone and
Interstate Telephone. The MAG Plan is designed to lower access charges toward cost, replace
implicit support for universal service with explicit support that is portable to all eligible
telecommunications carriers, and provide certainty and stability for the small and mid-sized local
telephone companies serving rural and high-cost areas by permitting them to continue to set rates
based on a rate-of-return of 11.25%, thereby encouraging rural investment. The MAG Plan, as
adopted, will reduce switched access fees for small incumbent local exchange carriers and protect
universal service in areas served by those incumbent local exchange carriers. Although the MAG
Plan significantly reduces per-minute access charge revenues to these carriers, it is designed to
protect them for at least the term of the plan from potentially much larger revenue reductions. On
February 12, 2004, the FCC issued an order regarding the MAG Plan designed to streamline the FCCs 16




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rules further and increase rural carriers flexibility to respond to market conditions.
Petitions for reconsideration of the MAG Plan are currently pending before the FCC and the FCC has
sought further comment on certain proposals related to the MAG Plan. In March 2005, the FCC requested further comment in its intercarrier compensation proceeding
on replacing the existing intercarrier compensation regimes with a unified regime designed for the
developing marketplace, as previously discussed. As part of the proceeding, the FCC will review
numerous aspects of intercarrier compensation, including access charges. The FCCs decision will
impact the amounts that we both pay and receive from all carriers with whom we are interconnected,
both directly and indirectly. Regulatory treatment of VoIP telephone services. Currently, the FCC and state regulators do
not treat most IP-enabled services, including those offering real time voice transmission, as
regulated telecommunications services. A number of providers are using VoIP to compete with our
voice services, and some providers using VoIP may be avoiding certain regulatory obligations or
access charges for interexchange services that might otherwise be due if such voice over IP
offerings were subject to regulation. However, in March 2004, the FCC commenced a rulemaking
proceeding to address the regulatory treatment of IP enabled services, including VoIP applications.
Although we cannot predict when the FCC will issue a decision in this proceeding, the FCC has
precluded states from regulating VoIP services by ruling that IP-enabled services are subject to
its exclusive jurisdiction. In response to individual petitions for declaratory ruling, the FCC
has addressed specific VoIP applications. For example, the FCC ruled that an AT&T service using
VoIP solely as an intermediate routing technology is a telecommunications service. By contrast,
the FCC ruled that pulver.coms Free World Dialup service, which enables customers to make
computer-to-computer VoIP calls, is an information service. The FCC is currently considering a
petition filed by Level 3 Communications LLC requesting the agency to forbear from enforcing the
Act and its regulations to the extent they could be interpreted as permitting local exchange
carriers to impose access charges on certain IP-enabled services. Unless the FCC acts on this
petition by March 22, 2005, the petition will be deemed granted. These and other similar
proceedings could lead to an increase in the costs of VoIP providers if they become subject to
additional regulation (in the absence of forbearance from the same), and may change the
compensation structure for IP-enabled services. At this time, we are unable to predict the impact,
if any, that additional regulatory action on this issue will have on our business. Regulatory treatment of cable modem services. A decision of the U.S. Court of Appeals for the
Ninth Circuit issued in October 2003 vacated in part an FCC declaratory ruling that cable modem
services consisted of information services only, and did not include a separate offering of
telecommunications service. The U.S. Court of Appeals for the Ninth Circuit found that cable modem
service included, in part, the offering of telecommunications services. On December 3, 2004, the
United States Supreme Court granted two petitions for writ of certiorari of the Ninth Circuits
2003 decision, and thus will address the question of whether cable modem service includes a
separate, underlying telecommunications service component that is subject to regulation as a common
carrier service under Title II of the Communications Act of 1934, as amended. The Supreme Courts
decision in this matter will impact the industry, as well as future actions by the FCC. However,
pending a decision by the Supreme Court and further FCC consideration of the matter, providers of
cable modem service such as us may be deemed and treated as telecommunications carriers, at least
in part, in their provision of such services and subject to common carrier requirements, such as
nondiscrimination and authorization obligations under Title II of the Communications Act (see
Additional requirements below) and universal service contribution obligations, depending upon
what the FCC determines in response to the Courts instruction. In addition, cable modem service
providers may become subject to franchise and right-of-way requirements separately applicable to
telecommunications carriers, including franchise fees. Results imposing authorization and other
telecommunications carrier requirements, obligations to contribute to universal service, franchise
fees, or similar burdens would have the effect of increasing the costs of providing cable modem
service relative to non-cable-based alternatives, such as providers of Internet access through DSL
service. Furthermore, the determination by the U.S. Court of Appeals for the Ninth Circuit may
expose providers of cable modem services to potential claims that, because they are offering, in
part, telecommunications services, as well as information services (in part), they fall under FCC
requirements that facilities-based providers of information services must open their networks to
competitive providers of information services. However, to date, we have offeredand will continue
to offeraccess to our network on a wholesale basis, so this aspect of the U.S. Court of Appeals
for the Ninth Circuit decision is not expected to have a material impact on our business or our
operations. Advanced services. The FCCs Triennial Review Order, effective October 2, 2003, significantly
changed many of the regulations governing the telecommunications industry. Among the changes
adopted, the FCC determined that all-fiber loops to a customers premises are not subject to the
mandatory unbundling provisions of the Telecommunications Act of 1996, and that in the case of
hybrid loops containing some fiber and some copper, the broadband capabilities of these loops do
not need to be unbundled. These rulings give the incumbent local exchange carriers greater control
over whether, and at what price, broadband access facilities will be made available to third
parties. Although the U.S. Court of Appeal for the D.C. Circuit vacated and remanded several
aspects of the Triennial Review Order, the FCCs decisions regarding broadband unbundling were
upheld. Subsequently, the FCC extended its deregulation of broadband facilities to fiber loops
deployed to multi-tenant buildings or campuses where the predominant use is residential and to
loops with no more than 500 feet of copper (so-called fiber-to-the-curb loops). In October 2004,
the FCC exempted the former Bell Telephone Company entities from long distance market entry
provisions to the extent those provisions might have imposed a separate obligation to unbundled all
fiber or fiber-to-the-curb broadband loops. The FCC is currently reviewing the regulatory treatment of incumbent local exchange carrier
provision of stand-alone broadband and broadband sold in combination with Internet access services
in several proceedings including the following: (1) a pending FCC proceeding that is considering
deregulating incumbent local exchange carrier broadband services and facilities where the 17




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incumbent local exchange carrier is classified as non-dominant in the provision of local
exchange and exchange access service; (2) a pending FCC proceeding that is considering
re-classifying broadband services as information services, meaning that they would no longer be
subject to telecommunications service regulations; and (3) the FCC, as noted above, has initiated a
proceeding that will consider the regulatory status of IP-based services. If the FCC further
exempts or substantially reduces incumbent local exchange carriers from regulation of broadband
services (for example, by eliminating regulations governing end user prices or collocation of
competitive DSL providers equipment in central offices), broadband offerings by incumbent local
exchange carriers may place even greater competitive pressures on our broadband service offerings. Access to, and competition in, multiple dwelling units by and among telecommunications
carriers.In October 2000, the FCC prohibited telecommunications carriers from entering into
future exclusive access agreements with building owners or managers in commercial (but not
residential) multi-tenant environments. Simultaneously, the FCC adopted rules that require
utilities (including incumbent local exchange carriers and other local exchange carriers) to
provide telecommunications carriers (and cable operators) with reasonable and non-discriminatory
access to utility-owned or controlled conduits and rights-of-way in all multiple tenant
environments (e.g., apartment buildings, office buildings, campuses, etc.) in those states where
the state government has not certified to the FCC that it regulates utility pole attachments and
rights-of-way matters. The FCC has pending before it the question of whether to adopt rules
abrogating existing exclusive telecommunications carrier access arrangements in commercial
multitenant environments. The FCC is also considering whether to extend prohibitions against
exclusivity to residential multiple dwelling units. Finally, the FCC is considering rules that
would require owners of multi-tenant environments to allow telecommunications carriers
nondiscriminatory access to their buildings. If adopted, these requirements may facilitate our
access (as well as the access of competitors) to customers in multi-tenant environments, at least
with regard to its provision of telecommunications services. These prospective requirements, if
adopted, may also increase competition in multiple dwelling units and other multi-tenant
environments where we currently provide service. State Regulation Traditionally, the states have exercised jurisdiction over intrastate telecommunications
services. The Telecommunications Act of 1996 modifies the dimensions of state authority in
relation to federal authority. It also prohibits states and localities from adopting or imposing
any legal requirement that may prohibit, or have the effect of prohibiting, market entry by new
providers of interstate or intrastate telecommunications services. The FCC is required to preempt
any such state or local requirement to the extent necessary to enforce the Telecommunications Act
of 1996s open market entry requirements. States and localities may, however, continue to regulate
the provision of intrastate telecommunications services (barring federal preemption) and require
carriers to obtain certificates or licenses before providing service. Alabama, Georgia, Florida, Kentucky, South Carolina and Tennessee each have adopted statutory
and regulatory schemes that require us to comply with telecommunications certification and other
regulatory requirements. To date, we are authorized to provide intrastate local telephone,
long-distance telephone and operator services in Alabama, Georgia, Florida, Kentucky, South
Carolina and Tennessee. As a condition of providing intrastate telecommunications services, we are
required, among other things:  
    to file and maintain intrastate tariffs or price lists describing the rates, terms
and conditions of our services;
    to comply with state regulatory reporting, tax and fee obligations, including
contributions to intrastate universal service funds; and
    to comply with, and to submit to, state regulatory jurisdiction over consumer
protection policies (including regulations governing customer privacy, changing of
service providers, and content of customer bills), complaints, transfers of control and
certain financing transactions. Generally, state regulatory authorities can condition, modify, cancel, terminate or revoke
certificates of authority to operate in a state for failure to comply with state laws or the rules,
regulations and policies of the state regulatory authority. Fines and other penalties may also be
imposed for such violations. As we expand our telecommunications services into new states, we will
likely be required to obtain certificates of authority to operate, and be subject to similar
ongoing regulatory requirements, in those states as well. We are certified in all states where we
currently have operations and certification is required. We cannot be sure that we will retain
such certifications or that we will receive authorization for markets in which we expect to operate
in the future. In addition, the states have authority under the Telecommunications Act of 1996 to determine
whether we are eligible to receive funds from the federal universal service fund. They also
possess authority to approve or (in limited circumstances) reject agreements for the
interconnection of telecommunications carriers facilities with those of the local exchange
carrier, and to arbitrate disputes arising in negotiations for interconnection, although, as
mentioned, the Court of Appeals for the Eleventh Circuit (which governs many of our markets),
recently concluded that state public service commissions have the authority under Section 252 of
the federal Communications Act to interpret and enforce interconnection agreements. The states
also have jurisdiction over whether Interstate Telephone and Valley Telephone will continue to be
subject to exemptions as rural carriers from the incumbent local exchange carrier obligations under
Section 251(c) of the Communications Act. 18




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Interstate Telephone and Valley Telephone are subject to additional requirements under state
law, including rate regulation and quality of service requirements. In Alabama and Georgia, both
Interstate Telephone and Valley Telephone are subject to a price cap form of rate regulation.
Under price caps, the companies have limited ability to raise rates for intrastate telephone
services, but the Alabama and Georgia Public Service Commissions do not regulate the rate of return
earned by the companies. Local Regulation In certain locations, we must obtain local franchises, licenses or other operating rights and
street opening and construction permits to install, expand and operate our telecommunications
facilities in the public rights-of-way. In some of the areas where we provide services, we pay
license or franchise fees based on a percentage of gross revenues. Cities that do not currently
impose fees might seek to impose them in the future, and after the expiration of existing
franchises, fees could increase. Under the Telecom Act, state and local governments retain the
right to manage the public rights-of-way and to require fair and reasonable compensation from
telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of
public rights-of-way. As noted above, these activities must be consistent with the
Telecommunications Act, and may not have the effect of prohibiting us from providing
telecommunications services in any particular local jurisdiction. If an existing franchise or license agreement were to be terminated prior to its expiration
date and we were forced to remove our facilities from the streets or abandon them in place, our
operations in that area would cease, which could have a material adverse effect on our business as
a whole. We believe that the provisions of the Telecommunications Act barring state and local
requirements that prohibit or have the effect of prohibiting any entity from providing
telecommunications service should be construed to limit any such action, but there is no guarantee
that they would be. Environmental Regulation Our switch site and some customer premise locations are equipped with back-up power sources in
the event of an electrical failure. Each of our switch site locations has battery and diesel fuel
powered backup generators, and we use batteries to back-up some of our customer premise equipment.
Federal, state and local environmental laws require that we notify certain authorities of the
location of hazardous materials and that we implement spill prevention plans. We believe that we
currently are in compliance with these requirements in all material respects. Franchises As described above, cable television systems and local telephone systems generally are
constructed and operated under the authority of nonexclusive franchises, granted by local and/or
state governmental authorities. Franchises typically contain many conditions, such as:  
    time limitations on commencement and completion of system construction;
    customer service standards;
    minimum number of channels; and
    the provision of free service to schools and certain other public institutions. We believe that the conditions in our franchises are fairly typical for the industry. Our
franchises generally provide for the payment of fees to the municipality ranging from 3% to 5% of
revenues from telephone and cable television service, respectively. Our franchises generally have
ten to 15 year terms, and we expect our franchises to be renewed by the relevant franchising
authority before or upon expiration. Prior to the scheduled expiration of most franchises, we initiate renewal proceedings with the
relevant franchising authorities. The Cable Communications Policy Act of 1984 provides for an
orderly franchise renewal process in which the franchising authorities may not unreasonably deny
renewals. If a renewal is withheld and the franchising authority takes over operation of the
affected cable system or awards the franchise to another party, the franchising authority must pay
the cable operator the fair market value of the system. The Cable Communications Policy Act of
1984 also established comprehensive renewal procedures requiring that the renewal application be
evaluated on its own merit and not as part of a comparative process with other proposals. 19




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The following table lists our existing and pending franchises by market, term and expiration
date. Market Area
    
    Term (years)
    
    Expiration DateHuntsville, ALHuntsville, AL
    
    15
    
    
    3/6/2006Limestone County, AL
    
    15
    
    
    5/7/2005Madison, AL
    
    15
    
    
    10/22/2006Madison County, AL
    
    10
    
    
    11/20/2009Redstone Arsenal, AL
    
    10
    
    
    2/8/2011Montgomery, ALAutauga County, AL
    
    15
    
    
    10/15/2013Maxwell Air Force Base, AL.
    
    5
    
    
    12/13/2005Montgomery, AL
    
    15
    
    
    9/2/2005Prattville, AL
    
    15
    
    
    7/7/2013Cerritos, CACerritos, CA
    
    15
    
    
    5/3/2006Valley, AL; West Point, GAChambers County, AL
    
    15
    
    
    12/15/2012Lanett, AL
    
    15
    
    
    1/20/2013Valley, AL
    
    15
    
    
    1/12/2013West Point, GA
    
    15
    
    
    1/19/2013Panama City, FLBay County, FL
    
    15
    
    
    1/5/2006Cedar Grove, FL
    
    15
    
    
    6/9/2013Callaway, FL
    
    10
    
    
    9/28/2009Lynn Haven, FL
    
    20
    
    
    5/12/2018Panama City, FL
    
    20
    
    
    3/10/2018Parker, FL
    
    10
    
    
    12/7/2009Panama City Beach, FL
    
    15
    
    
    12/3/2012Pinellas County, FLClearwater, FL
    
    10
    
    
    6/20/2006Dunedin, FL
    
    10
    
    
    3/20/2007Largo, FL
    
    10
    
    
    6/9/2008Oldsmar, FL
    
    10
    
    
    8/19/2007Pinellas County, FL
    
    10
    
    
    1/1/2010Safety Harbor, FL
    
    10
    
    
    4/21/2007Seminole, FL
    
    10
    
    
    6/9/2008St Petersburg, FL
    
    10
    
    
    9/9/2009Tarpon Springs, FL
    
    10
    
    
    8/19/2007Augusta, GAAugusta Richmond County, GA
    
    15
    
    
    1/20/2013Burnettown, SC
    
    15
    
    
    6/20/2015Columbia County, GA
    
    11
    
    
    11/1/2009Columbus, GAColumbus, GA
    
    10
    
    
    3/16/2009Louisville, KYLouisville, KY
    
    15
    
    
    9/12/2015Charleston, SCBerkeley County, SC
    
    15
    
    
    11/05/2013Charleston, SC
    
    15
    
    
    4/28/2013Charleston County, SC
    
    15
    
    
    12/15/2013Dorchester County, SC
    
    15
    
    
    7/20/2013Goose Creek, SC
    
    15
    
    
    11/17/2013Hanahan, SC
    
    15
    
    
    9/8/2013
 20




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Market Area
    
    Term (years)
    
    Expiration DateLincolnville, SC
    
    15
    
    
    12/2/2013Mount Pleasant, SC
    
    15
    
    
    3/9/2014North Charleston, SC
    
    15
    
    
    5/28/2013Summerville, SC
    
    15
    
    
    8/31/2013Knoxville, TNKnox County, TN
    
    10
    
    
    6/9/2010Knoxville, TN
    
    15
    
    
    5/18/2015Nashville, TNBrentwood, TN
    
    15
    
    
    4/24/2015Franklin County, TN
    
    15
    
    
    5/9/2015Nashville, TN
    
    15
    
    
    10/17/2015Williamson County, TN
    
    15
    
    
    5/8/2015
 The Cable Communications Policy Act of 1984 also prohibits franchising authorities from
granting exclusive franchises or unreasonably refusing to award additional franchises covering an
existing cable systems service area. This simplifies the application process for our obtaining a
new franchise. This process usually takes about six to nine months. While this makes it easier for
us to enter new markets, it also makes it easier for competitors to enter the markets in which we
currently have franchises. RISK FACTORS Risks Related to Our Business We have a history of net losses and may not be profitable in the future. As of December 31, 2004, we had an accumulated deficit of $473.4 million. We expect to incur
net losses for the next several years as our business matures. Our ability to generate profits and
positive cash flow from operating activities will depend in large part on our ability to increase
our revenues to offset the costs of operating our network and providing services. If we cannot
achieve operating profitability or positive cash flow from operating activities, our business,
financial condition and operating results will be adversely affected. Failure to obtain additional funding may limit our ability to complete our existing networks or to
expand our business. As of December 31, 2004, we had $3.2 million of working capital and $473.4 million of
accumulated deficit. We currently expect to spend approximately $33.2 million during 2005 to expand
and upgrade our networks in the markets where we currently provide service, including our network
in Pinellas County, Florida. Planned capital expenditures in 2005 and thereafter to complete the
buildout of our network in Pinellas County, Florida will have to be funded by cash flow from
operations in that market or from additional equity financings. We may not be able to raise
proceeds sufficient to complete our buildout in Pinellas County. In addition, if financing is
available, it may not be obtained on a timely basis and with acceptable terms. If we fail to obtain
sufficient financing, we may be required to discontinue our buildout of Pinellas County, which
could have a material adverse effect on our business. See Item 7-Managements Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. Our substantial indebtedness may adversely affect our cash flows, future financing and flexibility. As of December 31, 2004, we had approximately $286.7 million of outstanding indebtedness,
including accrued interest, and our stockholders equity was $86.3 million. We pay interest in cash
on our credit facilities and on our outstanding 12% senior notes due 2009. We may incur additional
indebtedness in the future. Our level of indebtedness could adversely affect our business in a
number of ways, including:  
    we may have to dedicate a significant amount of our available funding and cash flow
from operating activities to the payment of interest and the repayment of principal on
outstanding indebtedness;
    depending on the levels of our outstanding debt and the terms of our debt agreements,
we may have trouble obtaining future financing for working capital, capital
expenditures, general corporate and other purposes;
    high levels of indebtedness may limit our flexibility in planning for or reacting to
changes in our business; and
    increases in our outstanding indebtedness and leverage will make us more vulnerable
to adverse changes in general economic and industry conditions, as well as to
competitive pressure. 21




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We may not be able to make future principal and interest payments on our debt. Our earnings were not sufficient to cover our fixed charges in each year of the seven-year
period ended December 31, 2004. We currently generate sufficient cash flow from operating
activities to service our debt. However, our ability to make future principal and interest
payments on our debt depends upon our future performance, which is subject to general economic
conditions, industry cycles and financial, business and other factors affecting our operations,
many of which are beyond our control. If we cannot grow and generate sufficient cash flow from
operating activities to service our debt payments, we may be required, among other things to:  
    seek additional financing in the debt or equity markets;
    refinance or restructure all or a portion of our debt;
    sell selected assets; or
    reduce or delay planned capital expenditures. These measures may not be sufficient to enable us to service our debt. In addition, any such
financing, refinancing or sale of assets may not be available on commercially reasonable terms, or
at all. Restrictions on our business imposed by our debt agreements could limit our growth or activities. Our indenture and our credit agreements place operating and financial restrictions on us and
our subsidiaries. These restrictions affect, and any restrictions created by future financings,
will affect our and our subsidiaries ability to, among other things:  
    incur additional debt or issue mandatorily redeemable equity securities;
    create liens on our assets;
    make certain loans, investments and capital expenditures;
    use the proceeds from any sale of assets;
    make distributions on or redeem our stock;
    consolidate, merge or transfer all or substantially all our assets;
    enter into transactions with affiliates;
    utilize revenues except for specified uses; and
    utilize excess liquidity except for specified uses. In addition, our credit facilities require us to maintain specified financial ratios, such as
a maximum leverage ratio and a minimum liquidity ratio. We are also required to maintain a minimum
level of earnings before income, taxes, depreciation and amortization (or EBITDA). These
limitations may affect our ability to finance our future operations or to engage in other business
activities that may be in our interest. If we violate any of these restrictions or any restrictions
created by future financings, we could be in default under our agreements and be required to repay
our debt immediately rather than at scheduled maturity. We may not be able to sell our cable system in Cerritos, California which may adversely affect our
financial condition. In March 2005, we entered into a definitive asset purchase agreement to sell our cable assets
located in Cerritos, California to WaveDivision Holdings, LLC for $10.0 million in cash, subject to
customary closing adjustments. We expect the sale of the Cerritos system to close in the third
quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory
approvals with respect to the municipal franchise in Cerritos, California. However, there can be
no assurance that we will complete the sale of the Cerritos cable system or we may not complete the
sale in a timely manner. In the event the purchaser does not receive necessary regulatory or other
approvals or the other conditions to closing are not satisfied, the sale will not be completed. If
we are unable to sell the Cerritos assets in a timely manner, or on acceptable terms, our financial
condition may be adversely affected 22




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The demand for our bundled broadband communications services may be lower than we expect. The demand for video, voice and data services, either alone or as part of a bundle, cannot
readily be determined. Our business could be adversely affected if demand for bundled broadband
communications services is materially lower than we expect. If the markets for the services we
offer, including voice and data services, fail to develop, grow more slowly than anticipated or
become saturated with competitors, our ability to generate revenue will suffer. Competition from other providers of video services could adversely affect our results of
operations. To be successful, we will need to retain our existing video customers and attract video
customers away from our competitors. Some of our competitors have advantages over us, such as
long-standing customer relationships, larger networks, and greater experience, resources, marketing
capabilities and name recognition. In addition, a continuing trend toward business combinations and
alliances in the cable television area and in the telecommunications industry as a whole may create
significant new competitors for us. In providing video service, we currently compete with Bright
House Networks, or Bright House, Charter Communications Inc., or Charter, Comcast Corporation, or
Comcast, Mediacom Communications Corporation, or Mediacom, and Time Warner Cable Inc., or Time
Warner. We also compete with satellite television providers, including DirecTV, Inc., or DirecTV,
and Echostar Communications Corporation, or Echostar. Legislation now allows satellite television
providers to offer local broadcast television stations. This may reduce our current advantage over
satellite television providers and our ability to attract and maintain customers. The providers of video services in our markets have, from time to time, adopted promotional
discounts. We expect these promotional discounts in our markets to continue into the foreseeable
future and additional promotional discounts may be adopted. We may need to offer additional
promotional discounts to be competitive, which could have an adverse impact on our revenues. In
addition, incumbent local phone companies may market video services in their service areas to
provide a bundle of services. BellSouth Corporation, or BellSouth, has entered into a strategic
marketing alliance with DirecTV to jointly market voice and video services. If telephone service
providers offer video services in our markets, it could increase our competition for our video and
voice services and for our bundled services. Competition from other providers of voice services could adversely affect our results of
operations. In providing local and long-distance telephone services, we compete with the incumbent local
phone company in each of our markets. We are not the first provider of telephone services in most
of our markets and we therefore must attract customers away from other telephone companies.
BellSouth and Verizon are the primary incumbent local exchange carriers in our targeted region.
They offer both local and long-distance services in our markets and are particularly strong
competitors. We also compete with a number of providers of long-distance telephone services, such
as AT&T Corp., or AT&T, Bellsouth, MCI, Inc., or MCI, Sprint Corporation, or Sprint, and Verizon.
Our other competitors include competitive local exchange carriers, which are local phone companies
other than the incumbent phone company that provide local telephone services and access to
long-distance services over their own networks or over networks leased from other companies, and
wireless telephone carriers. In the future, we may face other competitors, such as cable television
service operators who have announced their intention to offer telephone services with
Internet-based telephony. If cable operators offer voice services in our markets, it could increase
competition for our bundled services. The past several years have seen the emergence in our markets of carriers relying on the
so-called unbundled network element platform obtained from incumbent local exchange carriers under
Section 251(c)(3) of the Communications Act of 1934 and the Federal Communications Commissions, or
FCCs, implementing regulations. Some of these carriers have been successful in capturing market
share in a relatively short period of time. In the FCCs Triennial Review Order, the framework was
established whereby the obligations of incumbent local exchange carriers to continue to make
available the unbundled network element platform may be eliminated in the future subject to certain
conditions being satisfied and certified by state public service commissions. It is difficult at
this time to determine the extent to which competition from unbundled network element platform
providers in our markets may intensify or diminish and it is impossible to predict, in the event
that the unbundled network element platform is no longer available in certain markets in the
future, whether and which unbundled network element platform-based carriers will successfully
transition to other means of serving their local exchange customers. Competition from other providers of data services could adversely affect our results of operations. Providing data services is a rapidly growing business and competition is increasing in each of
our markets. Some of our competitors have advantages over us, such as greater experience,
resources, marketing capabilities and name recognition. In providing data services, we compete
with:  
    traditional dial-up Internet service providers;
    incumbent local exchange carriers that provide dial-up and digital subscriber line, or DSL, services;
    providers of satellite-based Internet access services; 23




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
    competitive local exchange carriers; and
    cable television companies. In addition, some providers of data services have reduced prices and engaged in aggressive
promotional activities. We expect these price reductions and promotional activities to continue
into the foreseeable future and additional price reductions may be adopted. We may need to lower
our prices for data services to remain competitive. Our programming costs are increasing, which could reduce our gross profit. Programming has been our largest single operating expense and we expect this to continue. In
recent years, the cable industry has experienced rapid increases in the cost of programming,
particularly sports programming. Our relatively small base of subscribers limits our ability to
negotiate lower programming costs. We expect these increases to continue, and we may not be able to
pass our programming cost increases on to our customers. In addition, as we increase the channel
capacity of our systems and add programming to our expanded basic and digital programming tiers, we
may face additional market constraints on our ability to pass programming costs on to our
customers. Any inability to pass programming cost increases on to our customers would have an
adverse impact on our gross profit. Programming exclusivity in favor of our competitors could adversely affect the demand for our video
services. We obtain our programming by entering into contracts or arrangements with programming
suppliers. A programming supplier could enter into an exclusive arrangement with one of our video
competitors that could create a competitive advantage for that competitor by restricting our access
to this programming. If our ability to offer popular programming on our cable television systems is
restricted by exclusive arrangements between our competitors and programming suppliers, the demand
for our video services may be adversely affected and our cost to obtain programming may increase. The rates we pay for pole attachments may increase significantly. The rates we must pay utility companies for space on their utility poles is the subject of
frequent disputes. If the rates we pay for pole attachments were to increase significantly or
unexpectedly, it would cause our network to be more expensive to operate. It could also place us in
a competitive disadvantage to video and telecommunications service providers who do not require, or
who are less dependent upon, pole attachments, such as satellite providers and wireless voice
service providers. See Legislation and regulationFederal RegulationRegulation of Cable
ServicesPole Attachments for more information. Loss of interconnection arrangements could impair our telephone service. We rely on other companies to connect our local telephone customers with customers of other
local telephone providers. We presently have access to BellSouths telephone network under a
nine-state interconnection agreement, which expires in September 2005. We have access to Verizons
telephone network in Florida under an interconnection agreement covering Florida, which expires in
[August 2005]. If either interconnection agreement is not renewed, we will have to negotiate
another interconnection agreement with the respective carrier. The renegotiated agreement could be
on terms less favorable than our current terms. It is generally expected that the Telecommunications Act of 1996 will continue to undergo
considerable interpretation and implementation, which could have a negative impact on our
interconnection agreements with BellSouth and Verizon. It is also possible that further amendments
to the Communications Act of 1934 may be enacted which could have a negative impact on our
interconnection agreements with BellSouth and Verizon. The contractual arrangements for
interconnection and access to unbundled network elements with incumbent carriers generally contain
provisions for incorporation of changes in governing law. Thus, future FCC, state public service
commission and/or court decisions may negatively impact the rates, terms and conditions of the
interconnection services we have obtained and may seek to obtain under these agreements, which
could adversely affect our business, financial condition or results of operations. Our ability to
compete successfully in the provision of services will depend on the nature and timing of any such
legislative changes, regulations and interpretations and whether they are favorable to us or to our
competitors. See Legislation and Regulation for more information. We could be hurt by future interpretation or implementation of regulations. The current communications and cable legislation is complex and in many areas sets forth
policy objectives to be implemented by regulation, at the federal, state, and local levels. It is
generally expected that the Communications Act of 1934, as amended, the Telecommunications Act of
1996 and implementing regulations and decisions, as well as applicable state laws and regulations,
will continue to undergo considerable interpretation and implementation. Regulations that enhance
the ability of certain classes of our competitors, or interpretation of existing regulations to the
same effect, would adversely affect our competitive position. It is also possible that further
amendments to the Communications Act of 1934 and state statutes to which we or our competitors are
subject may be enacted. Our ability to compete successfully will depend on the nature and timing of
any such legislative changes, 24




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regulations, and interpretations and whether they are favorable to us or to our competitors.
See Legislation and Regulation for more information. We operate our network under franchises that are subject to non-renewal or termination. Our network generally operates pursuant to franchises, permits or licenses typically granted
by a municipality or other state or local government controlling the public rights-of-way. Often,
franchises are terminable if the franchisee fails to comply with material terms of the franchise
order or the local franchise authoritys regulations. Although none of our existing franchise or
license agreements have been terminated, and we have received no threat of such a termination, one
or more local authorities may attempt to take such action. We may not prevail in any judicial or
regulatory proceeding to resolve such a dispute. Further, franchises generally have fixed terms and must be renewed periodically. Local
franchising authorities may resist granting a renewal if they consider either past performance or
the prospective operating proposal to be inadequate. In a number of jurisdictions, local
authorities have attempted to impose rights-of-way fees on providers that have been challenged as
violating federal law. A number of FCC and judicial decisions have addressed the issues posed by
the imposition of rights-of-way fees on competitive local exchange carriers and on video
distributors. To date, the state of the law is uncertain and may remain so for some time. We may
become subject to future obligations to pay local rights-of-way fees which are excessive or
discriminatory. The local franchising authorities can grant franchises to competitors who may build networks
in our market areas. Local franchise authorities have the ability to impose regulatory constraints
or requirements on our business, including constraints and requirements that could materially
increase our expenses. In the past, local franchise authorities have imposed regulatory
constraints, by local ordinance or as part of the process of granting or renewing a franchise, on
the construction of our network. They have also imposed requirements on the level of customer
service we provide, as well as other requirements. The local franchise authorities in our new
markets may also impose regulatory constraints or requirements, which could increase our expenses
in operating our business. We may not be able to obtain telephone numbers for new voice customers in a timely manner. In providing voice services, we rely on access to numbering resources in order to provide our
customers with telephone numbers. A shortage of or a delay in obtaining new numbers from numbering
administrators, as has sometimes been the case for local exchange carriers in the recent past,
could adversely affect our ability to expand into new markets or enlarge our market share in
existing markets. Substantially all of our voice traffic passes through one of our two switches located in West
Point, Georgia and nearby Huguley, Alabama, and these switches may fail to operate. Substantially all of our voice traffic passes through one of our two switches located in West
Point, Georgia and nearby Huguley, Alabama. If one or both of our switches were to fail to operate,
a portion or all of our customers would not be able to access our voice services, which likely
would damage our relationship with our customers and could adversely affect our business. We may encounter difficulties in implementing and developing new technologies. We have invested in advanced technology platforms that support advanced communications
services and multiple emerging interactive services, such as video-on-demand, subscriber
video-on-demand, digital video recording, interactive television, IP Centrex services and passive
optical network services. We have also invested in our new enterprise management system. However,
existing and future technological implementations and developments may allow new competitors to
emerge, reduce our networks competitiveness or require expensive and time-consuming upgrades or
additional equipment, which may also require the write-down of existing equipment. In addition, we
may be required to select in advance one technology over another and may not choose the technology
that is the most economic, efficient or attractive to customers. We may also encounter difficulties
in implementing new technologies, products and services and may encounter disruptions in service as
a result. We may encounter difficulties expanding into additional markets. To expand into additional cities we will have to obtain pole attachment agreements,
construction permits, telephone numbers, franchises and other regulatory approvals. Delays in
entering into pole attachment agreements, receiving the necessary construction permits and
conducting the construction itself have adversely affected our schedule in the past and could do so
again in the future. Difficulty in obtaining numbering resources may also adversely affect our
ability to expand into new markets. Further, as we recently experienced in Louisville, we may face
legal or similar resistance from competitors who are already in these markets. See Item 3Legal
Proceedings. For example, a competitor may oppose or delay our franchise application or our
request for pole attachment space. These difficulties could significantly harm or delay the
development of our business in new markets. 25




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It may take us longer to construct our network than anticipated, which could adversely affect our
growth, financial condition and results of operations. When we enter new markets or upgrade or expand our network in existing markets, we project the
capital expenditures that will be required based in part on the amount of time necessary to
complete the construction or upgrade of the network and the difficulty of such construction. For
example we currently expect to spend approximately $7.5 million in capital expenditures in 2005 to
enhance the network assets in Pinellas County Florida acquired from Verizon Media. If construction
lasts longer than anticipated or is more difficult than anticipated, our capital expenditures could
be significantly higher, which could adversely affect our growth, financial condition or results of
operations. It may take us longer to increase connections than anticipated. When we enter new markets or expand existing markets, we project the amount of revenue we will
receive in such markets based in part on how quickly we are able to generate new connections. If we
are not able to generate connections as quickly as anticipated, we will not be able to generate
revenue in such markets as quickly as anticipated, which could adversely affect our growth,
financial condition or results of operations. Future acquisitions and joint ventures could strain our business and resources. If we acquire existing companies or networks or enter into joint ventures, we may:  
    miscalculate the value of the acquired company or joint venture;
    divert resources and management time;
    experience difficulties in integrating the acquired business or joint venture with our operations;
    experience relationship issues, such as with customers, employees and suppliers, as a
result of changes in management;
    incur additional liabilities or obligations as a result of the acquisition or joint venture; and
    assume additional financial burdens or dilution in connection with the transaction. Additionally, ongoing consolidation in our industry may be shrinking the number of attractive
acquisition targets. We depend on the services of key personnel to implement our strategy. If we lose the services of
our key personnel or are unable to attract and retain other qualified management personnel, we may
be unable to implement our strategy. Our business is currently managed by a small number of key management and operating personnel.
We do not have any employment agreements with, nor do we maintain key man life insurance policies
on, these or any other employees. The loss of members of our key management and certain other
members of our operating personnel could adversely affect our business. Our ability to manage our anticipated growth depends on our ability to identify, hire and
retain additional qualified management personnel. While we are able to offer competitive
compensation to prospective employees, we may still be unsuccessful in attracting and retaining
personnel which could affect our ability to grow effectively and adversely affect our business. Since our business is concentrated in specific geographic locations, our business could be hurt by
a depressed economy and natural disasters in these areas. We provide our services to areas in Alabama, Florida, Georgia, South Carolina and Tennessee,
which are all in the southeastern United States, as well as California. A stagnant or depressed
economy in the United States and the southeastern United States in particular could affect all of
our markets, and adversely affect our business and results of operations. Our success depends on the efficient and uninterrupted operation of our communications
services. Our network is attached to poles and other structures in our service areas, and our
ability to provide service depends on the availability of electric power. A tornado, hurricane,
flood, mudslide or other natural catastrophe in one of these areas could damage our network,
interrupt our service and harm our business in the affected area. In addition, many of our markets
are close together, and a single natural catastrophe could damage our network in more than one
market. 26




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Risks Related to Relationships with Stockholders, Affiliates and Related Parties A small number of stockholders control a significant portion of our stock and could exercise
significant influence over matters requiring stockholder approval, regardless of the wishes of
other stockholders. As of January 31, 2005, Silver Point Capital, or Silver Point, our largest stockholder, owned
approximately 20% of our outstanding voting stock. Additionally, private equity funds affiliated
with Whitney & Co., LLC, or Whitney, and The Blackstone Group L.P., or Blackstone, owned
approximately 6.7% and 5.1% of our outstanding voting stock, respectively. Further, approximately
5.8% of our outstanding voting stock was owned by Campbell B. Lanier, III, the chairman of our
board of directors, and members of Mr. Laniers immediate family. As a result, these stockholders
have significant voting power with respect to the ability to:  
    authorize additional shares of capital stock or otherwise amend our certificate of incorporation or bylaws;
    elect our directors; or
    effect a merger, sale of assets or other corporate transaction. The extent of ownership by these stockholders may also discourage a potential acquirer from
making an offer to acquire us. This could reduce the value of our stock. Some of our major stockholders own stock in our competitors and may have conflicts of interest. Some of our major stockholders, including Silver Point, Whitney, Blackstone and Mr. Lanier,
own or in the future may own interests in companies that may compete with us. When the interest of
one of our competitors differs from ours, these stockholders may support our competitor or take
other actions that could adversely affect our interests. Risks Related to Our Common Stock If we issue more stock in future offerings, the percentage of our stock that our stockholders own
will be diluted. As of January 31, 2005, we had outstanding 23,697,787 shares of common stock. We also had
outstanding on that date options to purchase 2,026,285 shares of common stock as well as warrants
to purchase 1,090,733 shares of common stock. Our authorized capital stock includes 200,000,000
shares of common stock and 199,000,000 shares of preferred stock, which our board of directors has
the authority to issue without further stockholder action. Future stock issuances also will reduce
the percentage ownership of our current stockholders. Our board of directors has the authority to issue, without stockholder approval, shares of
preferred stock with rights and preferences senior to the rights and preferences of the common
stock. As a result our board of directors could issue shares of preferred stock with the right to
receive dividends and the assets of the company upon liquidation prior to the holders of the common
stock. The value of our stock could be hurt by substantial price fluctuations. The value of our common stock could be subject to sudden and material increases and decreases.
The value of our stock could fluctuate in response to:  
    our quarterly operating results;
    changes in our business;
    changes in the markets perception of our bundled services;
    changes in the businesses or market perceptions of our competitors; and
    changes in general market or economic conditions. In addition, the stock market has experienced extreme price and volume fluctuations in recent
years that have significantly affected the value of securities of many companies. The changes
often appear to occur without regard to specific operating performance. The value of our common
stock could increase or decrease based on change of this type. These fluctuations could materially
reduce the value of our stock. Fluctuations in the value of our stock will also affect the value of
our outstanding warrants and options, which may adversely affect shareholders equity, net income
or both. Forward-looking statements should be read with caution. This annual report on Form 10-K for the year ended December 31, 2004 contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 including,
specifically, the information under the captions 27




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Managements Discussion and Analysis of Financial Condition and Results of Operations and
Business, as well as other places in this annual report. Statements in this annual report that
are not historical facts are forward-looking statements. Such forward-looking statements include
those relating to:  
    our anticipated capital expenditures;
    our anticipated sources of capital and other funding;
    plans to develop future networks and upgrade facilities;
    the market opportunity presented by markets we have targeted;
    the current and future markets for our services and products;
    the effects of regulatory changes on our business;
    competitive and technological developments;
    possible acquisitions, alliances or dispositions; and
    projected revenues, liquidity, interest costs and income. The words estimate, project, intend, expect, believe, may, could, plan and
similar expressions are intended to identify forward-looking statements. Wherever they occur in
this annual report or in other statements attributable to us, forward-looking statements are
necessarily estimates reflecting our best judgment. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties and other factors
that could cause our actual results, levels of activity, performance or achievements to differ
materially from any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. The most significant of these risks, uncertainties and
other factors are discussed above. We caution you to carefully consider these risks and not to
place undue reliance on our forward-looking statements. Except as required by law, we assume no
responsibility for updating any forward-looking statements. EMPLOYEES At December 31, 2004 we had 1,448 full-time employees. We consider our relations with our
employees to be good, and we structure our compensation and benefit plans in order to attract and
retain high-caliber personnel. We will need to recruit additional employees in order to implement
our expansion plan, including general managers for each new city and additional personnel for
installation, sales, customer service and network construction. We recruit from several major
industries for employees with skills in video, voice and data technologies. 
 ITEM 2. PROPERTIES Our primary assets consist of voice, video and data distribution plant and equipment,
including voice switching equipment, data receiving equipment, data decoding equipment, data
encoding equipment, headend reception facilities, distribution systems and customer premise
equipment. Our plant and related equipment are generally attached to utility poles under pole rental
agreements with public electric utilities, electric cooperative utilities, municipal electric
utilities and telephone companies. In certain locations our plant is buried underground. We own or
lease real property for signal reception sites. Our headend locations are located on owned or
leased parcels of land We own or lease the real property and buildings for our market administrative offices,
customer call center, data center, and our corporate offices. The physical components of our broadband systems require maintenance as well as periodic
upgrades to support the new services and products we may introduce. We believe that our properties
are generally in good operating condition and are suitable for our business operations. 
 ITEM 3. LEGAL PROCEEDINGS In September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., our
subsidiary, a cable television franchise. On November 2, 2000, Insight filed a complaint against
the City of Louisville in Kentucky Circuit Court in Jefferson 28




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County, Kentucky claiming that our franchise was more favorable than Insights franchise.
Insights complaint suspended our franchise until there is a final, nonappealable order in
Insights Kentucky Circuit Court case. In April 2001 the City of Louisville moved for summary
judgment in Kentucky Circuit Court against Insight. In March 2002, the Kentucky Circuit Court ruled
that Insights complaint had no merit and the Kentucky Circuit Court granted the City of
Louisvilles motion to dismiss Insights complaint. Insight appealed the Kentucky Circuit Court
order dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld the Kentucky
Circuit Court ruling. Insight sought discretionary review of the Kentucky Court of Appeals ruling
by the Kentucky Supreme Court and that request is pending. On November 8, 2000, we filed an action in the U.S. District Court for the Western District of
Kentucky against Insight seeking monetary damages, declaratory and injunctive relief from Insight
and the City arising out of Insights complaint and the suspension of our franchise. In March 2001,
the U.S. District Court issued an order granting our motion for preliminary injunctive relief and
denying Insights motion to dismiss. In June 2003 the U.S. District Court ruled on the parties
cross motions for summary judgment, resolving certain claims and setting others down for trial. The
U.S. District Court granted our motion for summary judgment based on causation on certain claims.
In August 2003, the U.S. District Court granted Insights motion for an immediate interlocutory
appeal on certain issues, which was accepted in October 2003 by the U.S. Court of Appeals for the
Sixth Circuit. On December 29, 2004, the Sixth Circuit reversed the U.S. District Courts decision denying
Insights Noerr-Penningtonimmunity and granting summary judgment to Knology on its First Amendment
Section 1983 claim. The Sixth Circuit remanded to the U.S. District Court for further proceedings
consistent with its Opinion. On January 12, 2005, we filed a Petition for Rehearing En Bancwith
the Sixth Circuit. On March 2, 2005, the Sixth Circuit denied our Petition for Rehearing. The
parties dispute what remains, if any, of our case now that the Sixth Circuit has denied our
Petition. We contend we are entitled to a trial on whether Insights State Court Action was
protected by Noerr-Penningtonimmunity. Insight contends the Sixth Circuits Opinion requires a
dismissal with prejudice of all of our claims. At this time it is impossible to determine with
certainty the ultimate outcome of the litigation. We are also subject to other litigation in the normal course of our business. However, in our
opinion, there is no legal proceeding pending against us which would have a material adverse effect
on our financial position, results of operations or liquidity. We are also a party to regulatory
proceedings affecting the segments of the communications industry generally in which we engage in
business. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 29




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our common stock has been traded on the Nasdaq National Market under the symbol KNOL since
December 18, 2003. The following table sets forth the high and low sales prices as reported on the
Nasdaq National Market for the period from January 1, 2003 through December 31, 2004: High
    
    
    Low2004Fourth Quarter
    
    $
    4.25
    
    
    $
    2.63Third Quarter
    
    $
    5.35
    
    
    $
    3.24Second Quarter
    
    $
    8.99
    
    
    $
    4.91First Quarter
    
    $
    10.86
    
    
    $
    6.132003Fourth Quarter
    
    $
    9.54
    
    
    $
    8.99Third Quarter
    
    
    N/A
    
    
    
    N/ASecond Quarter
    
    
    N/A
    
    
    
    N/AFirst Quarter
    
    
    N/A
    
    
    
    N/A
 Holders As of January 31, 2005, there were approximately 2,250 shareholders of record of our common
stock (excluding beneficial owners of shares registered in nominee or street name). Dividends We have never declared or paid any cash dividends on our common stock and do not anticipate
paying cash dividends on our common stock in the foreseeable future. It is the current policy of
our board of directors to retain earnings to finance the expansion of our operations. As we are a
holding company, our ability to pay cash dividends depends on our receiving cash dividends,
advances and other payments from our subsidiaries. Future declaration and payment of dividends, if
any, will be determined based on the then-current conditions, including our earnings, operations,
capital requirements, financial condition, and other factors our board of directors deems relevant.
In addition, our ability to pay dividends is limited by the terms of the indenture governing our
outstanding senior notes and by the terms of our credit facilities. 30




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ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with the section
entitled Managements Discussion and Analysis of Financial Condition and Results of Operations,
our financial statements and the related notes, and other financial data included elsewhere in this
Annual Report. Year Ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(in thousands)Statement of Operations Data:Operating revenues
    
    $
    82,573
    
    
    $
    106,189
    
    
    $
    141,866
    
    
    $
    172,938
    
    
    $
    211,458Operating expenses:Cost of services
    
    
    31,010
    
    
    
    32,469
    
    
    
    41,007
    
    
    
    46,525
    
    
    
    60,829Selling, operations and
administrative
    
    
    58,725
    
    
    
    73,322
    
    
    
    79,837
    
    
    
    93,366
    
    
    
    117,588Depreciation and amortization
    
    
    60,672
    
    
    
    78,954
    
    
    
    80,533
    
    
    
    77,806
    
    
    
    74,163Gain on debt extinguishment
    
    
    0
    
    
    
    (31,875
    )
    
    
    0
    
    
    
    0
    
    
    
    0Gain on debt reorganization
    
    
    0
    
    
    
    0
    
    
    
    (109,804
    )
    
    
    0
    
    
    
    0Reorganization professional fees
    
    
    0
    
    
    
    0
    
    
    
    3,842
    
    
    
    84
    
    
    
    0Capital markets activity
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    880Asset impairment
    
    
    0
    
    
    
    0
    
    
    
    9,946
    
    
    
    0
    
    
    
    0Non-cash stock option compensation
    
    
    0
    
    
    
    0
    
    
    
    3,266
    
    
    
    1,833
    
    
    
    3,625Litigation fees
    
    
    0
    
    
    
    0
    
    
    
    1,244
    
    
    
    907
    
    
    
    377Total operating expenses
    
    
    150,407
    
    
    
    155,870
    
    
    
    109,871
    
    
    
    220,571
    
    
    
    257,454Operating (loss) income
    
    
    (67,834
    )
    
    
    (48,681
    )
    
    
    31,995
    
    
    
    (47,633
    )
    
    
    (45,996
    )Interest (expense), net
    
    
    (34,859
    )
    
    
    (40,069
    )
    
    
    (35,871
    )
    
    
    (28,796
    )
    
    
    (30,342
    )Gain on adjustments of warrants to
market
    
    
    0
    
    
    
    0
    
    
    
    2,865
    
    
    
    929
    
    
    
    535Other income (expense), net
    
    
    (1,373
    )
    
    
    (834
    )
    
    
    (321
    )
    
    
    (12,288
    )
    
    
    133Loss before minority interest,
income taxes, extraordinary item,
and cumulative effect of a change
in accounting principle
    
    
    (104,066
    )
    
    
    (87,584
    )
    
    
    (1,332
    )
    
    
    (87,788
    )
    
    
    (75,670
    )Income from discontinued operations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    106Income tax (provision) benefit
    
    
    3,170
    
    
    
    (2,789
    )
    
    
    0
    
    
    
    0
    
    
    
    0Cumulative effect of a benefit
change in accounting principle
    
    
    0
    
    
    
    0
    
    
    
    (1,294
    )
    
    
    0
    
    
    
    0Net loss
    
    
    (100,896
    )
    
    
    (90,373
    )
    
    
    (2,626
    )
    
    
    (87,788
    )
    
    
    (75,564
    )Subsidiary preferred stock dividends.
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Non-cash distribution to preferred
stockholders
    
    
    0
    
    
    
    (36,579
    )
    
    
    0
    
    
    
    0
    
    
    
    0Net loss attributable to common
stockholders
    
    $
    (100,896
    )
    
    $
    (126,952
    )
    
    $
    (2,626
    )
    
    $
    (87,788
    )
    
    $
    (75,564
    )Basic and diluted net loss per share
attributable to common stockholders
    
    $
    (3,618.68
    )
    
    $
    (2,628.84
    )
    
    $
    (52.20
    )
    
    $
    (5.17
    )
    
    $
    (3.19
    )Other Financial Data:Capital expenditures
    
    $
    146,706
    
    
    $
    86,696
    
    
    $
    44,446
    
    
    $
    35,533
    
    
    $
    63,592Capitalized interest
    
    
    2,329
    
    
    
    2,430
    
    
    
    0
    
    
    
    0
    
    
    
    0Cash provided by (used in) operating
activities
    
    
    35,884
    
    
    
    (13,251
    )
    
    
    10,318
    
    
    
    29,512
    
    
    
    23,869Cash used in investing activities
    
    
    (149,986
    )
    
    
    (89,117
    )
    
    
    (44,847
    )
    
    
    (55,121
    )
    
    
    (63,711
    )Cash provided by financing activities
    
    
    126,911
    
    
    
    119,814
    
    
    
    40,368
    
    
    
    45,383
    
    
    
    4,185
 December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    20,628
    
    
    $
    38,074
    
    
    $
    43,913
    
    
    $
    63,335
    
    
    $
    27,678Net working capital
    
    
    (12,918
    )
    
    
    617
    
    
    
    24,000
    
    
    
    42,935
    
    
    
    3,201Property and equipment, net
    
    
    377,421
    
    
    
    400,851
    
    
    
    357,182
    
    
    
    336,060
    
    
    
    326,499Total assets
    
    
    489,406
    
    
    
    516,540
    
    
    
    471,291
    
    
    
    463,712
    
    
    
    420,193Long-term debt, including
accrued interest
    
    
    367,915
    
    
    
    370,999
    
    
    
    250,916
    
    
    
    271,317
    
    
    
    286,888Total liabilities
    
    
    416,715
    
    
    
    423,416
    
    
    
    284,899
    
    
    
    312,819
    
    
    
    333,924Accumulated deficit
    
    
    (180,490
    )
    
    
    (307,442
    )
    
    
    (310,068
    )
    
    
    (397,853
    )
    
    
    (473,419
    )Total stockholders equity
    
    
    67,965
    
    
    
    88,398
    
    
    
    184,531
    
    
    
    150,893
    
    
    
    86,269
 31




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a fully integrated provider of video, voice, data and advanced communications services
to residential and business customers in nine markets in the southeastern United States. We provide
a full suite of video, voice and data services in Huntsville and Montgomery, Alabama; Panama City
and a portion of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston,
South Carolina; and Knoxville, Tennessee. We provide video services in Cerritos, California. Our
primary business is the delivery of bundled communication services over our own network. In
addition to our bundled package offerings, we sell these services on an unbundled basis. We have built our business through: 
    acquisitions of other cable related assets and subsidiaries, networks and
franchises;
    upgrades of acquired networks to introduce expanded broadband services including
bundled video, voice and data services;
    construction and expansion of our broadband network to offer integrated video,
voice and data services; and
    organic growth of connections through increased penetration of services to new
marketable homes and our existing customer base. To date, we have experienced operating losses as a result of the expansion of our service
territories and the construction of our network. We expect to continue to focus on increasing our
customer base and expanding our broadband operations. Our ability to generate profits will depend
in large part on our ability to increase revenues to offset the costs of construction and operation
of our business. Highlights of the year ended December 31, 2004 include the following:  
    Significant operating efficiencies realized from the completion of the
implementation of our single billing platform for video, voice and data services,
which is part of an enterprise management system. This system, which was developed
to our specifications, enables us to send a single bill to our customers for video,
voice and data services.
    Amendments to our credit facilities with Wachovia Bank, National Association and
CoBank, ACB. The amended credit facilities defer approximately $24.5 million of
principal payments until 2007 which were previously scheduled during 2004, 2005 and
2006, and modify certain financial covenants. In addition, the amendments allowed
our Telephone Operations Group to make a $7.7 million dividend payment to us, as
well as future dividend payments equal to the net income of the Telephone Operations
Group. These dividends decrease the amount of our cash that is restricted for use
for our Telephone Operations Group.
    Introduction of voice services to our Pinellas County market. In December of
2003 we completed the acquisition, from Verizon Media, of the cable television
system and franchise rights in Pinellas County, Florida. We began the enhancement of
the network to enable that market to offer our full bundle, including voice
services. We added our first voice connections during the third quarter and expect
to complete the enhancements of the network in 2005. The following discussion includes details, highlights and insight into our consolidated
financial condition and results of operations including recent business developments, critical
accounting policies, estimates used in preparing the financial statements and other factors that
are expected to affect our prospective financial condition. The following discussion and analysis
should be read in conjunction with our Selected Consolidated Financial Data and our financial
statements and related notes elsewhere in this annual report. Critical Accounting Policies Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require us to make estimates and assumptions. We
believe that, of our significant accounting policies described in Note 2 to our audited
consolidated financial statements included in Item 8 of this annual report, the following may
involve a higher degree of judgment and complexity. Revenue Recognition. The Company generates recurring or multi-period operating revenues, as
well as nonrecurring revenues. We recognize revenue in accordance with SEC Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition, which requires that the following four basic
criteria must be satisfied before revenues can be recognized:  
    There is persuasive evidence that an arrangement exists;
    Delivery has occurred or services rendered;
 32




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##### Table of Contents




    The fee is fixed and determinable; and,
    Collectibility is reasonably assured. We base our determination of the third and fourth criteria above on our judgment regarding the
fixed nature of the fee we have charged for the services rendered and products delivered, and the
prospect that those fees will be collected. If changes in conditions should cause us to determine
that these criteria likely will not be met for certain future transactions, revenue recognized for
any reporting period could be materially affected. We generate recurring revenues for our broadband offerings of video, voice and data and other
services. Revenues generated from these services primarily consists of a fixed monthly fee for
access to cable programming, local phone services and enhanced services and access to the internet.
Additional fees are charged for services including pay-per-view movies, events such as boxing
matches and concerts, long distance service and cable modem rental. Revenues are recognized as
services are provided and advance billings or cash payments received in advance of services
performed are recorded as deferred revenue. Allowance for Doubtful Accounts.We use estimates to determine our allowance for bad debts.
These estimates are based on historical collection experience, current trends, credit policy and a
percentage of our delinquent customer accounts receivable. Capitalization of labor and overhead costs.Our business is capital intensive, and a large
portion of the capital we have raised to date has been spent on activities associated with
building, extending, upgrading and enhancing our network. As of December 31, 2004 and 2003, the net
carrying amount of our property, plant and equipment was approximately $326.5 million, 78% of total
assets, and $336.1 million, 72% of total assets, respectively. Total capital expenditures for the
years ended December 31, 2004, 2003 and 2002 were approximately $63.6 million, $35.5 million and
$44.4 million, respectively. Costs associated with network construction, network enhancements and initial customer
installation are capitalized. Costs capitalized as part of the initial customer installation
includes materials, direct labor, and certain indirect costs. These indirect costs are associated
with the activities of personnel who assist in connecting and activating the new service and
consist of compensation and overhead costs associated with these support functions. The costs of
disconnecting service at a customers premise or reconnecting service to a previously installed
premise are charged to operating expense in the period incurred. Costs for repairs and maintenance
are charged to operating expense as incurred, while equipment replacement and significant
enhancements, including replacement of cable drops from the pole to the premise, are capitalized. We make judgments regarding the installation and construction activities to be capitalized. We
capitalize direct labor and certain indirect costs (overhead) using standards developed from
time costs studies and operational data. We calculate standards for items such as the labor rates,
overhead rates and the actual amount of time required to perform a capitalizable activity. Overhead
rates are established based on an analysis of the nature of costs incurred in support of
capitalizable activities and a determination of the portion of costs that is directly attributable
to capitalizable activities. Judgment is required to determine the extent to which overhead is incurred as a result of
specific capital activities, and therefore should be capitalized. The primary costs that are
included in the determination of the overhead rate are (i) employee benefits and payroll taxes
associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable
activities, consisting primarily of installation costs, (iii) the cost of support personnel that
directly assist with capitalizable installation activities, and (iv) indirect costs directly
attributable to capitalizable activities. While we believe our existing capitalization policies are reasonable, a significant change in
the nature or extent of our system activities could affect managements judgment about the extent
to which we should capitalize direct labor or overhead in the future. We monitor the
appropriateness of our capitalization policies, and perform updates to our internal studies on an
ongoing basis to determine whether facts or circumstances warrant a change to our capitalization
policies. Valuation of Long-Lived and Intangible Assets and Goodwill. We assess the impairment of
identifiable long-lived assets and related goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable in accordance with Statement of Financial
Accounting Standards, or SFAS No. 121, and beginning January 1, 2002 SFAS No. 144. Factors we
consider important and that could trigger an impairment review include the following:  
    Significant underperformance of our assets relative to expected historical or
projected future operating results;
    Significant changes in the manner in which we use our assets or significant
changes in our overall business strategy; and,
    Significant negative industry economic trends. 33




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In July 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived Assets,
which is effective for fiscal years beginning after December 15, 2001. The provisions of this
statement provide a single accounting model for impairment of long-lived assets. We recognized an
asset impairment of approximately $9.9 million during the year ended December 31, 2002 in
accordance with SFAS No. 144. We adopted SFAS No. 142 on January 1, 2002 and have performed a goodwill impairment test
annually in accordance with SFAS No. 142. Based on the results of the goodwill impairment test, we
recorded an impairment loss of $1.3 million in the first quarter of 2002 as a cumulative effect of
change in accounting principle. There have been no other impairments to our recorded goodwill. Significant and Subjective EstimatesThe following discussion and analysis of our results of
operations and financial condition is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets
and contingent liabilities. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United States, with no
need for us to judge the application. We base our judgments on historical experience and on various
other assumptions that we believe are reasonable under the circumstances, the results of which form
the basis for making estimates about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. See our consolidated financial statements and related notes thereto
included elsewhere in this annual report, which contain accounting policies and other disclosures
required by accounting principles generally accepted in the United States. Homes Passed and Connections We report homes passed as the number of residential and business units, such as single
residence homes, apartments and condominium units, passed by our broadband network and listed in
our database. Marketable homes passed are homes passed other than those we believe are covered by
exclusive arrangements with other providers of competing services. Because we deliver multiple
services to our customers, we report the total number of connections for video, voice and data
rather than the total number of customers. We count each video, voice or data purchase as a
separate connection. For example, a single customer who purchases cable television, local telephone
and Internet access services would count as three connections. We do not record the purchase of
digital video services by an analog video customer as an additional connection. As we continue to
sell bundled services, we expect more of our video customers to purchase voice, data and other
enhanced services in addition to video services. Accordingly, we expect that our number of voice
and data connections will grow faster than our video connections and will represent a higher
percentage of our total connections in the future. Revenues Our operating revenues are primarily derived from monthly charges for video, voice and
Internet data services and other services to residential and business customers. We provide these
services over our network. Our products and services involve different types of charges and in some
cases a different method of accounting for or recording revenues. Below is a description of our
significant sources of revenue:  
    Video revenuesOur video revenues consist of fixed monthly fees for expanded basic,
premium and digital cable television services, as well as fees from pay-per-view movies,
fees for video-on-demand and events such as boxing matches and concerts that involve a
charge for each viewing. Video revenues accounted for approximately 42.8%, 41.6% and
46.2% of our consolidated revenues for the years ended December 31, 2002, 2003 and 2004,
respectively. Video revenues as a percentage of our total revenues increased
significantly in 2004 as a result of the acquisition of video-only connections in
Cerritos, California and video and data connections in Pinellas County, FL. In providing
video services, we currently compete with BellSouth, Bright House Networks, Charter,
Comcast, Mediacom and Time Warner. We also compete with satellite television providers
such as DirecTV and Echostar. Our other competitors include broadcast television
stations and other satellite television companies. We expect in the future to face
additional competition from telephone companies providing video services within their
service areas.
    Voice revenues. Our voice revenues consist primarily of fixed monthly fees for local
service and enhanced services, such as call waiting, voice mail and measured and flat
rate long-distance service. Voice revenues accounted for approximately 41.4%, 40.5% and
34.3% of our consolidated revenues for the years ended December 31, 2002, 2003 and 2004,
respectively. In providing local and long-distance telephone services, we compete with
the incumbent local phone company and various long-distance providers in each of our
markets. BellSouth and Verizon are the incumbent local phone companies in our markets.
They offer both local and long-distance services in our markets and are particularly
strong competitors. We also compete with providers of long-distance telephone services,
such as AT&T, MCI and Sprint.We also expect to compete in the near future with
voice-over-IP providers. 34




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##### Table of Contents




    Data revenues and other revenues. Our data revenues consist primarily of fixed
monthly fees for data service and rental of cable modems. Other revenues result
principally from broadband carrier services. These combined revenues accounted for
approximately 15.8%, 17.9% and 19.5% of our consolidated revenues for the years ended
December 31, 2002, 2003 and 2004, respectively. Providing data services is a rapidly
growing business and competition is increasing in each of our markets. Some of our
competitors have competitive advantages such as greater experience, resources, marketing
capabilities and stronger name recognition. In providing data services, we compete with
traditional dial-up Internet service providers; incumbent local exchange carriers that
provide dial-up and DSL services; providers of satellite-based Internet access services;
cable television companies; and providers of wireless high-speed data services. We experienced a loss of video connections in 2004. While we expect to have positive growth in
video connections in 2005, we believe that the historical rate of growth will decline as the video
segment matures in our current markets. While the number of new video connections may grow at a
declining rate, the company believes there is an opportunity to increase revenue and gross profits
with the introduction of new products, price increases and new technology. New voice and data
connections are expected to increase with sales and marketing efforts directed at selling customers
a bundle of services, penetrating untapped market segments and offering new services. Costs and Expenses Our operating expenses include cost of services, selling, operations and administrative
expenses and depreciation and amortization. Costs of services includes:  
    Video cost of services. Video cost of services consists primarily of monthly fees to
the National Cable Television Cooperative and other programming providers. Programming
costs are our largest single cost and we expect this trend to continue. Programming
costs as a percentage of video revenue were approximately 48.1%, 46.1% and 49.6% for the
years ended December 31, 2002, 2003 and 2004, respectively. We have entered into
contracts with various entities to provide programming to be aired on our network. We
pay a monthly fee for these programming services, generally based on the average number
of subscribers to the program, although some fees are adjusted based on the total number
of subscribers to the system and/or the system penetration percentage. Since programming
cost is partially based on numbers of subscribers, it will increase as we add more
subscribers. It will also increase as costs per channel increase over time. We paid
approximately $47.0 million in programming fees under programming contracts during 2004.
    Voice cost of services. Voice cost of services consists primarily of transport cost
and network access fees. The voice cost of services as a percentage of voice revenues
was approximately 17.3%, 16.2% and 14.7% for the years ended December 31, 2002, 2003 and
2004, respectively.
    Data and other costs of services. Data and other costs of services consist primarily
of transport cost and network access fees. The data and other costs of services as a
percentage of data and other revenue were 7.4%, 6.5% and 4.2% for the years ended
December 31, 2002, 2003 and 2004, respectively. Relative to our current product mix, we expect voice and data revenue will become larger
percentages of our overall revenue, and potentially will provide higher gross profits. Based on the
anticipated changes in our revenue mix, we expect that our consolidated cost of services as a
percentage of our consolidated revenues will decrease. Selling, operations and administrative expenses include:  
    Sales and marketing expenses. Sales and marketing expenses include the cost of sales
and marketing personnel and advertising and promotional expenses.
    Network operations and maintenance expenses. Network operations and maintenance
expenses include payroll and departmental costs incurred for network design, 24/7
maintenance monitoring and plant maintenance activity.
    Service and installation expenses. Service and installation expenses include payroll
and departmental cost incurred for customer installation and service technicians.
    Customer service expenses. Customer service expenses include payroll and departmental
costs incurred for customer service representatives and customer service management,
primarily at our centralized call center.
    General and administrative expenses. General and administrative expenses consist of
corporate and subsidiary management and administrative costs. 35




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Depreciation and amortization expenses include depreciation of our interactive broadband
networks and equipment and amortization of costs in excess of net assets and other intangible
assets related to acquisitions. For periods beginning after January 1, 2002, we no longer amortize
goodwill related to acquisitions in accordance with SFAS 142. As our sales and marketing efforts continue and our networks expand, we expect to add customer
connections resulting in increased revenue. We also expect our cost of services and operating
expenses to increase as we add connections and grow our business. Results of Operations The following table sets forth financial data as a percentage of operating revenues for the
years ended December 31, 2002, 2003 and 2004. Year EndedDecember 31,2002
    
    
    2003
    
    
    2004Operating revenues:Video
    
    
    43
    %
    
    
    42
    %
    
    
    46
    %Voice
    
    
    41
    
    
    
    40
    
    
    
    34Data
    
    
    16
    
    
    
    18
    
    
    
    20Total
    
    
    100
    
    
    
    100
    
    
    
    100Operating expenses:Cost of services
    
    
    29
    
    
    
    27
    
    
    
    29Selling, operating and administrative
    
    
    56
    
    
    
    54
    
    
    
    56Depreciation and amortization
    
    
    57
    
    
    
    45
    
    
    
    35Gain on reorganization
    
    
    (77
    )
    
    
    0
    
    
    
    0Reorganization professional fees
    
    
    2
    
    
    
    0
    
    
    
    0Non-cash stock option compensation
    
    
    2
    
    
    
    1
    
    
    
    2Asset impairment
    
    
    7
    
    
    
    0
    
    
    
    0Litigation fees
    
    
    1
    
    
    
    1
    
    
    
    0Total
    
    
    77
    
    
    
    128
    
    
    
    122Operating (loss) income
    
    
    23
    
    
    
    (28
    )
    
    
    (22
    )Other income and (expense)
    
    
    (24
    )
    
    
    (23
    )
    
    
    (14
    )Loss before income taxes, discontinued
operations, and cumulative effect of change in
accounting principle
    
    
    (1
    )
    
    
    (51
    )
    
    
    (36
    )Income tax benefit (provision)
    
    
    0
    
    
    
    0
    
    
    
    0Discontinued Operations
    
    
    0
    
    
    
    0
    
    
    
    0Cumulative effect of change in accounting
principle
    
    
    (1
    )
    
    
    0
    
    
    
    0Net loss
    
    
    (2
    )
    
    
    (51
    )
    
    
    (36
    )
 Quarterly Comparison The following table presents certain unaudited consolidated statements of operations and other
operating data for our eight most recent quarters. The information for each of these quarters is
unaudited and has been prepared on the same basis as our audited consolidated financial statements
appearing elsewhere in this annual report. In the opinion of our management, all necessary
adjustments, consisting only of normal recurring adjustments, have been included to present fairly
the unaudited quarterly results when read in conjunction with our consolidated financial statements
and related notes included elsewhere in this annual report. We believe that results of operations
for interim periods should not be relied upon as any indication of the results to be expected or
achieved in any future periods or any year as a whole. The information presented includes 391,798
homes passed, 287,094 marketable homes passes, 49,717 video connections and 8,705 data connections
acquired as part of the Verizon Media acquisition in the quarter ended December 31, 2003. Quarters endedMar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,
    
    
    Mar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2003
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except operating data)Revenues
    
    $
    40,687
    
    
    $
    42,869
    
    
    $
    43,733
    
    
    $
    45,649
    
    
    $
    53,794
    
    
    $
    52,735
    
    
    $
    52,065
    
    
    $
    52,864Cost of services
    
    
    11,565
    
    
    
    11,258
    
    
    
    11,868
    
    
    
    11,835
    
    
    
    15,784
    
    
    
    15,104
    
    
    
    15,103
    
    
    
    14,838Gross profit
    
    
    29,122
    
    
    
    31,611
    
    
    
    31,865
    
    
    
    33,814
    
    
    
    38,010
    
    
    
    37,631
    
    
    
    36,962
    
    
    
    38,026Loss before discontinued operation
    
    
    (20,469
    )
    
    
    (19,450
    )
    
    
    (31,251
    )
    
    
    (16,618
    )
    
    
    (18,366
    )
    
    
    (18,674
    )
    
    
    (20,082
    )
    
    
    (18,548
    )Net loss
    
    
    (20,469
    )
    
    
    (19,450
    )
    
    
    (31,251
    )
    
    
    (16,618
    )
    
    
    (18,366
    )
    
    
    (18,664
    )
    
    
    (20,039
    )
    
    
    (18,495
    )Homes passed
    
    
    527,511
    
    
    
    534,084
    
    
    
    540,401
    
    
    
    935,640
    
    
    
    943,459
    
    
    
    950,337
    
    
    
    957,731
    
    
    
    963,177
 36




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##### Table of Contents



Quarters endedMar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,
    
    
    Mar. 31,
    
    
    June 30,
    
    
    Sept. 30,
    
    
    Dec. 31,2003
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except operating data)Marketable homes passed
    
    
    439,025
    
    
    
    443,159
    
    
    
    446,251
    
    
    
    737,145
    
    
    
    742,717
    
    
    
    746,782
    
    
    
    751,821
    
    
    
    756,694Video connections (1)
    
    
    132,385
    
    
    
    132,163
    
    
    
    133,267
    
    
    
    183,783
    
    
    
    178,550
    
    
    
    174,957
    
    
    
    175,907
    
    
    
    177,323Video penetration (2)
    
    
    30.2
    %
    
    
    29.8
    %
    
    
    29.9
    %
    
    
    24.9
    %
    
    
    24.0
    %
    
    
    23.4
    %
    
    
    23.4
    %
    
    
    23.4
    %Digital video connections
    
    
    33,546
    
    
    
    33,037
    
    
    
    33,297
    
    
    
    57,716
    
    
    
    54,332
    
    
    
    51,831
    
    
    
    53,920
    
    
    
    56,838Digital penetration of video connections
    
    
    25.3
    %
    
    
    25.0
    %
    
    
    25.0
    %
    
    
    31.4
    %
    
    
    30.4
    %
    
    
    29.6
    %
    
    
    30.7
    %
    
    
    32.1
    %Voice connections on-net (3)
    
    
    113,899
    
    
    
    115,268
    
    
    
    118,038
    
    
    
    118,872
    
    
    
    121,012
    
    
    
    121,819
    
    
    
    125,337
    
    
    
    128,757On-net voice penetration (4)
    
    
    20.6
    %
    
    
    20.8
    %
    
    
    21.4
    %
    
    
    16.1
    %
    
    
    16.3
    %
    
    
    16.3
    %
    
    
    16.7
    %
    
    
    17.0
    %Data connections
    
    
    55,000
    
    
    
    58,031
    
    
    
    62,276
    
    
    
    73,482
    
    
    
    75,220
    
    
    
    77,174
    
    
    
    82,152
    
    
    
    86,366Data penetration (2)
    
    
    12.5
    %
    
    
    13.1
    %
    
    
    14.0
    %
    
    
    10.0
    %
    
    
    10.1
    %
    
    
    10.3
    %
    
    
    10.9
    %
    
    
    11.4
    %Total connections
    
    
    306,552
    
    
    
    310,794
    
    
    
    319,031
    
    
    
    381,815
    
    
    
    380,684
    
    
    
    379,990
    
    
    
    389,374
    
    
    
    398,433Average monthly revenue per
connection
    
    $
    45.24
    
    
    $
    46.23
    
    
    $
    46.43
    
    
    $
    46.00
    
    
    $
    46.96
    
    
    $
    46.95
    
    
    $
    45.86
    
    
    $
    45.42
   (1)
    
    Video connections include customers who receive analog or digital video services.(2)
    
    Penetration is measured as a percentage of marketable homes passed.(3)
    
    On-net connections are connections provided over our network as opposed to telephone lines
leased from third parties.(4)
    
    On-net voice penetration is measured as a percentage of marketable homes passed and excludes
off-net connections, as well as connections and marketable homes related to our incumbent
local exchange carrier subsidiaries. Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenues. Operating revenues increased 22.3% from $172.9 million for the year ended December
31, 2003, to $211.5 million for the year ended December 31, 2004. Operating revenues from video
services increased 35.8% from $71.9 million for the year ended December 31, 2003, to $97.6 million
for the same period in 2004. Operating revenues from voice services increased 3.3% from $70.1
million for the year ended December 31, 2003, to $72.4 million for the same period in 2004.
Operating revenues from data and other services increased 33.9% from $30.9 million for the year
ended December 31, 2003, to $41.4 million for the same period in 2004. The increased revenues from video, voice and data and other services are due primarily to an
increase in the number of connections, from 381,815 as of December 31, 2003, which included 58,422
connections acquired from Verizon Media in December of 2003, to 398,433 as of December 31, 2004.
For the year ended December 2003, the connections acquired from Verizon Media generated less than
$300,000 in revenues. Rate increases accounted for approximately 3% of the increased revenues for
the twelve months ended December 31, 2004, and the increase in the number of connections accounted
for approximately 97% of the increased revenue for the same period. The additional connections
resulted primarily from:  
    New service offerings specifically marketed to increase sales and connections
penetration.
    Sales of voice and data services, which accounted for the positive growth in our
connections added from December 31, 2003 through December 31, 2004. We gained these
connections by offering competitive plans that focus on bundling services to customers.
    The acquisition of certain cable system assets in Cerritos, California and Pinellas
County, Florida from Veizon Media. We experienced a loss of video connections in 2004 as we transitioned our acquired Pinellas
County customers to new plans and rates. We expect to add new video connections in the future, but
as our video segment matures in our current markets, we expect to grow at a decreasing rate
compared to our historical experience. While the number of new video connections may grow at a
declining rate, we believe that the opportunity to increase revenue and video gross profits is
available through price increases and the introduction of new products and new technology. New
voice and data connections are expected to increase with sales and marketing efforts directed at
selling customers a bundle of services, penetrating untapped market segments and offering new
services. Relative to our current product mix, we expect voice and data revenue will become larger
percentages of our overall revenue, and potentially will provide higher gross profits. Based on the
anticipated changes in our revenue mix, we expect that our consolidated cost of services as a
percentage of consolidated revenues will decrease. Cost of Services. Cost of services increased 30.7% from $46.5 million for the year ended
December 31, 2003, to $60.8 million for the year ended December 31, 2004. Cost of services for
video services increased 46.2% from $33.1 million for the year ended December 31, 2003, to $48.4
million for the same period in 2004. Cost of services for voice services decreased 6.5% from $11.4
million for the year ended December 31, 2003, to $10.6 million for the same period in 2004. Cost of
services for data and other services decreased 12.8% from $2.0 million for the year ended December
31, 2003, to $1.8 million for the same period in 2004. The decrease in voice and data cost of
services is primarily due to efficiency gains in our network architecture. We expect our cost of
services to increase as we add more connections. Programming costs, which are one of our largest
single expense items, have been increasing over the last several years on an aggregate basis due to
an increase in subscribers, as a result of internal growth and the Verizon Media acquisition noted
above, and on a per subscriber basis due to an increase in costs per program channel. We expect
this trend to continue. We may not be able to pass these higher costs on to customers because of
competitive factors, which could adversely affect our cash flow and gross profit. 37




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Gross Profit. Gross profit increased 19.2% from $126.4 million for the year ended December 31,
2003, to $150.6 million for the year ended December 31, 2004. Gross profit for video services
increased 26.9% from $38.7 million for the year ended December 31, 2003, to $49.2.million for the
same period in 2004. Gross profit for voice services increased 5.2% from $58.7 million for the year
ended December 31, 2003, to $61.8 million for the same period in 2004. Gross profit for data and
other services increased 37.1% from $28.9 million for the year ended December 31, 2003, to $39.7
million for the same period in 2004. The increase in gross profit is primarily a result of the
changes in revenues and cost of services as described above. Operating Expenses. Our operating expenses, excluding depreciation and amortization, increased
25.9% from $93.4 million for the year ended December 31, 2003, to $117.6 for the year ended
December 31, 2004. The increase in our operating expenses is consistent with the growth in
revenues and is a result of the expansion of our operations and an increase in the number of
employees associated with such expansion and growth. During 2004 we incurred certain incremental
expenses associated with the unusual storm and hurricane activity. Selling, operations and
administrative expenses will continue to increase as we continue to grow our business. Our depreciation and amortization decreased from $77.8 million for the year ended December 31,
2003, to $74.2 million for the year ended December 31, 2004. The decrease in depreciation and
amortization resulted from a combination of lower spending for additions in property, plant,
equipment and intangible assets in 2004, and a portion of our long-lived assets becoming fully
depreciated. We expect depreciation and amortization expense to continue to decrease as our
overall capital expenditures decrease and existing long-lived assets become fully depreciated.. Our capital market activities were $84,000 for the year ended December 31, 2003, compared to
$880,000 for the year ended December 31, 2004. The increase is primarily a result fees and expenses
for our proposed debt offering which was withdrawn during the first quarter of 2004. Our non-cash stock option compensation expense increased from $1.9 million for the year ended
December 31, 2003 to $3.6 million for the year ended December 31, 2004. The increase in the
non-cash stock option compensation expense was primarily due to a re-pricing of certain stock
options during the second quarter of 2004. Our litigation fees decreased from $907,000 for the year ended December 31, 2003, to $377,000
for the year ended December 31, 2004. The decrease in litigation fees is primarily due to less
activity related to the Insight litigation. Other Income and Expense, Including Interest Income and Interest Expense. Our total other
expense decreased from $40.2 million for the year ended December 31, 2003, to $29.7 million for the
year ended December 31, 2004. Interest income was $379,000 for the year ended December 31, 2003,
compared to $720,000 for the same period in 2004. The increase in interest income primarily
reflects a higher average cash and cash equivalent balance for the year ended December 31, 2004.
Interest expense increased from $29.2 million for the year ended December 31, 2003, to $31.1
million for the year ended December 31, 2004. The increase in interest expense for 2004 resulted
from a higher average debt balance outstanding due to in-kind interest payments associated with our
senior notes.. In the fourth quarter of 2003, we adjusted the carrying value of the outstanding warrants to
purchase our common stock to market value based on the published market per share value of our
common stock. The published market per share value of our common stock on December 31, 2003 was
$9.03 resulting in a $929,000 gain on the adjustment of warrants to market value. During 2004, we
adjusted the carrying value of the outstanding warrants to purchase our common stock to market
value based on the published market per share value of our common stock. The published market per
share value of our common stock on December 31, 2004 was $3.90 resulting in a $535,000 gain on the
adjustment of warrants to market value. Other expenses, net decreased from $12.3 million for the
year ended December 31, 2003 to $134,000 for the year ended December 31, 2004. We recorded a loss
on our investment in Grande Communications, Inc. of $12.4 million for the year ended December 31,
2003 after we determined that the adverse conditions at Grande were other than temporary. Income Tax Provision. We recorded no income tax benefit for the years ended December 31, 2003
and 2004, respectively, as our net operating losses are fully offset by a valuation allowance. Loss Before Discontinued Operations. We incurred a loss before discontinued operations of
$87.8 million for the year ended December 31, 2003, compared to a loss before discontinued
operations of $75.7 million for the year ended December 31, 2004. Net income from discontinued operations.Effective April 30, 2004, following the guidance of
SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, we deemed the
Cerritos, Calfornia cable system to be a long-lived asset to be disposed of based on our actions
taken to sell the property. The amount recorded represents the income from our Cerritos operations. Net Loss Attributable to Common Stockholders. We incurred a net loss attributable to common
stockholders of $87.8 million and $75.6 million for the years ended December 31, 2003 and 2004,
respectively. We expect net losses to continue as our business matures. 38




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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues. Operating revenues increased 21.9% from $141.9 million for the year ended December
31, 2002, to $172.9 million for the year ended December 31, 2003. Operating revenues from video
services increased 18.3% from $60.8 million for the year ended December 31, 2002, to $71.9 million
for the same period in 2003. Operating revenues from voice services increased 19.4% from $58.7
million for the year ended December 31, 2002, to $70.1 million for the same period in 2003.
Operating revenues from data and other services increased 38.3% from $22.4 million for the year
ended December 31, 2002, to $30.9 million for the same period in 2003. The increased revenues from video, voice and data and other services are due primarily to an
increase in the number of connections, from 293,149 as of December 31, 2002, to 381,815 as of
December 31, 2003. Rate increases accounted for approximately 23% of the increased revenues for the
twelve months ended December 31, 2003, and the increase in the number of connections accounted for
approximately 77% of the increased revenue for the same period. The additional connections resulted
primarily from:  
    New service offerings specifically marketed to increase sales and penetration.
    Sales of voice and data services, which accounted for approximately 85% of the
additional connections added from December 31, 2002 through December 31, 2003. We gained
these connections by offering competitive plans that focus on bundling services to
customers.
    The continued construction of the broadband network in the Knoxville market.
    The acquisition of certain cable system assets in Cerritos, California from Verizon
Media, with revenue included in the month ended December 31, 2003 (We also acquired the
Pinellas County, FL assets prior to year end, but no revenue was included in the
operating results for the year ended December 31, 2003). Cost of Services. Cost of services increased 13.5% from $41.0 million for the year ended
December 31, 2002, to $46.5 million for the year ended December 31, 2003. Cost of services for
video services increased 13.5% from $29.2 million for the year ended December 31, 2002, to $33.1
million for the same period in 2003. Cost of services for voice services increased 12.1% from $10.1
million for the year ended December 31, 2002, to $11.4 million for the same period in 2003. Cost of
services for data and other services increased 21.2% from $1.7 million for the year ended December
31, 2002, to $2.0 million for the same period in 2003. Gross Profit. Gross profit increased 25.3% from $100.9 million for the year ended December 31,
2002, to $126.4 million for the year ended December 31, 2003. Gross profit for video services
increased 22.8% from $31.6 million for the year ended December 31, 2002, to $38.7 million for the
same period in 2003. Gross profit for voice services increased 20.9% from $48.6 million for the
year ended December 31, 2002, to $58.7 million for the same period in 2003. Gross profit for data
and other services increased 39.7% from $20.7 million for the year ended December 31, 2002, to
$28.9 million for the same period in 2003. Operating Expenses. Our operating expenses, excluding depreciation and amortization, increased
16.9% from $79.8 million for the year ended December 31, 2002, to $93.4 for the year ended December
31, 2003. Our depreciation and amortization decreased from $80.4 million for the year ended December 31,
2002, to $77.8 million for the year ended December 31, 2003. The decrease in depreciation and
amortization is due to lower spending for additions in property, plant, equipment and intangible
assets in 2003 compared to 2002. We recognized a gain of $109.8 million with the completion of our financial restructuring and
generated related professional fees of $3.8 million for the year ended December 31, 2002. We recognized $9.9 million in asset impairment for the year ended December 31, 2002 in
accordance with SFAS No. 144. We recorded a non-cash stock option compensation expense of $3.3 million for the year ended
December 31, 2002 and $1.9 million for the year ended December 31, 2003. Our litigation fees decreased from $1.2 million for the year ended December 31, 2002, to
$907,000 for the year ended December 31, 2004. The decrease in litigation fees is primarily due to
less activity related to the Insight litigation. Other Income and Expense, Including Interest Income and Interest Expense. Our total other
expense increased from $33.3 million for the year ended December 31, 2002, to $40.2 million for the
year ended December 31, 2003. Interest income was $395,000 for the year ended December 31, 2002,
compared to $379,000 for the same period in 2003. The decrease in interest income primarily
reflects a lower average cash balance for the year ended December 31, 2003. Interest expense
decreased from $36.3 million for the year ended December 31, 2002, to $29.2 million for the year
ended December 31, 2003. The interest expense is principally the in-kind 39




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interest on our 12% senior notes due 2009. The interest expense in 2003 is significantly lower
than in prior years as a result of our financial restructuring. Although the interest rate payable
on the our senior notes is comparable to the rate payable on the canceled Broadband notes, the
aggregate amount of notes outstanding is substantially lower. In the fourth quarter of 2003, we adjusted the carrying value of the outstanding warrants to
purchase our common stock to market value based on the published market per share value of our
common stock. The published market per share value of our common stock on December 31, 2003 was
$9.03 resulting in a $929,000 gain on the adjustment of warrants to market value. Other expenses,
net increased from $321,000 for the year ended December 31, 2002 to $12.3 million for the year
ended December 31, 2003. We recorded a loss on our investment in Grande Communications, Inc. of
$12.4 million for the year ended December 31, 2003 after we determined that the adverse conditions
at Grande were other than temporary. Income Tax Provision. We recorded no income tax benefit for the years ended December 31, 2002
and 2003, respectively, as our net operating losses are fully offset by a valuation allowance. Loss Before Cumulative Effect of Change in Accounting Principle. We incurred a loss before
cumulative effect of change in accounting principle of $1.3 million for the year ended December 31,
2002, compared to a loss before extraordinary item and cumulative effect of change in accounting
principle of $87.8 million for the year ended December 31, 2003. Cumulative Effect of Change in Accounting Principle. We adopted SFAS No. 142 on January 1,
2002. We have performed a goodwill impairment test in accordance with SFAS 142 and based on the
results of this test we recorded an impairment loss of $1.3 million for the year ended December 31,
2002. Net Loss Attributable to Common Stockholders. We incurred a net loss attributable to common
stockholders of $2.6 million and $87.8 million for the years ended December 31, 2002 and 2003,
respectively. We expect net losses to continue as our business matures. Liquidity and Capital Resources Overview. We may need to issue equity or debt and/or sell assets to raise additional cash to fund the
future operations of our business and meet our debt service obligations. We currently expect to
spend approximately $33.2 million during 2005 to expand and upgrade our networks in the markets
where we currently provide service, including our network in Pinellas County, Florida. Under the
terms of the indenture for our existing 12% senior notes due 2009, capital expenditures to complete
the buildout of our network in Pinellas County, Florida must be funded by cash flow from operations
in that market or from additional equity financings or proceeds from the sale of our Cerritos
division. Through 2004, the Pinellas operation was funded by the proceeds from our initial public
offering. In March 2005, we entered into a definitive asset purchase agreement to sell our cable
assets located in Cerritos, California to WaveDivision Holdings, LLC for $10.0 million in cash,
subject to customary closing adjustments. We expect the sale of the Cerritos system to close in the
third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of
regulatory approvals with respect to the municipal franchise in Cerritos, California. However,
there can be no assurance that we will complete the sale of the Cerritos cable system or we may not
complete the sale in a timely manner. In the event the purchaser does not receive necessary
regulatory or other approvals or the other conditions to closing are not satisfied, the sale will
not be completed. If the Cerritos sale or an equity offering is not completed, we expect the cash
available to fund the Pinellas operation under our indenture to be exhausted before the end of the
third quarter 2005. If we are unable to sell the Cerritos assets in a timely manner, or on
acceptable terms, or an equity offering is not completed, we may not be able to complete our
buildout in Pinellas County and grow our Pinellas County operations in accordance with our business
plan, which may have any adverse impact on our financial condition. Operating, Investing and Financing activities. As of December 31, 2004, we had net working capital of $3.2 million, compared to net working
capital of $42.9 million as of December 31, 2003. The decrease in working capital from December 31,
2003 to December 31, 2004 is primarily due to the use of the cash proceeds from our initial public
offering to enhance the network and fund operations in the Pinellas County market. Net cash provided by operating activities from continuing operations totaled $10.3 million,
$29.5 million and $22.4 million for the years ended December 31, 2002, 2003 and 2004, respectively,
and operating activities from discontinued operations used $0.1 million for the year ended December
31, 2004. The net cash flow activity related to operations consists primarily of changes in
operating assets and liabilities and adjustments to net income for non-cash transactions including:  
    depreciation and amortization;
    non-cash stock option compensation; 40




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
    asset impairment;
    litigation fees;
    write off of investments;
    accretion of discounted debt;
    non-cash bond interest expense;
    provision for bad debt;
    gain on reorganization;
    loss (gain) on disposition of assets;
    cumulative effect of change in accounting principle; and
    gain on adjustment of warrants to market; Net cash used for investing activities was $44.8 million, $95.5 million and $36.3 million for
the years ended December 31, 2002, 2003 and 2004, respectively. Our investing activities for the
year ended December 31, 2002, consisted of $44.4 million of capital expenditures and $1.4 million
of organizational and franchise expenditures partially offset by $1.0 million of proceeds from the
sale of property. Investing activities in 2003 consisted of $35.5 million of capital expenditures,
$50.0 million for the purchase of short term investments, $0.4 million in organizational and
franchise expenditures, $18.8 million for the acquisition of Verizon Media, an additional
investment of $1.1 million Grande partially offset by $10.0 million from the sale of short term
investments and $0.4 million of proceeds from the sale of property. Investing activities in 2004
consisted of $63.6 million of capital expenditures, $210.1 million for the purchase of short term
investments, $0.3 million in organizational and franchise expenditures, partially offset by $237.4
million from the sale of short term investments and $0.2 million of proceeds from the sale of
property. We received net cash flow from financing activities of $39.4 million and $43.9 million for the
years ended December 31, 2002 and 2003, respectively, and used $0.4 million in financing activities
for the year ended December 31, 2004. Financing activities in 2002 consisted primarily of $39.0
million of proceeds from an equity private placement offering of our Series C preferred stock and
$5.5 million of proceeds from our long-term debt facility partially offset by $1.0 million of cash
pledged as security and $4.1 million in expenditures related to the prepackaged plan of
reorganization. In 2003 financing activities consisted primarily of $48.8 million of net proceeds
from our initial public offering of common stock partially offset by $3.4 million in principal
payments on debt and $1.5 million of cash pledged as security. In 2004 financing activities
consisted primarily of $7.3 million of net proceeds from the fulfillment of the over allotment
option of our initial public offering of common stock partially offset by $2.7 million in principal
payments on debt, $0.4 million of expenditures related to issuance of debt and $4.6 million of cash
pledged as security. Verizon Media Acquisition and Related Planned Expenditures In December 2003, we completed our acquisitions of the cable system and franchise rights in
Cerritos, California, and Pinellas County, Florida, for which we paid Verizon Media approximately
$17.0 million in cash, which we funded with the proceeds of our initial public offering of common
stock. In connection with the completion of the Verizon Media acquisition, we issued to a prior
prospective purchaser and certain of its employees warrants to purchase one million shares of our
common stock with an exercise price of $9.00 per share as compensation for the release of an
agreement with Verizon Media granting exclusive rights to negotiate with respect to the purchase of
the Verizon Media businesses. We currently expect to spend approximately $7.5 million in capital expenditures during 2005 to
complete the enhancement of the network assets in Pinellas County, Florida. Under the terms of the
indenture for our existing 12% senior notes due 2009, substantially all of our capital expenditures
in the Verizon Media markets will have to be funded with the net cash proceeds from issuances of
our capital stock or the sale of our Cerritos division and cash flow provided by the Pinellas
operations. Capital Expenditures We spent approximately $63.6 million in capital expenditures during 2004, of which
approximately $36.8 million related to network construction and enhancement and the remainder
related to the purchase of customer premise equipment, such as cable set-top boxes and cable
modems, network equipment, including switching and transport equipment, and billing and information
systems. 41




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We expect to spend approximately $33.2 million in capital expenditures during 2005. We believe
if we complete the sale of our Cerritos, California operations we will have sufficient cash on hand
and cash from internally generated cash flow to cover our planned operating expenses and capital
expenditures during 2005. If the Cerritos sale or an equity offering is not completed, however, we
expect the cash available to fund the Pinellas operation under our indenture to be exhausted before
the end of the third quarter 2005. There can be no assurance that we will successfully complete a
timely sale of our Cerritos cable assets. If we are unable to sell the Cerritos assets in a timely
manner, or on acceptable terms, the financial condition of the company may be adversely affected. We do not intend to expand into other markets until the required funding is available. We
estimate the cost of constructing our network and funding initial customer premise equipment in new
markets to be approximately $750 to $1,000 per home passed. The actual costs of each new market may
vary significantly from this range and will depend on the number of miles of network to be
constructed, the geographic and demographic characteristics of the city, population density, costs
associated with the cable franchise in each city, the number of customers in each city, the mix of
services purchased, the cost of customer premise equipment we pay for or finance, utility
requirements and other factors. Contractual Obligations The following table sets forth, as of December 31, 2004, our long-term debt, capital leases
and operating lease obligations for 2005, the following five years and thereafter. The long-term
debt obligations are our cash debt service obligations, including both principal and interest. The
capital lease obligations are our future rental payments under one lease with a 10-year term and
network fiber leasing aggreements. Operating lease obligations are the future minimum rental
payments required under the operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of December 31, 2004. Payment due by periodJanuary 1, 2005
    
    
    January 1, 2006
    
    
    January 1, 2008through December
    
    
    through December
    
    
    through December
    
    
    After December 31,Contractual obligations
    
    Total
    
    
    31, 2005
    
    
    31, 2007
    
    
    31, 2009
    
    
    2009(in thousands)Long-term debt obligations
    
    $
    284,456
    
    
    $
    0
    
    
    $
    16,465
    
    
    $
    267,991
    
    
    $
    0Interest
    
    
    151,184
    
    
    
    31,507
    
    
    
    62,605
    
    
    
    56,612
    
    
    
    460Capital lease obligation
    
    
    2,257
    
    
    
    179
    
    
    
    543
    
    
    
    653
    
    
    
    882Operating lease obligations
    
    
    14,804
    
    
    
    3,076
    
    
    
    4,229
    
    
    
    2,304
    
    
    
    5,195Programming contracts(1)
    
    
    151,779
    
    
    
    50,296
    
    
    
    101,483
    
    
    
    0
    
    
    
    0Pole attachment obligations(2)
    
    
    12,098
    
    
    
    2,971
    
    
    
    6,020
    
    
    
    3,107
    
    
    
    0Total
    
    $
    616,578
    
    
    $
    88,029
    
    
    $
    191,345
    
    
    $
    330,667
    
    
    $
    6,537
   (1) The Company has entered into contracts with various entities to provide
programming to be aired by the Company. The Company pays a monthly fee for the programming
services, generally based on the number of average video subscribers to the program, although
some fees are adjusted based on the total number of video subscribers to the system and/or the
system penetration percentage. The amounts presented are based on the estimated number of
connections we will have in future periods through the completion of the current
contracts.(2) Federal law requires utilities, defined to include all local telephone companies and
electric utilities except those owned by municipalities and co-operatives, to provide cable
operators and telecommunications carriers with nondiscriminatory access to poles, ducts,
conduit and rights-of-way at just and reasonable rates. Utilities may charge
telecommunications carriers a different rate for pole attachments than they charge cable
operators providing solely cable service. The amounts presented are based on the estimated
number of poles we will attach to in future periods through the completion of the current
contracts. As discussed above, we currently expect to spend $33.2 million in capital expenditures in
2005, including capital expenditures related to the Pinellas County, Florida market. We expect to
fund these contractual obligations, programming costs and expected capital expenditures using a
portion of the $18.7 million of cash and cash equivalents and short term investments on hand as of
December 31, 2004, with the remainder funded by cash flow generated by operations. In particular,
we believe we can satisfy all of our anticipated funding requirements, including capital
expenditures, through 2005 using a combination of cash flow from operations, our cash on hand and
proceeds from the sale of our Cerritos, California operations. In order to satisfy funding
requirements, including capital expenditures, beyond 2005, we may need to raise additional capital
through equity offerings, asset sales or debt financing. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123)
and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values, beginning with the first interim
or annual period after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R
will cause unrecognized expense related to options vesting after the date of initial adoption to be
recognized as a charge to results of operations over the remaining vesting period. In December
2002, we elected to adopt the recognition provisions of SFAS No. 123 which is considered the
preferable 42




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##### Table of Contents



accounting method for stock-based employee compensation. We also elected to report the change
in accounting principle using the prospective method in accordance with SFAS No. 148. Under the
prospective method, the recognition of compensation costs is applied to all employee awards
granted, modified or settled after the beginning of the fiscal year in which the recognition
provisions are first applied. Because we adopted the fair value recognition provisions of SFAS No.
123 on January 1, 2003, we do not expect this revised standard to have a material impact on our
financial statements. At the March 2004 Emerging Issues Task Force (EITF) meeting, the Task Force reached a
consensus on the Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments. Issue 03-1 defines the terms otherthan-temporary and other-than-temporary
impairment and establishes a three-step impairment model applicable to debt and equity securities
that are within the scope of SFAS 115. At the November 2003 EITF meeting, the Task Force reached a
consensus effective for fiscal years ending after December 15, 2003 on quantitative disclosures.
Except for disclosure requirements already in place, the Issue 03-1 consensus will be effective
prospectively for all relevant current and future investments in reporting periods beginning after
June 15, 2004. We adopted EITF Issue No. 03-1 disclosure requirements for the fiscal year ended
December 31, 2003 and do not expect the adoption of future requirements of EITF Issue No. 03-1 to
have material impact on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its scope as a
liability or an asset in some circumstances. SFAS No. 150 is effective for the first interim period
beginning after June 15, 2003. We adopted SFAS No. 150 effective July 1, 2003, which resulted in no
material impact our financial position or results of operations. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates. We manage our exposure to this
market risk through our regular operating and financing activities. Derivative instruments are not
currently used and, if used, are employed as risk management tools and not for trading purposes. We have no derivative financial instruments outstanding to hedge interest rate risk. Our only
borrowings subject to market conditions are our borrowings under our credit facilities which are
based on either a prime or federal funds rate plus applicable margin or LIBOR plus applicable
margin. Any changes in these rates would affect the rate at which we could borrow funds under our
credit facilities. A hypothetical 10% increase in interest rates on our variable rate bank debt for
a duration of one year would increase interest expense by an immaterial amount. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 8 is incorporated by reference to pages
F-1 through F-21. 
 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures.The Companys management, with the
participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2004. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as
of December 31, 2004, the Companys disclosure controls and procedures are effective. Changes in Internal Control over Financial Reporting.There have been no changes in our
internal control over financial reporting that occurred during the quarter ended December 31, 2004
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting. ITEM 9B. OTHER INFORMATION None. 43




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A portion of the information required by this Item 10 will be contained in the sections
entitled Information About Our Executive Officers, Directors and Nominees, Meetings and
Committees of the Board and Section 16(a) Beneficial Ownership Reporting Compliance of our
definitive proxy statement for our 2005 Annual Meeting of Stockholders to be filed with the SEC,
and such information is incorporated in this Annual Report on Form 10-K by this reference. We have adopted a code of ethics that applies to our employees, officers and directors,
including our chief executive officer, chief financial officer, principal accounting officer and
controller. This code of ethics is posted on our website located at www.knology.com. The code of
ethics may be found as follows: From our main web page, first click on About Us at the bottom of
the page and then on Investor Relations. Next, click on Corporate Governance. Finally, click on
Standards of Conduct. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics by posting such
information on our website, at the address and location specified above. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 will be contained in the section entitled Executive
Compensation and Meetings and Committees of the Board of our definitive proxy statement for our
2005 Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated
in this Annual Report on Form 10-K by this reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS A portion of the information required by this Item 12 will be contained in the section
entitled Principal Stockholders of our definitive proxy statement for its 2005 Annual Meeting of
Stockholders to be filed with the SEC, and such information is incorporated in this Annual Report
on Form 10-K by this reference. Securities Authorized for Issuance Under Equity Compensation Plans The following table gives information about the common stock that may be issued upon the
exercise of options, warrants and rights under all of our existing equity compensation plans as of
December 31, 2004. (c)(a)
    
    
    
    
    
    
    Number of SecuritiesNumber of
    
    
    
    
    
    
    Remaining Available forSecurities to
    
    
    (b)
    
    
    Future Issuance Underbe Issued Upon
    
    
    Weighted-Average
    
    
    Equity CompensationExercise of
    
    
    Exercise Price of
    
    
    PlansOutstanding Options,
    
    
    Outstanding Options,
    
    
    (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    
    Warrants and Rights
    
    
    Reflected in Column (a))Equity Compensation
Plans Approved by
Stockholders
    
    
    1,784,855
    (1)
    
    $
    7.96
    
    
    
    1,215,145
    (3)241,430
    (2)
    
    $
    16.22
    
    
    
    0Equity Compensation
Plans Not Approved
by Stockholders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    2,026,285
    
    
    $
    8.94
    
    
    
    1,215,145
   (1)
    
    Options to purchase common stock pursuant to the Knology, Inc. Amended and Restated 2002
Long-Term Incentive Plan.(2)
    
    Options to purchase common stock pursuant to the Knology, Inc Spin-Off Plan.(3)
    
    Shares reserved for issuance under the Amended and Restated 2002 Long-Term Incentive Plan are
available for issuance pursuant to the exercise of options or other rights to acquire common
stock, or may be granted as awards of restricted stock, performance shares or unrestricted
stock. 44




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Sales of Unregistered Securities During the year ended December 31, 2004, we had no sales of unregistered securities. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 will be contained in the section entitled Certain
Relationships and Related Transactions of our definitive proxy statement for its 2005 Annual
Meeting of Stockholders to be filed with the SEC, and such information is incorporated in this
Annual Report on Form 10-K by this reference. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item 14 will be contained in the section entitled
Independent Registered Public Accounting Firm of our definitive proxy statement for its 2005
Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated in
this Annual Report on Form 10-K by this reference. 45




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following Consolidated Financial Statements of the Company and independent
auditors report are included in Item 8 of this Form 10-K. Independent Auditors Report Report of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 2003 and 2004. Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and 2004. Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004. Consolidated Statements of Stockholders (Deficit) Equity for the Years Ended December 31,
2002, 2003 and 2004. Notes to Consolidated Financial Statements. All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission either have been included in the Consolidated Financial
Statements of the Company or the notes thereto, are not required under the related instructions or
are inapplicable, and therefore have been omitted. (a)(3) The following exhibits are either provided with this Form 10-K or are incorporated
herein by reference: Exhibit No.
    
    Exhibit Description2.1
    
    Asset Purchase Agreement, dated as of July 15, 2003, by and between Verizon Media Ventures Inc. and Knology
New Media, Inc. (Incorporated herein by reference to Exhibit 2.2 to Knology, Inc.s Registration Statement on
Form S-2 (File No. 333-109366)).2.2
    
    Side Letter Agreement, dated as of July 15, 2003, by and between Verizon Media Ventures Inc. and Knology New
Media, Inc. (Incorporated herein by reference to Exhibit 2.3 to Knology, Inc.s Registration Statement on Form
S-2 (File No. 333-109366)).2.3
    
    Agreement, dated as of July 15, 2003, between GLA New Ventures, LLC and Knology, Inc. (Incorporated herein by
reference to Exhibit 2.4 to Knology, Inc.s Registration Statement on Form S-2 (File No. 333-109366)).3.1
    
    Amended and Restated Certificate of Incorporation of Knology, Inc. (Incorporated herein by reference to
Exhibit 3.1 to Knology, Inc.s Quarterly Report Form 10-Q for the period ended June 30, 2004 (File No.
000-32647)).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)).4.1
    
    Indenture, dated as of November 6, 2002, by and between Knology Inc. and Wilmington Trust Company, as Trustee,
relating to the 12% Senior Notes Due 2009 of Knology, Inc. (Incorporated herein by reference to Exhibit 4.1 to
Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).4.2
    
    Form of Senior Note (contained in Exhibit 4.1).
 46




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Exhibit No.
    
    Exhibit Description10.1.1
    
    Stockholders Agreement dated February 7, 2000 among Knology, Inc., Certain holders of the Series A preferred
stock, the holders of Series B Preferred stock, certain management holders and certain additional stockholders
(Incorporated herein by reference to Exhibit 10.84 to Knology, Inc.s Post-Effective Amendment No. 2 to Form
S-1 (File No. 333-89179)).10.1.2
    
    Amendment No. 1 to Stockholders Agreement, dated as of February 7, 2000, by and among Knology, Inc. and the
other signatories thereto, dated as of January 12, 2001, by and among Knology, Inc. and the other signatories
thereto (Incorporated herein by reference to Exhibit 10.2 to Knology, Inc.s Current Report on Form 8-K filed
January 26, 2001 (File No. 000-32647)).10.1.3
    
    Amendment No. 2 to Stockholders Agreement, dated as of February 7, 2000, by and among Knology, Inc. and the
other signatories thereto, as amended as of January 12, 2001, dated as of October 18, 2002, by and among
Knology, Inc. and the other signatories thereto (Incorporated herein by reference to Exhibit 10.1.3 to
Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).10.2
    
    Lease, dated June 1, 2003 by and between D. L. Jordan, L.L.P. Family Partnership and Knology, Inc.
(Incorporated herein by reference from Exhibit 10.62 to Knology, Inc.s Annual Report on Form 10-K for the
year ended December 31, 2003 (File No. 000-32647)).10.3
    
    Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power Company and Beach Cable, Inc.
(Incorporated herein by reference to Exhibit 10.7 to Knology Broadband, Inc.s Registration Statement on Form
S-4 (File No. 333-43339)).10.4
    
    Telecommunications Facility Lease and Capacity Agreement, dated September 10, 1996, by and between Troup EMC
Communications, Inc. and Cybernet Holding, Inc. (Incorporated herein by reference to Exhibit 10.16 to Knology
Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).10.5
    
    Master Pole Attachment agreement dated January 12, 1998 by and between South Carolina Electric and Gas and
Knology Holdings, Inc. d/b/a/ Knology of Charleston (Incorporated herein by reference to Exhibit 10.17 to
Knology Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).10.6
    
    Lease Agreement, dated December 5, 1997 by and between The Hilton Company and Knology of Panama City, Inc.
(Incorporated herein by reference to Exhibit 10.25 to Knology Broadband, Inc.s Registration Statement on Form
S-4 (File No. 333-43339))10.7
    
    Certificate of Membership with National Cable Television Cooperative, dated January 29, 1996, of Cybernet
Holding, Inc. (Incorporated herein by reference to Exhibit 10.34 to Knology Broadband, Inc.s Registration
Statement on Form S-4 (File No. 333-43339)).10.8
    
    Ordinance No. 99-16 effective March 16, 1999 between Columbus consolidated Government and Knology of Columbus
Inc. (Incorporated herein by reference to Exhibit 10.18 to Knology Broadband, Inc.s Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 333-43339)).10.9
    
    Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990 (Incorporated herein by reference to Exhibit
10.44 to Knology Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).10.10
    
    Ordinance No. 50-76 (Montgomery, Alabama) (Incorporated herein by reference to Exhibit 10.45 to Knology
Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).
 47




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Exhibit No.
    
    Exhibit Description10.11
    
    Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990 (Incorporated herein by reference to Exhibit
10.45.1 to Knology Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).10.12
    
    Resolution No. 58-95 (Montgomery, Alabama) dated April 6, 1995 (Incorporated herein by reference to Exhibit
10.46 to Knology Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).10.13
    
    Resolution No. 97-22 (Panama City Beach, Florida) dated December 3, 1997 (Incorporated herein by reference to
Exhibit 10.49 to Knology Broadband, Inc.s Registration Statement on Form S-4 (File No. 333-43339)).10.14
    
    Ordinance No. 5999 (Augusta, Georgia) dated January 20, 1998 (Incorporated herein by reference to Exhibit
10.53 to Knology Broadband, Inc.s Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
333-43339)).10.15
    
    Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998 (Incorporated herein by reference to Exhibit
10.54 to Knology Broadband, Inc.s Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
333-43339)).10.16
    
    Franchise Agreement (Charleston County, South Carolina) dated December 15, 1998 (Incorporated herein by
reference to Exhibit 10.31 to Knology Broadband, Inc.s Annual Report on Form 10-K for the year ended December
31, 1998 (File No. 333-43339)).10.17
    
    Ordinance No. 1998-47 (North Charleston, South Carolina) dated May 28, 1998 (Incorporated herein by reference
to Exhibit 10.32 to Knology Broadband, Inc.s Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 333-43339)).10.18
    
    Ordinance No. 1998-77 (Charleston, South Carolina) dated April 28, 1998 (Incorporated herein by reference to
Exhibit 10.33 to Knology Broadband, Inc.s Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 333-43339)).10.19
    
    Ordinance No. 98-5 (Columbia County, Georgia) dated August 18, 1998 (Incorporated herein by reference to
Exhibit 10.34 to Knology Broadband Inc.s Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 333-43339)).10.20
    
    Network Access Agreement dated July 1, 1998 between SCANA Communications, Inc., f/k/a MPX Systems, Inc. and
Knology Holdings, Inc. (Incorporated herein by reference to Exhibit 10.36 to Knology Broadband, Inc.s Annual
Report on Form 10-K for the year ended December 31, 1998 (File No. 333-43339)).10.21
    *
    Master Agreement for Internet Access Services dated January 2, 2002, by and between ITC/\DeltaCom, Inc. and
Knology, Inc. (Incorporated herein by reference to Exhibit 10.21 to Knology, Inc.s Annual Report on Form 10-K
for the year ended December 31, 2001 (File No. 000-32647)).10.22
    *
    Collocation Agreement for Multiple Sites dated on or about June 1998 between Interstate FiberNet, Inc. and
Knology Holdings, Inc. (Incorporated herein by reference to Exhibit 10.38 to Knology Broadband, Inc.s Annual
Report on Form 10-K for the year ended December 31, 1998 (File No. 333-43339)).10.23
    *
    Lease Agreement dated October 12, 1998 between Southern Company Services, Inc. and Knology Holdings, Inc.
(Incorporated herein by reference to Exhibit 10.39 to Knology Broadband, Inc.s Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 333-43339)).
 48




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##### Table of Contents



Exhibit No.
    
    Exhibit Description10.24
    
    Facilities Transfer Agreement dated February 11, 1998 between South Carolina Electric and Gas Company and
Knology Holdings, Inc., d/b/a Knology of Charleston (Incorporated herein by reference to Exhibit 10.40 to
Knology Broadband, Inc.s Annual Report on Form 10-K for the year ended December 31, 1998 (File No.
333-43339)).10.25
    
    License Agreement dated March 3, 1998 between BellSouth Telecommunications, Inc. and Knology Holdings, Inc.
(Incorporated herein by reference to Exhibit 10.41 to Knology Broadband, Inc.s Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 333-43339)).10.26
    
    Pole Attachment Agreement dated February 18, 1998 between Knology Holdings, Inc. and Georgia Power Company
(Incorporated herein by reference to Exhibit 10.44 to Knology Broadband, Inc.s Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 333-43339)).10.27
    
    Assignment Agreement dated March 4, 1998 between Gulf Power Company and Knology of Panama City, Inc.
(Incorporated herein by reference to Exhibit 10.46 to Knology Broadband, Inc.s Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 333-43339)).10.28
    
    Registration Rights Agreement, dated November 6, 2002, by and between Knology, Inc. and SCANA Communications
Holdings, Inc. (Incorporated herein by reference to Exhibit 10.53 to Knology, Inc.s Annual Report on Form
10-K for the year ended December 31, 2002 (File No. 000-32647)).10.29
    
    Carrier Services Agreement dated July 16, 2001, between Business Telecom, Inc. and Knology, Inc. (Incorporated
herein by reference to Exhibit 10.2 to Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 000-32647)).10.30
    *
    Reseller Services Agreement dated September 9, 1998 between Business Telecom, Inc. and Knology Holdings, Inc.
(Incorporated herein by reference to Exhibit 10.51 to Knology Broadband, Inc.s Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 333-43339)).10.31
    *
    Private Line Services Agreement dated September 10, 1998 between BTI Communications Corporation and Knology
Holdings, Inc. (Incorporated herein by reference to Exhibit 10.52 to Knology Broadband, Inc.s Annual Report
on Form 10-K for the year ended December 31, 1998 (File No. 333-43339)).10.32.1
    
    Amended and Restated Credit Agreement, between certain subsidiaries of Knology Broadband, Inc. and Wachovia
Bank, National Association, dated October 22, 2002 (Incorporated herein by reference to Exhibit 10.32.1 to
Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).10.32.2
    
    Note Payable to Wachovia, dated October 22, 2002 (Incorporated herein by reference to Exhibit 10.32.2 to
Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).10.32.3
    
    Reaffirmation Agreement, dated October 22, 2002. (Incorporated herein by reference to Exhibit 10.32.3 to
Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).10.32.4
    
    Collateral Agreement, dated October 22, 2002. (Incorporated herein by reference to Exhibit 10.32.4 to Knology,
Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).10.32.5
    
    First Amendment, dated as of September 10, 2004, by and among Knology Broadband, Inc., certain subsidiaries of
Knology Broadband, Inc. identified on the signature pages thereto, the Lenders referred to in the Amended and
Restated Credit Agreement, dated as of October 22, 2002 and effective as of November 6, 2002, and Wachovia
Bank, National Association, as administrative agent for the Lenders (Incorporated herein by reference
 49




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Exhibit No.
    
    Exhibit Descriptionto
Exhibit 10.1 to Knology, Inc.s Current Report on Form 8-K filed on September 15, 2004 (File No. 000-32647)).10.34
    
    Right of First Refusal and Option Agreement, Dated November 19, 1999 by and between Knology of Columbus, Inc.
and ITC Service Company, Inc. (Incorporated herein by reference to Exhibit 10.60 to Knology, Inc.s
Registration Statement on Form S-1 (File No. 333-89179)).10.35
    
    Services Agreement dated November 2, 1999 between Knology, Inc. and ITC Service Company, Inc. (Incorporated
herein by reference to Exhibit 10.61 to Knology, Inc.s Registration Statement on Form S-1 (File No.
333-89179)).10.36
    
    Support Agreement, dated November 2, 1999 between Interstate Telephone Company, Inc. and ITC Service Company,
Inc. (Incorporated herein by reference to Exhibit 10.62 to Knology, Inc.s Registration Statement on Form S-1
(File No. 333-89179)).10.37
    **
    Knology, Inc. Amended and Restated 2002 Long Term Incentive Plan (Incorporated by reference to Exhibit B to
Knology, Inc.s Proxy Statement for the 2004 Annual Meeting of Shareholders (File No. 000-32647)).10.38
    
    Warrant Agreement, dated as of December 3, 1999, between Knology, Inc. and United States Trust Company of New
York (including form of Warrant Certificate) (Incorporated herein by reference to Exhibit 10.65 to Knology,
Inc.s Registration Statement on Form S-1 (File No. 333-89179)).10.39
    
    Warrant Registration Rights Agreement, dated as of December 3, 1999, between Knology, Inc. and United States
Trust Company of New York (Incorporated herein by reference to Exhibit 10.66 to Knology, Inc.s Registration
Statement on Form S-1 (File No. 333-89179)).10.40
    
    Knology, Inc. Spin-Off Plan (Incorporated herein by reference to Exhibit 10.71 to Knology, Inc.s Registration
Statement on Form S-1 (File No. 333-89179)).10.41
    
    Residual Note from Knology, Inc. to ITC Holding Company, Inc. (Incorporated herein by reference to Exhibit
10.74 to Knology, Inc.s Registration Statement on Form S-1 (File No. 333-89179)).10.42
    
    Joint Ownership Agreement dated as of December 8, 1998, among ITC Service Company, Powertel, Inc.,
ITC/\DeltaCom Communications, Inc. and Knology Holdings, Inc. (Incorporated herein by reference to Exhibit
10.48 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 1999 (File No.
000-32647)).10.43
    *
    On/Line Operating and License Agreement dated March 18, 1998 between Knology Holdings, Inc. and CableData,
Inc. (Incorporated herein by reference to Exhibit 10.49 to Knology, Inc.s Annual Report on Form 10-K for the
year ended December 31, 1999 (File No. 000-32647)).10.44
    *
    Dedicated Capacity Agreement between DeltaCom and Knology Holdings, Inc. dated August 22, 1997. (Incorporated
herein by reference to Exhibit 10.50 to Knology, Inc.s Annual Report on Form 10-K for the year ended December
31, 1999 (File No. 000-32647)).10.45
    *
    Agreement for Telecommunications Services dated April 28, 1999 between ITC/\DeltaCom Communications, Inc. and
Knology Holdings, Inc. (Incorporated herein by reference to Exhibit 10.51 to Knology, Inc.s Annual Report on
Form 10-K for the year ended December 31, 1999 (File No. 000-32647)).10.46
    *
    Amendment to Master Capacity Lease dated November 1, 1999 between Interstate Fibernet, Inc. and Knology
Holdings, Inc. (Incorporated herein by reference to Exhibit 10.52 to Knology, Inc.s Annual Report on Form
10-
 50




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##### Table of Contents



Exhibit No.
    
    Exhibit DescriptionK for the year ended December 31, 1999 (File No. 000-32647)).10.47
    
    Duct Sharing Agreement dated July 27, 1999 between Knology Holdings, Inc. and Interstate Fiber Network.
(Incorporated herein by reference to Exhibit 10.53 to Knology, Inc.s Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 000-32647)).10.48
    
    Assumption of Lease Agreement dated November 9, 1999 between Knology Holdings, Inc. ITC Holding Company, Inc.
and J. Smith Lanier II. (Incorporated herein by reference to Exhibit 10.54 to Knology, Inc.s Annual Report on
Form 10-K for the year ended December 31, 1999 (File No. 000-32647)).10.49
    
    Assumption of Lease Agreement dated November 9, 1999 among Knology Holdings, Inc. ITC Holding Company, Inc.
and Midtown Realty, Inc. (Incorporated herein by reference to Exhibit 10.55 to Knology, Inc.s Annual Report
on Form 10-K for the year ended December 31, 1999 (File No. 000-32647)).10.50
    *
    Contract for Centrex Switching Services dated January 4, 1999 between Interstate Telephone Company and
InterCall, Inc. (Incorporated herein by reference to Exhibit 10.56 to Knology, Inc.s Annual Report on Form
10-K for the year ended December 31, 1999 (File No. 000-32647)).10.51.1
    
    Master Loan Agreement, dated as of June 29, 2001, by and between CoBank, ACB and Globe Telecommunications,
Inc., Interstate Telephone Company and Valley Telephone Co., Inc. (Incorporated herein by reference to Exhibit
10.1 to Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No.
000-32647)).10.51.2
    
    First Supplement to the Master Loan Agreement, dated as of June 29, 2001, by and between CoBank, ACB and Globe
Telecommunications, Inc., Interstate Telephone Company and Valley Telephone Co., Inc. (Incorporated herein by
reference to Exhibit 10.1.1 to Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended September
30, 2001 (File No. 000-32647)).10.51.3
    
    Promissory Note, dated June 29, 2001, made by Globe Telecommunications, Inc., Interstate Telephone Company and
Valley Telephone Co., Inc. in favor of CoBank, ACB (Incorporated herein by reference to Exhibit 10.1.2 to
Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 000-32647)).10.51.4
    
    Stock Pledge Agreement, dated as of June 29, 2001, by and between Globe Telecommunications, Inc. and CoBank,
ACB (Incorporated herein by reference to Exhibit 10.1.3 to Knology, Inc.s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001 (File No. 000-32647)).10.51.5
    
    Security Agreement, dated as of June 29, 2001, made by Globe Telecommunications, Inc., Interstate Telephone
Company and Valley Telephone Co., Inc. in favor of CoBank, ACB (Incorporated herein by reference to Exhibit
10.1.4 to Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No.
000-32647)).10.51.6
    
    Security Agreement, dated as of June 29, 2001, made by ITC Globe, Inc. in favor of CoBank, ACB (Incorporated
herein by reference to Exhibit 10.1.5 to Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 000-32647)).10.51.7
    
    Continuing Guaranty, dated as of June 29, 2001 by ITC Globe, Inc. for the benefit of CoBank, ACB (Incorporated
herein by reference to Exhibit 10.1.6 to Knology, Inc.s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 000-32647)).10.51.8
    
    Stock Pledge Agreement, dated as of June 29, 2001, by and between Knology, Inc. and CoBank, ACB (Incorporated
herein by reference to Exhibit 10.1.7 to Knology, Inc.s Quarterly Report on Form 10-Q for the
 51




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##### Table of Contents



Exhibit No.
    
    Exhibit Descriptionquarter ended September 30, 2001 (File No. 000-32647)).10.51.9
    
    Letter from CoBank to Globe Telecommunications, Inc., Interstate Telephone Co. and Valley regarding Consent,
Waiver and Amendments to Master Loan Agreement, dated June 6, 2002 (Incorporated herein by reference to
Exhibit 10.52.9 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
000-32647)).10.51.10
    
    Letter from CoBank to Globe Telecommunications, Inc., Interstate Telephone Co. and Valley regarding Amendments
to Master Loan Agreement, dated July 3, 2002 (Incorporated herein by reference to Exhibit 10.52.9 to Knology,
Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-32647)).10.51.11
    
    Amended and Restated First Supplement to Master Loan Agreement, dated June 6, 2002 (Incorporated herein by
reference to Exhibit 10.52.11 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31,
2002 (File No. 000-32647)).10.51.12
    
    Continuing Guaranty by Knology of Knoxville, Inc., dated November 6, 2002 (Incorporated herein by reference to
Exhibit 10.52.12 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
000-32647)).10.51.13
    
    Security Agreement by Knology of Knoxville, Inc., dated November 6, 2002 (Incorporated herein by reference to
Exhibit 10.52.13 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
000-32647)).10.51.14
    
    Continuing Guaranty by Knology, Inc., dated November 6, 2002 (Incorporated herein by reference to Exhibit
10.52.14 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
000-32647)).10.51.15
    
    First Amendment, dated as of September 10, 2004, by and among Knology Broadband, Inc., certain subsidiaries of
Knology Broadband, Inc. identified on the signature pages thereto, the Lenders referred to in the Amended and
Restated Credit Agreement, dated as of October 22, 2002 and effective as of November 6, 2002, and Wachovia
Bank, National Association, as administrative agent for the Lenders (Incorporated herein by reference to
Exhibit 10.1 to Knology, Inc.s Current Report on Form 8-K filed on September 15, 2004 (File No. 000-32647)).10.51.16
    
    First Amendment to Master Loan Agreement and Amended and Restated First Supplement, dated as of September 10,
2004, by and among CoBank, ACB and Globe Telecommunications, Inc., Interstate Telephone Company and Valley
Telephone LLC (Incorporated herein by reference to Exhibit 10.2 to Knology, Inc.s Current Report on Form 8-K
filed on September 15, 2004 (File No. 000-32647)).10.51.17
    
    Continuing Guaranty made as of September 10, 2004, by Knology Broadband, Inc. for the benefit of the CoBank,
ACB (Incorporated herein by reference to Exhibit 10.3 to Knology, Inc.s Current Report on Form 8-K filed on
September 15, 2004 (File No. 000-32647)).10.52.1
    
    $6,700,000 Purchase Money Financing Line of Credit Promissory Note, dated December 1, 2003, made by Knology
Broadband of California, Inc. in favor of Campbell B. Lanier, III, as also executed by Knology, Inc. with
respect to the potential issuance of the stock of Knology, Inc. upon conversion of the note (Incorporated
herein by reference to Exhibit 10.53.1 to Knology, Inc.s Registration Statement on Form S-2 (File No.
333-109366)).10.52.2
    
    Purchase-Money Security Agreement, dated December 1, 2003, made by Knology Broadband of California, Inc. in
favor of Campbell B. Lanier, III (Incorporated herein by reference to Exhibit 10.53.2 to Knology, Inc.s
Registration Statement on Form S-2 (File No. 333-109366)).
 52




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##### Table of Contents



Exhibit No.
    
    Exhibit Description10.52.3
    
    Cancellation of $5,000,000 Promissory Note and Security Agreement, dated December 1, 2003, by and among
Knology New Media, Inc., SCANA Communications Holdings, Inc. and Campbell B. Lanier, III (Incorporated herein
by reference to Exhibit 10.53.3 to Knology, Inc.s Registration Statement on Form S-2 (File No. 333-109366)).10.53
    
    Sublease Agreement, dated as of December 30, 2003, by and between Verizon Media Ventures, Inc. and Knology
Broadband of Florida, Inc. (Incorporated herein by reference from Exhibit 10.53 to Knology, Inc.s Annual
Report on Form 10-K for the year ended December 31, 2003 (File No. 000-32647)).10.54
    
    Lease, dated April 10, 2003, by and between CalWest Industrial Properties, LLC and Verizon Media Ventures
Inc., as assigned to Knology Broadband of California, Inc. on December 1, 2003 (Incorporated herein by
reference from Exhibit 10.54 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31,
2003 (File No. 000-32647)).10.55
    
    City of Cerritos Resolution No. 2003-24, dated October 23, 2003, Approving the Transfer of the Cable
Television Franchise from Verizon Media Ventures Inc. to Knology Broadband of California, Inc. (Incorporated
herein by reference from Exhibit 10.55 to Knology, Inc.s Annual Report on Form 10-K for the year ended
December 31, 2003 (File No. 000-32647)).10.56
    
    Transfer Agreement, dated January 7, 2004, by and between Pinellas County, Florida, Verizon Media Ventures
Inc., Knology Broadband of Florida, Inc. and Knology New Media, Inc. (Incorporated herein by reference from
Exhibit 10.56 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2003 (File No.
000-32647)).10.57
    
    City of St. Petersburg Ordinance No. 643-G, dated November 20, 2003, Approving an Extension of the Knology
Broadband of Florida, Inc. Cable Television Franchise from September 9, 2006 to September 9, 2009
(Incorporated herein by reference from Exhibit 10.57 to Knology, Inc.s Annual Report on Form 10-K for the
year ended December 31, 2003 (File No. 000-32647)).10.58
    
    Transfer Agreement, dated December 16, 2003, by and between the City of Clearwater and Verizon Media Ventures
Inc., Knology, Inc., Knology Broadband of Florida, Inc. and Knology New Media, Inc. (Incorporated herein by
reference from Exhibit 10.58 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31,
2003 (File No. 000-32647)).10.59
    
    MCI Internet Dedicated OC12 Burstable Agreement, dated June 11, 2003, by and between Knology, Inc. and MCI
WORLDCOM Communications, Inc. (Incorporated herein by reference from Exhibit 10.59 to Knology, Inc.s Annual
Report on Form 10-K for the year ended December 31, 2003 (File No. 000-32647)).10.60
    
    Consent to Assignment and Assumption, dated December 17, 2003, among Verizon Media Ventures Inc., Progress
Energy Florida, Inc. and Knology Broadband of Florida, Inc. (Incorporated herein by reference from Exhibit
10.60 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2003 (File No.
000-32647)).10.61
    
    Lease, dated March 5, 2004, by and between Ted Alford and Knology, Inc. (Incorporated herein by reference from
Exhibit 10.61 to Knology, Inc.s Annual Report on Form 10-K for the year ended December 31, 2003 (File No.
000-32647)).10.62
    **
    Form of Stock Option Agreement.21.1
    
    Subsidiaries of Knology, Inc.23.1
    
    Consent of Deloitte & Touche LLP.
 53




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##### Table of Contents



Exhibit No.
    
    Exhibit Description31.1
    
    Certification of the Chief Executive Officer of Knology, Inc. pursuant to Securities Exchange Act Rule 13a-14.31.2
    
    Certification of the Chief Financial Officer of Knology, Inc. pursuant to Securities Exchange Act Rule 13a-14.32.1
    
    Statement of the Chief Executive Officer of Knology, Inc. pursuant to §18 U.S.C. S. 1350.32.2
    
    Statement of the Chief Financial Officer of Knology, Inc. pursuant to §18 U.S.C. S. 1350.
   *
    
    Confidential treatment has been requested pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended. The copy on file as an exhibit omits the information subject to the
confidentiality request. Such omitted information has been filed separately with the
Commission.**
    
    Compensatory plan or arrangement. (b) REPORTS ON FORM 8-K. On October 27, 2004, Knology furnished a current report on Form 8-K, under item 12, announcing
its 2004 third quarter results. On November 3, 2004, Knology furnished a current report on Form 8-K, under item 9, providing
the transcripts from its third quarter earnings conference call held on October 28, 2004. (c) EXHIBITS We hereby file as part of this Form 10-K the Exhibits listed in the Index to Exhibits. (d) FINANCIAL STATEMENT SCHEDULE Financial statement schedules required to be included in this report are either shown in the
financial statements and notes thereto, included in Item 8 of this report, or have been omitted
because they are not applicable. 54




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##### Table of Contents



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

/s/
Rodger L. JohnsonRodger L. JohnsonPresident and Chief Executive Officer March 31, 2005(Date)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated and on
the dates indicated. SIGNATURE
    
    TITLE
    
    DATE/s/ Campbell B. Lanier, III
    
    Chairman of the Board and Director
    
    March 31, 2005Campbell B. Lanier, III/s/ Rodger L. Johnson
    
    President, Chief Executive Officer
    
    March 31, 2005Rodger L. Johnson
    
    and Director (Principal executive officer)/s/ Robert K. Mills
    
    Chief Financial Officer, Vice President
    
    March 31, 2005Robert K. Mills
    
    and Treasurer (Principal financial officer)/s/ M. Todd Holt
    
    Vice President and Corporate Controller
    
    March 31, 2005M. Todd Holt
    
    (Principal accounting officer)/s/ Richard S. Bodman
    
    Director
    
    March 31, 2005Richard S. Bodman/s/ Alan A. Burgess
    
    Director
    
    March 31, 2005Alan A. BurgessDirector
    
    March     , 2005Donald W. Burton/s/ Eugene I. Davis
    
    Director
    
    March 31, 2005Eugene I. Davis/s/ O. Gene Gabbard
    
    Director
    
    March 31, 2005O. Gene Gabbard/s/ William Laverack, Jr.
    
    Director
    
    March 31, 2005William Laverack, Jr./s/ William H. Scott III
    
    Director
    
    March 31, 2005William H. Scott III
 55




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##### Table of Contents



Index to Consolidated Financial Statements Knology, Inc.Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance SheetsDecember 31, 2003 and 2004
    
    
    F-3Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003, and 2004
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Loss for the Years Ended December 31, 2002, 2003, and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003, and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Knology, Inc.: We have audited the accompanying consolidated balance sheets of Knology, Inc. (a Delaware
corporation) and subsidiaries (the Company) as of December 31, 2004 and 2003 and the related
consolidated statements of operations, stockholders equity and comprehensive loss, and cash flows
for each of the three years in the period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America. Deloitte & Touche LLP Atlanta, GA March 28, 2005 F-2




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##### Table of Contents



KNOLOGY, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 31,2003
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents (Note 2)
    
    $
    20,575
    
    
    $
    6,082Restricted cash (Note 2)
    
    
    2,760
    
    
    
    7,365Short term investments (Note 2)
    
    
    40,000
    
    
    
    12,625Accounts receivable, net of allowance for doubtful accounts of
$1,449 and $724 as of December 31, 2003 and 2004, respectively
    
    
    19,284
    
    
    
    18,924Prepaid expenses
    
    
    1,818
    
    
    
    2,735Assets of business held for sale (Note 11)
    
    
    0
    
    
    
    887Total current assets
    
    
    84,437
    
    
    
    48,618PROPERTY, PLANT AND EQUIPMENT:System and installation equipment
    
    
    557,088
    
    
    
    602,731Test and office equipment
    
    
    52,326
    
    
    
    59,369Automobiles and trucks
    
    
    9,620
    
    
    
    9,766Production equipment
    
    
    724
    
    
    
    781Land
    
    
    3,738
    
    
    
    4,006Buildings
    
    
    17,377
    
    
    
    17,332Construction and premise inventory
    
    
    12,780
    
    
    
    15,694Leasehold improvements
    
    
    1,768
    
    
    
    2,565655,421
    
    
    
    712,244Less accumulated depreciation and amortization
    
    
    (319,361
    )
    
    
    (385,745
    )Property, plant, and equipment, net
    
    
    336,060
    
    
    
    326,499OTHER LONG-TERM ASSETS:Goodwill and intangible assets
    
    
    41,150
    
    
    
    41,142Deferred issuance costs
    
    
    365
    
    
    
    634Investments
    
    
    1,243
    
    
    
    1,243Other
    
    
    457
    
    
    
    451Total assets
    
    $
    463,712
    
    
    $
    418,587LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of notes payable
    
    $
    5,213
    
    
    $
    179Accounts payable
    
    
    15,520
    
    
    
    20,428Accrued liabilities
    
    
    9,136
    
    
    
    12,199Unearned revenue
    
    
    11,633
    
    
    
    11,841Liabilities of business held for sale (Note 11)
    
    
    0
    
    
    
    770Total current liabilities
    
    
    41,502
    
    
    
    45,417NONCURRENT LIABILITIES:Notes payable
    
    
    45,309
    
    
    
    49,438Unamortized investment tax credits
    
    
    39
    
    
    
    13Senior unsecured notes, net of discount
    
    
    225,037
    
    
    
    237,096Warrants (Note 4)
    
    
    932
    
    
    
    354Total noncurrent liabilities
    
    
    271,317
    
    
    
    286,901Total liabilities
    
    
    312,819
    
    
    
    332,318COMMITMENTS AND CONTINGENCIES (NOTE 6)STOCKHOLDERS EQUITY:Preferred stock, $.01 par value per share;199,000,000 shares authorized, 0 and 0 shares
issued and outstanding at December 31, 2003 and 2004, respectively
    
    
    0
    
    
    
    0Common stock, $.01 par value per share; 200,000,000 shares
authorized, 20,605,430 and 23,697,787 shares issued and outstanding
at December 31, 2003 and 2004, respectively
    
    
    207
    
    
    
    237Non-voting common stock, $.01 par value per share; 25,000,000 shares
authorized, 2,170,127 and 0 shares issued and outstanding
at December 31, 2003 and 2004, respectively
    
    
    21
    
    
    
    0Additional paid-in capital
    
    
    548,518
    
    
    
    559,451Other Comprehensive Income
    
    
    3
    
    
    
    1Accumulated deficit
    
    
    (397,856
    )
    
    
    (473,420
    )Total stockholders equity
    
    
    150,893
    
    
    
    86,269Total liabilities and stockholders equity
    
    $
    463,712
    
    
    $
    418,587
 See notes to consolidated financial statements. F-3




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KNOLOGY, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEAR ENDED DECEMBER 31,2002
    
    
    2003
    
    
    2004OPERATING REVENUES:Video
    
    $
    60,752
    
    
    $
    71,879
    
    
    $
    97,590Voice
    
    
    58,742
    
    
    
    70,117
    
    
    
    72,438Data services and other
    
    
    22,372
    
    
    
    30,942
    
    
    
    41,430Total operating revenues
    
    
    141,866
    
    
    
    172,938
    
    
    
    211,458OPERATING EXPENSES:Costs of services (excluding depreciation and amortization)
    
    
    41,007
    
    
    
    46,525
    
    
    
    60,829Selling, general and administrative expenses
    
    
    79,837
    
    
    
    93,366
    
    
    
    117,580Depreciation and amortization
    
    
    80,533
    
    
    
    77,806
    
    
    
    74,163Gain on reorganization (Note 4)
    
    
    (109,804
    )
    
    
    0
    
    
    
    0Reorganization professional fees
    
    
    3,842
    
    
    
    84
    
    
    
    0Capital markets activity
    
    
    0
    
    
    
    0
    
    
    
    880Asset impairment (Note 2)
    
    
    9,946
    
    
    
    0
    
    
    
    0Non-cash stock option compensation
    
    
    3,266
    
    
    
    1,883
    
    
    
    3,625Litigation fees (Note 6)
    
    
    1,244
    
    
    
    907
    
    
    
    377Total operating expenses
    
    
    109,871
    
    
    
    220,571
    
    
    
    257,454OPERATING INCOME (LOSS)
    
    
    31,995
    
    
    
    (47,633
    )
    
    
    (45,996
    )OTHER INCOME (EXPENSE):Interest income
    
    
    395
    
    
    
    379
    
    
    
    720Interest expense (contractual interest of $41,619 for the
twelve months ended December 31, 2002)
    
    
    (36,266
    )
    
    
    (29,175
    )
    
    
    (31,062
    )Gain on adjustment of warrants to market
    
    
    2,865
    
    
    
    929
    
    
    
    535Other (expense) income, net
    
    
    (321
    )
    
    
    (12,288
    )
    
    
    133Total other expense
    
    
    (33,327
    )
    
    
    (40,155
    )
    
    
    (29,674
    )LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF CHANGE IN
IN ACCOUNTING PRINCIPLE
    
    
    (1,332
    )
    
    
    (87,788
    )
    
    
    (75,670
    )INCOME FROM DISCONTINUED OPERATIONS (NOTE 11)
    
    
    0
    
    
    
    0
    
    
    
    106LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
    
    
    (1,332
    )
    
    
    (87,788
    )
    
    
    (75,564
    )CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    (1,294
    )
    
    
    0
    
    
    
    0NET LOSS
    
    $
    (2,626
    )
    
    $
    (87,788
    )
    
    $
    (75,564
    )BASIC AND DILUTED NET LOSS PER SHARE
    
    $
    (52.20
    )
    
    $
    (5.17
    )
    
    $
    (3.19
    )BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
    
    
    50,304
    
    
    
    16,995,092
    
    
    
    23,655,733
 See notes to consolidated financial statements. F-4




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##### Table of Contents



KNOLOGY, INC. AND
SUBSIDIARIES 
 CONSOLIDATED STATEMENTS
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS (DOLLARS IN THOUSANDS) SERIES A
    
    
    SERIES B
    
    
    SERIES C
    
    
    SERIES D
    
    
    SERIES EPREFERRED STOCK
    
    
    PREFERRED STOCK
    
    
    PREFERRED STOCK
    
    
    PREFERRED STOCK
    
    
    PREFERRED STOCKSHARES
    
    
    AMOUNT
    
    
    SHARES
    
    
    AMOUNT
    
    
    SHARES
    
    
    AMOUNT
    
    
    SHARES
    
    
    AMOUNT
    
    
    SHARES
    
    
    AMOUNTBALANCE, December 31, 2001
    
    
    50,990,888
    
    
    $
    510
    
    
    
    21,180,131
    
    
    $
    212
    
    
    
    37,219,562
    
    
    $
    372
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0Comprehensive Loss:Net loss attributable to common
stockholdersComprehensive LossExercise of stock options
    
    
    49,569
    
    
    
    0Private Placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000,000
    
    
    
    130Non-cash stock option compensationReorganization, net of fees of $3,842 (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,684,751
    
    
    
    107
    
    
    
    21,701,279
    
    
    
    217BALANCE, December 31, 2002
    
    
    51,040,457
    
    
    $
    510
    
    
    
    21,180,131
    
    
    $
    212
    
    
    
    50,219,562
    
    
    $
    502
    
    
    
    10,684,751
    
    
    $
    107
    
    
    
    21,701,279
    
    
    $
    217Comprehensive Loss:Net loss attributable to common
stockholdersComprehensive LossExercise of stock options
    
    
    209,404
    
    
    
    2Unrealized gainNon-cash stock option compensationReorganization fees (Note 8)Initial public offering of common stock
    
    
    (51,249,861
    )
    
    
    (512
    )
    
    
    (21,180,131
    )
    
    
    (212
    )
    
    
    (50,219,562
    )
    
    
    (502
    )
    
    
    (10,684,751
    )
    
    
    (107
    )
    
    
    (21,701,279
    )
    
    
    (217
    )BALANCE, December 31, 2003
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0Comprehensive Loss:Net loss attributable to common
stockholdersComprehensive LossExercise of stock optionsUnrealized lossNon-cash stock option compensationInitial public offering of common stockExercise of warrantsConversion of non-voting stockBALANCE, December 31, 2004
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    0
 See notes to consolidated financial statements. F-5




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##### Table of Contents



ACCUMULATEDCOMMON STOCK
    
    
    COMMON STOCK
    
    
    ADDITIONAL
    
    
    
    
    
    
    OTHER
    
    
    TOTALSHARES
    
    
    SHARES
    
    
    PAID-IN
    
    
    ACCUMULATED
    
    
    COMPREHENSIVE
    
    
    STOCKHOLDERSSHARES
    
    
    AMOUNT
    
    
    SHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    DEFICIT
    
    
    INCOME (LOSS)
    
    
    EQUITYBALANCE, December 31, 2001
    
    
    502,194
    
    
    $
    5
    
    
    
    0
    
    
    $
    0
    
    
    $
    394,741
    
    
    $
    (307,442
    )
    
    ($
    0
    )
    
    $
    88,398Comprehensive Loss:Net loss attributable to common
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,626
    )
    
    
    
    
    
    
    (2,626
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,626
    )Exercise of stock options
    
    
    1,003
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Private Placement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,870
    
    
    
    
    
    
    
    
    
    
    
    39,000Non-cash stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,266
    
    
    
    
    
    
    
    
    
    
    
    3,266Reorganization, net of fees of $3,842 (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,167
    
    
    
    
    
    
    
    
    
    
    
    56,491BALANCE, December 31, 2002
    
    
    503,197
    
    
    $
    5
    
    
    
    0
    
    
    $
    0
    
    
    $
    493,046
    
    
    ($
    310,068
    )
    
    ($
    0
    )
    
    $
    184,531Comprehensive Loss:Net loss attributable to common
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,788
    )
    
    
    
    
    
    
    (87,788
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,788
    )Exercise of stock options
    
    
    9,356
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    18Unrealized gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Non-cash stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,883
    
    
    
    
    
    
    
    
    
    
    
    1,883Reorganization fees (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )Initial public offering of common stock
    
    
    20,092,877
    
    
    
    201
    
    
    
    2,170,127
    
    
    
    21
    
    
    
    53,624
    
    
    
    
    
    
    
    
    
    
    
    52,296BALANCE, December 31, 2003
    
    
    20,605,430
    
    
    $
    207
    
    
    
    2,170,127
    
    
    $
    21
    
    
    $
    548,518
    
    
    $
    (397,856
    )
    
    $
    3
    
    
    $
    150,893Comprehensive Loss:Net loss attributable to common
stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,564
    )
    
    
    
    
    
    
    (75,564
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,564
    )Exercise of stock options
    
    
    9,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Unrealized loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Non-cash stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,625
    
    
    
    
    
    
    
    
    
    
    
    3,625Initial public offering of common stock
    
    
    900,000
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    7,264
    
    
    
    
    
    
    
    
    
    
    
    7,273Exercise of warrants
    
    
    12,454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Conversion of non-voting stock
    
    
    2,170,127
    
    
    
    21
    
    
    
    (2,170,127
    )
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0BALANCE, December 31, 2004
    
    
    23,697,787
    
    
    $
    237
    
    
    
    0
    
    
    $
    0
    
    
    $
    559,451
    
    
    $
    (473,420
    )
    
    $
    1
    
    
    $
    86,269
 F-5




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##### Table of Contents



KNOLOGY, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,2002
    
    
    2003
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,626
    )
    
    $
    (87,788
    )
    
    $
    (75,564
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    80,533
    
    
    
    77,806
    
    
    
    74,163Non-cash stock option compensation
    
    
    3,266
    
    
    
    1,883
    
    
    
    3,625Asset impairment
    
    
    9,946
    
    
    
    0
    
    
    
    0Litigation fees
    
    
    1,244
    
    
    
    0
    
    
    
    0Write off of investment
    
    
    45
    
    
    
    12,406
    
    
    
    0Accretion of discounted debt
    
    
    29,411
    
    
    
    0
    
    
    
    0Non-cash bond interest expense
    
    
    3,796
    
    
    
    26,582
    
    
    
    12,059Provision for bad debt
    
    
    3,595
    
    
    
    4,714
    
    
    
    4,479Gain on reorganization
    
    
    (109,804
    )
    
    
    0
    
    
    
    0(Gain) loss on disposition of assets
    
    
    (88
    )
    
    
    (14
    )
    
    
    32Cumulative effect of change in accounting principle
    
    
    1,294
    
    
    
    0
    
    
    
    0Gain on adjustment of warrants to market
    
    
    (2,865
    )
    
    
    (929
    )
    
    
    (535
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,964
    )
    
    
    (9,135
    )
    
    
    (4,120
    )Accounts receivableaffiliate
    
    
    465
    
    
    
    72
    
    
    
    0Prepaid expenses and other
    
    
    (30
    )
    
    
    64
    
    
    
    (895
    )Accounts payable
    
    
    (2,390
    )
    
    
    (209
    )
    
    
    4,908Accrued liabilities
    
    
    (2,142
    )
    
    
    695
    
    
    
    4,043Unearned revenue
    
    
    1,632
    
    
    
    3,365
    
    
    
    207Total adjustments
    
    
    12,944
    
    
    
    117,300
    
    
    
    97,966Net cash provided by operating activities from continuing operations
    
    
    10,318
    
    
    
    29,512
    
    
    
    22,402Net cash used in operating activities from discontinued operations
    
    
    0
    
    
    
    0
    
    
    
    (139
    )Net cash provided by operating activities
    
    
    10,318
    
    
    
    29,512
    
    
    
    22,263CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (44,446
    )
    
    
    (35,533
    )
    
    
    (63,592
    )Purchase of short term investments
    
    
    0
    
    
    
    (50,000
    )
    
    
    (210,051
    )Proceeds from sale of short term investments
    
    
    0
    
    
    
    10,000
    
    
    
    237,426Franchise and other intangible expenditures
    
    
    (1,448
    )
    
    
    (407
    )
    
    
    (288
    )Proceeds from sale of property
    
    
    1,047
    
    
    
    378
    
    
    
    169Acquisition of Verizon Media
    
    
    0
    
    
    
    (18,841
    )
    
    
    0Investment in Grande
    
    
    0
    
    
    
    (1,070
    )
    
    
    0Net cash used in investing activities
    
    
    (44,847
    )
    
    
    (95,473
    )
    
    
    (36,336
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt and short-term borrowings
    
    
    (2
    )
    
    
    (3,373
    )
    
    
    (2,719
    )Expenditures related to issuance of debt
    
    
    0
    
    
    
    0
    
    
    
    (370
    )Proceeds from private placement, net of offering expenses
    
    
    39,000
    
    
    
    0
    
    
    
    0Net proceeds from public offering
    
    
    0
    
    
    
    48,788
    
    
    
    7,273Cash pledged as security
    
    
    (990
    )
    
    
    (1,520
    )
    
    
    (4,605
    )Proceeds from long-term debt facility
    
    
    5,470
    
    
    
    0
    
    
    
    0Stock options exercised
    
    
    2
    
    
    
    18
    
    
    
    0Warrants exercised
    
    
    0
    
    
    
    0
    
    
    
    1Expenditures related to reorganization
    
    
    (4,102
    )
    
    
    (50
    )
    
    
    0Net cash provided by (used in) financing activities
    
    
    39,378
    
    
    
    43,863
    
    
    
    (420
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    4,849
    
    
    
    (22,098
    )
    
    
    (14,493
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    37,824
    
    
    
    42,673
    
    
    
    20,575CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    42,673
    
    
    $
    20,575
    
    
    $
    6,082SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for interest
    
    $
    1,550
    
    
    $
    2,589
    
    
    $
    16,664Cash paid (received) during period for income taxes
    
    $
    296
    
    
    $
    0
    
    
    $
    0Detail of investments and acquisitions:Property, plant and equipment
    
    
    0
    
    
    
    21,149
    
    
    
    0Intangible assets & other
    
    
    0
    
    
    
    1,201
    
    
    
    0Warrants issued
    
    
    0
    
    
    
    (3,509
    )
    
    
    0Net cash paid for acquisitions
    
    $
    0
    
    
    $
    18,841
    
    
    $
    0Non-cash financing activities: Debt acquired in capital lease transactions
    
    $
    0
    
    
    $
    0
    
    
    $
    1,812
 See notes to consolidated financial statements. F-6




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##### Table of Contents



Notes to Consolidated Financial Statements December 31, 2002, 2003 and 2004 (dollars in thousands, except share data) 1. Organization, Nature of Business, and Basis of Presentation Organization Knology, Inc. (Knology or the Company) is a publicly traded company incorporated under
the laws of the State of Delaware in September 1998. The purpose of incorporating the Company
was to enable ITC Holding Company, Inc. to complete a reorganization of certain of its wholly
owned and majority-owned subsidiaries on November 23, 1999 (the Reorganization). Financial Condition The Company is subject to various risks in connection with the operation of its business,
including, among other things, (1) the Companys lack of liquidity and its ability to raise
additional capital, (2) inability to satisfy debt service requirements, working capital or
other cash requirements, (3) failure to be competitive with existing and new competitors, and
(4) changes in the Companys business strategy or an inability to execute its strategy due to
unanticipated changes in the market. The Company has $3,201 of working capital, $473,419 of
accumulated deficit and $286,534 of long-term debt as of
December 31, 2004. Although management believes it can meet its
operating, debt service and capital requirements through the next
fiscal year using available cash and cash flows from operations, management is
currently evaluating transactions to improve the Companys capital structure and liquidity
position, including the sale of its Cerritos, CA assets (see Note 11) and debt and/or equity
financing transactions. However, there can be no assurance that the sale of the Cerritos
assets will occur or that debt or equity funding will be available in the future or that it
will be available on terms acceptable to the Company. Prepackaged Plan of Reorganization Under Chapter 11 Knology Broadband, Inc., or Broadband, a wholly owned subsidiary of Valley Telephone Co.,
LLC, which is a wholly owned subsidiary of Knology, on September 18, 2002 filed a bankruptcy
petition under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy
Court for the Northern District of Georgia. On that same date, Knology and Broadband filed a
prepackaged plan of reorganization of Broadband under Chapter 11. Broadband received approval from the Bankruptcy Court to pay all trade claims and employee
wages in the ordinary course of business, including pre-petition claims. On October 22, 2002, the Bankruptcy Court confirmed the prepackaged plan of reorganization of
Broadband without modification. Nature of business Knology, Broadband and their respective subsidiaries own and operate an advanced interactive
broadband network and provide residential and business customers broadband communications
services, including analog and digital cable television, local and long-distance telephone,
high-speed Internet access, and broadband carrier services to various markets in the
southeastern United States. Our telephone operations group, consisting of Interstate Telephone Company, Globe
Telecommunications, Inc., ITC Globe, Inc., and Valley Telephone Co., Inc. (our Telephone
Operations Group) is wholly owned and provides a full line of local telephone and related
services and broadband services. Certain of the Telephone Operations Group subsidiaries are
subject to regulation by state public service commissions of applicable states for intrastate
telecommunications services. For applicable interstate matters related to telephone service,
certain Telephone Operations Group subsidiaries are subject to regulation by the Federal
Communications Commission. Basis of presentation The consolidated financial statements are prepared on the accrual basis of accounting and
include the accounts of the Company and its wholly owned subsidiaries. Investments in which
the Company does not exercise significant control are accounted for using the cost method of
accounting. All significant intercompany balances have been eliminated. 2. Summary of Significant Accounting Policies Accounting estimates Preparation of financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Financial F-7




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##### Table of Contents



statement line items that include significant estimates consist of property plant and
equipment, certain accrued liabilities and the allowance for doubtful accounts. Changes in
the facts or circumstances underlying these estimates could result in material changes and
actual results could differ from those estimates. These changes in estimates are recognized
in the period they are realized. Cash and cash equivalents Cash and cash equivalents are highly liquid investments with a maturity of three months or
less at the date of purchase and consist of time deposits, investment in money market funds
with commercial banks and financial institutions, commercial paper and high-quality corporate
and municipal bonds. As of December 31, 2003, the Company had $2,760 of cash that is restricted in use, all of
which is pledged as collateral for amounts potentially payable under certain insurance, lease
and surety bond agreements. As of December 31, 2004, the Company has $7,365 of cash that is restricted in use. Of this
amount, $2,000 and $2,000, respectively is held at Broadband and the Telephone Operations
Group in accordance with certain debt covenants. Also, the Company has pledged $3,365 of cash
as collateral for amounts potentially payable under certain insurance, lease and surety bond
agreements. Short term investments The Company follows Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No 115). SFAS No. 115 mandates that a determination he made of the
appropriate classification for equity securities with a readily determinable fair value and
all debt securities at the time of purchase and a re-evaluation of such designation as of
each balance sheet date. Short term investments consist of adjustable rate securities and are classified as
available-for-sale. These investments are carried at fair value and any unrealized gains and
losses are reported as a separate component of stockholders equity. Realized gains and
losses are included in interest income. The cost of securities sold is based on the specific
identification method.. The available-for-sale securities at December 31, 2003 and 2004 included the following: UnrealizedAmortized Cost
    
    
    Fair Value
    
    
    Gain (Loss)Marketable securities-current:Adjustable rate securities
    
    $
    39,997
    
    
    $
    40,000
    
    
    $
    32003 Total
    
    $
    39,997
    
    
    $
    40,000
    
    
    $
    3Marketable securities-current:Adjustable rate securities
    
    $
    12,624
    
    
    $
    12,625
    
    
    $
    12004 Total
    
    $
    12,624
    
    
    $
    12,625
    
    
    $
    1
 Allowance for doubtful accounts The allowance for doubtful accounts represents the Companys best estimate of probable losses
in the accounts receivable balance. The allowance is based on known troubled accounts,
historical experience and other currently available evidence. Activity in the allowance for
doubtful accounts is as follows: Balance at
    
    
    Charged to
    
    
    Write-offs,
    
    
    Balance atbeginning
    
    
    operating
    
    
    net of
    
    
    end ofYear ended December 31
    
    of period
    
    
    expenses
    
    
    recoveries
    
    
    period2002
    
    $
    811
    
    
    $
    3,595
    
    
    $
    2,212
    
    
    $
    2,1942003
    
    $
    2,194
    
    
    $
    4,714
    
    
    $
    5,459
    
    
    $
    1,4492004
    
    $
    1,449
    
    
    $
    4,479
    
    
    $
    5,204
    
    
    $
    724
 F-8




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##### Table of Contents



Property, plant, and equipment Property, plant, and equipment are stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the assets,
commencing when the asset is installed or placed in service. Maintenance, repairs, and
renewals are charged to expense as incurred. The cost and accumulated depreciation of
property and equipment disposed of are removed from the related accounts, and any gain or
loss is included in or deducted from income. Depreciation and amortization (excluding
telephone plant) are provided over the estimated useful lives as follows: YearsBuildings
    
    25System and installation equipment
    
    3-10Production equipment
    
    9Test and office equipment
    
    3-7Automobiles and trucks
    
    5Leasehold improvements
    
    5-25
 Depreciation expense for the years ended December 31, 2002, 2003 and 2004 was $78,623,
$77,438 and $73,809, respectively. Inventories are valued at the lower of cost or market (determined on a weighted average
basis) and include customer premise equipment and certain plant construction materials. These
items are transferred to system and installation equipment when installed. Goodwill and intangible assets The Company constructs and operates its cable systems under non-exclusive cable franchises
that are granted by state or local governmental authorities for varying lengths of time. As
of December 31, 2004, the Company has obtained these franchises through acquisitions of cable
systems accounted for as purchase business combinations and construction of new cable
systems. Summarized below are the carrying values and accumulated amortization of intangible assets
that will continue to be amortized under SFAS 142, as well as the carrying value of goodwill
which is no longer amortized. AmortizationPeriod2003
    
    
    2004
    
    
    (Years)Customer base
    
    
    326
    
    
    
    441
    
    
    
    3Other
    
    
    225
    
    
    
    356
    
    
    
    1-3Gross carrying value of intangible
assets subject to amortization
    
    
    551
    
    
    
    797Less accumulated amortization
    
    
    235
    
    
    
    489Net carrying value
    
    
    316
    
    
    
    308Goodwill
    
    
    40,834
    
    
    
    40,834Total goodwill and intangibles
    
    
    41,150
    
    
    
    41,142
 Goodwill represents the excess of the cost of businesses acquired over fair value or net
identifiable assets at the date of acquisition and has historically been amortized using the
straight-line method over various lives up to forty years. Goodwill is subject to a periodic
impairment assessment by applying a fair value based test based upon a two-step method. The
first step of the process compares the fair value of each reporting unit with the carrying
value of the reporting unit, including any goodwill. Each geographic operating unit is deemed
to be a reporting unit for testing purposes. The Company utilizes a discounted cash flow
valuation methodology to determine the fair value of each reporting unit. If the fair value
of each reporting unit exceeds the carrying amount of the reporting unit, goodwill is deemed
not to be impaired in which case the second step in the process is unnecessary. If the
carrying amount exceeds fair value, the Company performs the second step to measure the
amount of impairment loss. Any impairment loss is measured by comparing the implied fair
value of goodwill, calculated per SFAS No. 142, with the carrying amount of goodwill at the
reporting unit, with the excess of the carrying amount over the fair value recognized as an
impairment loss. The Company has adopted January 1 as the calculation date and has evaluated
these assets as of January 1, 2003, 2004 and 2005, and no impairment was identified. The Company accounts for the impairment of amortizable intangible assets in accordance with
SFAS No. 144 as described under Long-lived assets. Based on the results of the goodwill
impairment test, the Company recorded an impairment loss of $1,294 in the first quarter of
2002 as a cumulative effect of change in accounting principle. F-9




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Amortization expense related to intangible assets was $278, $358 and $791 for the years ended
December 31, 2004, 2003 and 2002, respectively. Scheduled amortization of intangible assets for the next five years is as follows: 2005
    
    $
    2492006
    
    
    502007
    
    
    9$
    308
 Deferred issuance costs Deferred issuance costs include costs associated with the issuance of debt and the
consummation of credit facilities (Note 4). Deferred issuance costs and the related useful
lives and accumulated amortization at December 31, 2003 and 2004 are as follows: AmortizationPeriod2003
    
    
    2004
    
    
    (Years)Deferred issuance costs
    
    $
    501
    
    
    $
    871
    
    
    
    8Accumulated amortization
    
    
    (136
    )
    
    
    (237
    )Deferred issuance costs, net
    
    $
    365
    
    
    $
    634
 Valuation of long-lived assets On January 1, 2002, the Company adopted FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). Under SFAS No. 144, the
Company reviews long-lived assets for impairment when circumstances indicate the carrying
amount of an asset may not be recoverable based on the undiscounted future cash flows of the
asset. If the carrying amount of the asset is determined not to be recoverable, a write-down
to fair value is recorded. The effects of adopting SFAS No. 144 were not material to the
Companys results of operations. In connection with the restructuring of capitalization pursuant to the prepackaged plan of
reorganization, the Company issued new 12% senior notes due 2009, which include covenants
limiting the ability to fund expansion into new markets, including Nashville and Louisville.
Due to the restrictive nature of the new covenants as they relate to the use of operating
cash flows or new borrowings for expansion, the Company evaluated certain long-lived assets
for impairment. The asset impairment charge was measured in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets. Based on this evaluation of the impact the new covenants will have on our business plan, the
Company recognized an asset impairment of approximately $9,946 during the year ended December
31, 2002. The total asset impairment is comprised of the following: 2002Abandoned construction in progress
    
    $
    6,094Franchise costs
    
    
    1,398Construction inventory
    
    
    2,454Total asset impairment
    
    $
    9,946
 Cost of services Cost of services related to video consists primarily of monthly fees to the National Cable
Television Cooperative and other programming providers and is generally based on the average
number of subscribers to each program. Cost of services related to voice and data services
and other consists primarily of transport cost and network access fees specifically
associated with each of these revenue streams. Stock based compensation In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends FASB Statement No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based F-10




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employee compensation and the effect of the method used on reported results. Finally, this
Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about
those effects in interim financial information. SFAS No. 148 is to be applied for financial
statements for fiscal years ending after December 15, 2002. In December 2002, the Company
elected to adopt the recognition provisions of SFAS No. 123 which is considered the
preferable accounting method for stock-based employee compensation. The Company also elected
to report the change in accounting principle using the prospective method in accordance with
SFAS No. 148. Under the prospective method, the recognition of compensation costs is applied
to all employee awards granted, modified or settled after the beginning of the fiscal year in
which the recognition provisions are first applied. As a result, the Company recorded $3,266,
$1,833 and $3,625 of non-cash stock option compensation expense for the years ended December
31, 2002, 2003 and 2004, respectively. We will continue to provide pro forma net income and
earnings per share information related to prior awards. The following table illustrates the effect on net loss if Knology had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation: Year ended December 31,2002
    
    
    2003
    
    
    2004Net loss, as reported
    
    $
    (2,626
    )
    
    
    (87,788
    )
    
    
    (75,564
    )Add: Stock-based compensation, as reported
    
    
    3,266
    
    
    
    1,883
    
    
    
    3,625Deduct: Total stock-based compensation
determined under fair value based method
for all awards, net of tax
    
    
    (3,299
    )
    
    
    (1,913
    )
    
    
    (3,625
    )Pro forma net loss
    
    $
    (2,659
    )
    
    
    (87,818
    )
    
    
    (75,564
    )Basic and diluted net loss per share
attributed to common shareholders
    
    $
    (52.86
    )
    
    
    (5.17
    )
    
    
    (3.19
    )Basic and diluted weighted average number
of common shares outstanding
    
    
    50,304
    
    
    
    16,995,092
    
    
    
    23,655,733
 Investments Investments and equity ownership in associated companies consisted of the following at
December 31, 2003 and 2004: 2003
    
    
    2004Nonmarketable investments, at cost:Grande Communications common
stock, 10,946,556 shares in 2003 and
2004.
    
    $
    1,243
    
    
    $
    1,243
 At December 31, 2004, the Company, through its wholly owned subsidiaries, owned approximately
2.4% of Grande. The Companys investment in Grande is accounted for under the cost method of
accounting. The Company determined that the adverse changes in business conditions at Grande
Communication, Inc. were other than temporary and recorded a loss of $12,406 during the third
quarter of 2003 on the investment in Grande. In the fourth quarter of 2003 the Company
invested an additional $1,069 in Grande. Accrued liabilities Accrued liabilities at December 31, 2003 and 2004 consist of the following: 2003
    
    
    2004Accrued trade expenses
    
    $
    4,073
    
    
    $
    4,811Accrued property taxes
    
    
    1,888
    
    
    
    2,297Accrued compensation
    
    
    2,738
    
    
    
    2,315Accrued interest
    
    
    437
    
    
    
    2,776Total
    
    $
    9,136
    
    
    $
    12,199
 Revenue recognition The Company generates recurring revenues for broadband offerings of video, voice and data and
other services. The revenues generated from these services primarily consists of a fixed
monthly fee for access to cable programming, local phone services and F-11




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enhanced services and access to the internet. Additional fees are charged for services
including pay-per-view movies, events such as boxing matches and concerts, long distance
service and cable modem rental. Revenues are recognized as services are provided and advance
billings or cash payments received in advance of services performed are recorded as deferred
revenue. Advertising costs The Company expenses all advertising costs as incurred. Approximately $4,226, $5,143 and
$6,370 of advertising expense are recorded in the Companys consolidated statements of
operations for the years ended December 31, 2002, 2003, and 2004, respectively. Installation The Company recognizes broadband installation revenue when the customer is initially billed
for the connection of services as the direct selling costs exceed installation revenue on a
per customer basis. The direct selling costs are expensed in the period incurred. Sources of supplies The Company purchases customer premise equipment and plant materials from outside vendors.
Although numerous suppliers market and sell customer premise equipment and plant materials,
the Company currently purchases each customer premise component from a single vendor and has
several suppliers for plant materials. If the suppliers are unable to meet the Companys
needs as it continues to build out its network infrastructure, then delays and increased
costs in the expansion of the Companys network could result, which would adversely affect
operating results. Credit risk The Companys accounts receivable potentially subject the Company to credit risk, as
collateral is generally not required. The Companys risk of loss is limited due to advance
billings to customers for services and the ability to terminate access on delinquent
accounts. The potential for material credit loss is mitigated by the large number of
customers with relatively small receivable balances. The carrying amount of the Companys
receivables approximates their fair values. Income taxes The Company utilizes the liability method of accounting for income taxes, as set forth in
SFAS No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are
determined based on the difference between the financial and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the differences are
expected to reverse. Deferred tax benefit represents the change in the deferred tax asset and
liability balances (Note 8). As of February 10, 2004, Valley Telephone Company was converted
from a corporation to a limited liability company in order to distribute all of its shares of
common stock of Knology Broadband, Inc. to Knology, Inc in a tax free distribution. Comprehensive loss The Company follows SFAS No. 130, Reporting Comprehensive Income. This statement
establishes standards for reporting and display of comprehensive loss and its components in a
full set of general purpose financial statements. The Company has chosen to disclose
comprehensive loss, which consists of net loss and unrealized gains (losses) on marketable
securities, in the consolidated statements of stockholders equity and comprehensive loss. Net loss per share The Company follows SFAS No. 128, Earnings Per Share. That statement requires the
disclosure of basic net loss per share and diluted net loss per share. Basic net loss per
share is computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net loss per share
gives effect to all potentially dilutive securities. The effect of the Companys warrants
(1,103,187 and 1,090,733 in 2003 and 2004, respectively) and stock options (1,810,254 and
2,026,285 shares in 2003 and 2004, respectively using the treasury stock method) were not
included in the computation of diluted EPS as their effect was antidilutive. New accounting pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No.
123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No.
123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values, beginning
with the first interim or annual period after June 15, 2005, with early adoption encouraged.
In addition, SFAS No. 123R will cause unrecognized expense related to options vesting after
the date of initial adoption to be recognized as a charge to results of operations over the
remaining vesting period. In December 2002 the Company elected to adopt the recognition
provisions of SFAS No. 123 which is considered the preferable F-12




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accounting method for stock-based employee compensation. The Company also elected to report
the change in accounting principle using the prospective method in accordance with SFAS No.
148. Under the prospective method, the recognition of compensation costs is applied to all
employee awards granted, modified or settled after the beginning of the fiscal year in which
the recognition provisions are first applied. Because the fair value recognition provisions
of SFAS No. 123 were adopted on January 1, 2003, the Company does not expect this revised
standard to have a material impact on its financial statements. At the March 2004 Emerging Issues Task Force (EITF) meeting, the Task Force reached a
consensus on the Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. Issue 03-1 defines the terms otherthan-temporary and
other-than-temporary impairment and establishes a three-step impairment model applicable to
debt and equity securities that are within the scope of SFAS 115. At the November 2003 EITF
meeting, the Task Force reached a consensus effective for fiscal years ending after December
15, 2003 on quantitative disclosures. Except for disclosure requirements already in place,
the Issue 03-1 consensus will be effective prospectively for all relevant current and future
investments in reporting periods beginning after June 15, 2004. The Company adopted EITF
Issue No. 03-1 disclosure requirements for the fiscal year ended December 31, 2003 and does
not expect the adoption of future requirements of EITF Issue No. 03-1 to have material impact
on the Companys results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability or an asset in some circumstances. SFAS No. 150 is effective
for the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150
effective July 1, 2003, which resulted in no material impact to its financial position or
results of operations. Prior Year Amounts Certain prior year amounts have been reclassified to conform to current year presentation. In
the current year, the Company has determined that its investments in variable rate demand
notes, which have interest rates that reset daily or weekly but have maturity dates in excess
of 90 days from the date of acquisition, are more appropriately classified as marketable
securities. The Company had previously classified these notes as cash equivalents. Therefore,
a total of $0 and $40 has been reclassified from cash equivalents to marketable securities as
of December 31, 2002 and 2003, respectively. Corresponding changes have been made to the
Companys Consolidated Balance Sheets, Consolidated Statements of Cash Flows, and related
Notes to Consolidated Financial Statements as appropriate. 3. Employee Benefit Plan The Company has a 401(k) Profit Sharing Plan (the Plan) for the benefit of eligible
employees and their beneficiaries. All employees are eligible to participate in the Plan on
the first full month following the date of employment. The Plan provides for a matching
contribution at the discretion of the board up to 8% of eligible contributions. The Company
contributions for the years ended December 31, 2002, 2003 and 2004 were $728, $735 and $887,
respectively. 4. Long-Term Debt Long-term debt at December 31, 2003 and 2004 consists of the following: 2003
    
    
    2004Senior Unsecured
Notes including
accrued interest, with
a face value of
$194,659 bearing
interest in-kind at
13% beginning November
6, 2002, interest
payable semiannually
at 12% beginning
November 30, 2004,
with principal and
unpaid interest due
November 30, 2009
    
    $
    225,037
    
    
    $
    237,096Senior secured
Wachovia credit
facility, at a rate of
LIBOR plus 3.75%,
interest payable
quarterly with
principal and any
unpaid interest due
September 10, 2007
    
    
    15,465
    
    
    
    15,465Senior secured CoBank
term credit facility,
at a rate of LIBOR
plus 3.5%, interest
payable quarterly,
principal payments due
quarterly beginning
Jan 2007 with final
principal and any
unpaid interest due
June 30, 2009
    
    
    34,588
    
    
    
    31,895Capitalized lease
obligations, at rates
between 7% and 8%,
with monthly principal
and interest payments
through November 2011
    
    
    470
    
    
    
    2,257275,560
    
    
    
    286,713Less current maturities
    
    
    5,213
    
    
    
    179$
    270,347
    
    
    $
    286,534
 F-13




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Following are maturities of long-term debt for each of the next five years as of December 31,
2004: 2005
    
    $
    1792006
    
    
    2562007
    
    
    16,7512008
    
    
    7,8122009
    
    
    260,832Thereafter
    
    
    883Total
    
    $
    286,713
 Knologys first interest payment on the senior unsecured notes was paid in November 2004
(Knology paid interest incurred for the first 18 months in kind through the issuance of
additional notes). The senior unsecured notes increased to $237,096 for the year ended
December 31, 2004, due to in kind interest payments of $14,226. The indenture governing the new Knology notes places certain restrictions on the ability of
Knology and its subsidiaries to take certain actions including the following:  
    pay dividends or make other restricted payments;
    incur additional debt or issue mandatorily redeemable equity;
    create or permit to exist certain liens;
    incur restrictions on the ability of its subsidiaries to pay dividends or other payments;
    consolidate, merge or transfer all or substantially all its assets;
    enter into transactions with affiliates;
    utilize revenues except for specified uses;
    utilize excess liquidity except for specified uses;
    make capital expenditures for Knology of Knoxville, Inc.; and
    permit the executive officers of Knology to serve as executive officers or
employees of other entities in competition with Knology. These covenants will be subject to a number of exceptions and qualifications. The Company had outstanding warrants of $932 and $354 at December 31, 2003 and 2004,
respectively. Knology adjusts the carrying value of the warrants based on the closing price
of the Companys common stock at the end of each reporting period. For the year ended
December 31, 2002, 2003 and 2004 the company recorded a gain of $2,865, $929 and $535,
respectively. On December 22, 1998, Broadband entered into a $50,000 four-year senior secured credit
facility with Wachovia Bank, National Association. The Wachovia credit facility, as amended
and restated effective November 6, 2002 and as amended as of September 10, 2004, allows
Broadband to borrow approximately $15,500. The Wachovia credit facility may be used for
working capital and other general corporate purposes, including capital expenditures and
permitted acquisitions. Interest accrues at the option of Broadband at LIBOR rate plus 3.75%
or at Base Rate plus 2.75%. The Wachovia credit facility contains a number of covenants that
restrict the ability of Broadband and its subsidiaries to take certain actions, including,
but not limited to, the ability to:  
    incur debt;
    create liens;
    pay dividends;
    make distributions or stock repurchases;
    make investments; F-14




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
    engage in transactions with affiliates; and
    sell assets and engage in mergers and acquisitions. The Wachovia credit facility also includes covenants requiring compliance with operating and
financial covenants, including that Broadband and its subsidiaries are required to maintain
an unrestricted cash balance of $2,000, and maintain a leverage ratio of not more than 1.0
times (total debt to EBITDA (earnings before interest, taxes, depreciation and amortization,
as calculated pursuant to the Wachovia credit agreement)). As of December 31, 2004 Broadband
is in compliance with these covenants. Should Broadband not be in compliance with the
covenants, Broadband would be in default and would require a waiver from the lender. In the
event the lender would not provide a waiver, amounts outstanding under the Wachovia credit
facility could be accelerated and be payable to the lender on demand. A change of control of
Broadband, as defined in the Wachovia credit facility, would constitute a default under the
covenants. The amendment to the Wachovia credit facility included, among other things, an
extension of the maturity date from November 6, 2006 until September 10, 2007, substantial
revision of the financial covenants and elimination of the mandatory quarterly commitment
reductions. The maximum amount available under the Wachovia credit facility as of December
31, 2003 and 2004 was approximately $15,500. As of December 31, 2003 and 2004, approximately
$15,465 had been drawn against the facility. On June 29, 2001, the Company, through its wholly owned subsidiaries, Globe
Telecommunications, Inc., Interstate Telephone Company and Valley Telephone Co., Inc. (the
Borrowers), entered into a $40,000 secured master loan agreement with CoBank, ACB. This
master loan agreement, as amended as of June 6, 2002, as further amended as of November 6,
2002 and as further amended as of September 10, 2004, allows the Borrowers to make one or
more advances in an amount not to exceed $38,000. Obligations under the loan agreement are
secured by substantially all tangible and intangible assets of the Borrowers. The master loan
agreement contains a number of covenants that restrict the ability of the Borrowers to take
certain actions, including, but not limited to, the ability to:  
    incur indebtedness;
    create liens;
    merge or consolidate with any other entity;
    make distributions or stock repurchases;
    make investments;
    engage in transactions with affiliates; and
    sell or transfer assets. The CoBank credit facility also includes covenants requiring compliance with certain
operating and financial covenants of the Borrowers on a consolidated basis, including a
minimum annual EBITDA measurement (as calculated in accordance with the CoBank loan
agreement) and a maximum leverage ratio of 3.5 times (total debt to operating cash flow (as
calculated in accordance with the CoBank loan agreement)). As of December 31, 2004 the
Borrowers are in compliance with these covenants, but there can be no assurances that the
Borrowers will remain in compliance. Should the Borrowers not be in compliance with the
covenants, the Borrowers would be in default and would require a waiver from CoBank. In the
event CoBank would not provide a waiver, amounts outstanding under CoBank credit facility
could be accelerated and payable on demand. The September 2004 amendment to the CoBank loan
agreement, among other things, deferred the initial quarterly principal installment payment
under the facility, in the amount of $250, until March 31, 2007. Beginning March 31, 2008,
the quarterly installment payment increases to $1,875 with the remaining outstanding
principal balance due on June 30, 2009. 5. Operating and Capital Leases The Company leases office space, utility poles, and other assets for varying periods. Leases
that expire are generally expected to be renewed or replaced by other leases. Total rental
expense for all operating and capital leases was approximately $1,173, $2,608 and $3,205 for
the years ended December 31, 2002, 2003, and 2004, respectively. Future minimum rental
payments required under the operating and capital leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2004 are as follows: Capitalized
    
    
    OperatingLeases
    
    
    Leases2005
    
    $
    349
    
    
    $
    3,0762006
    
    
    409
    
    
    
    2,6352007
    
    
    418
    
    
    
    1,594
 F-15




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Capitalized
    
    
    OperatingLeases
    
    
    Leases2008
    
    
    420
    
    
    
    1,3312009
    
    
    422
    
    
    
    973Thereafter
    
    
    1341
    
    
    
    5,195Total minimum lease payments
    
    $
    3,359
    
    
    $
    14,804Less imputed interest
    
    
    1,102Present value of minimum capitalized lease payments
    
    
    2,257Current portion
    
    
    179Long-term capitalized lease obligations
    
    
    2,078
 During the year ended December 31, 2004, the Company entered into capital lease transactions
related to the buildout of various multiple dwelling units and recorded $1,812 as property,
plant and equipment. The base rentals recorded to the capital leases are contingent upon the
Company acquiring subscribers. The Company has agreed to pay various amounts per subscriber
to the lessors as the base monthly rentals. The lease terms are seven years. In accordance
with FASB No. 13, Accounting for Leases, the Company has projected the number of
subscribers to record the capital asset and liability and will update the projections to
actual subscribers on a quarterly basis. 6. Commitments and Contingencies Purchase commitments The Company has entered into contracts with various entities to provide programming to be
aired by the Company. The Company pays a monthly fee for the programming services, generally
based on the number of average video subscribers to the program, although some fees are
adjusted based on the total number of video subscribers to the system and/or the system
penetration percentage. Total programming fees were approximately $27,497, $31,120 and 47,018
for the years ended December 31, 2002, 2003, and 2004, respectively. The Company estimates
that it will pay approximately $50,296 in programming fees under these contracts during 2005. Legal proceedings In September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., our
subsidiary, a cable television franchise. On November 2, 2000, Insight filed a complaint
against the City of Louisville in Kentucky Circuit Court in Jefferson County, Kentucky
claiming that our franchise was more favorable than Insights franchise. Insights complaint
suspended our franchise until there is a final, nonappealable order in Insights Kentucky
Circuit Court case. In April 2001 the City of Louisville moved for summary judgment in
Kentucky Circuit Court against Insight. In March 2002, the Kentucky Circuit Court ruled that
Insights complaint had no merit and the Kentucky Circuit Court granted the City of
Louisvilles motion to dismiss Insights complaint. Insight appealed the Kentucky Circuit
Court order dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld
the Kentucky Circuit Court ruling. Insight sought discretionary review of the Kentucky Court
of Appeals ruling by the Kentucky Supreme Court and that request is pending. On November 8, 2000, we filed an action in the U.S. District Court for the Western District
of Kentucky against Insight seeking monetary damages, declaratory and injunctive relief from
Insight and the City arising out of Insights complaint and the suspension of our franchise.
In March 2001, the U.S. District Court issued an order granting our motion for preliminary
injunctive relief and denying Insights motion to dismiss. In June 2003 the U.S. District
Court ruled on the parties cross motions for summary judgment, resolving certain claims and
setting others down for trial. The U.S. District Court granted our motion for summary
judgment based on causation on certain claims. In August 2003, the U.S. District Court
granted Insights motion for an immediate interlocutory appeal on certain issues, which was
accepted in October 2003 by the U.S. Court of Appeals for the Sixth Circuit. On December 29, 2004, the Sixth Circuit reversed the U.S. District Courts decision denying
Insights Noerr-Penningtonimmunity and granting summary judgment to Knology on its First
Amendment Section 1983 claim. The Sixth Circuit remanded to the U.S. District Court for
further proceedings consistent with its Opinion. On January 12, 2005, we filed a Petition
for Rehearing En Banc with the Sixth Circuit. On March 2, 2005, the Sixth Circuit denied our
Petition for Rehearing. The parties dispute what remains, if any, of our case now that the
Sixth Circuit has denied our Petition. We contend we are entitled to a trial on whether
Insights State Court Action was protected by Noerr-Penningtonimmunity. Insight contends
the Sixth Circuits Opinion requires a dismissal with prejudice of all of our claims. At
this time it is impossible to determine with certainty the ultimate outcome of the
litigation. We are also subject to other litigation in the normal course of our business. However, in our
opinion, there is no legal proceeding pending against us which would have a material adverse
effect on our financial position, results of operations or liquidity. We are also a party to
regulatory proceedings affecting the segments of the communications industry generally in
which we engage in business. F-16




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7. Income Taxes The benefit/(provision) for income taxes from continuing operations consisted of the
following for the years ended December 31, 2002, 2003, and 2004: 2002
    
    
    2003
    
    
    2004Current
    
    $
    0
    
    
    $
    0
    
    
    $
    0Deferred
    
    
    (7,840
    )
    
    
    34,882
    
    
    
    25,180(Increase) decrease in
valuation allowance
    
    
    7,840
    
    
    
    (34,882
    )
    
    
    (25,180
    )Income tax benefit (provision)
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 Deferred income taxes reflect the net tax effect of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The significant components of deferred tax assets and
liabilities as of December 31, 2003 and 2004 are as follows: 2003
    
    
    2004Current deferred tax assets:Inventory reserve
    
    $
    231
    
    
    $
    587Allowance for doubtful accounts
    
    
    482
    
    
    
    227Other
    
    
    985
    
    
    
    980Valuation allowance
    
    
    (1,698
    )
    
    
    (1,794
    )Total current deferred taxes
    
    
    0
    
    
    
    0Non-current deferred tax assets:Net operating loss & other attributes
carryforwards
    
    
    115,726
    
    
    
    138,143Deferred bond interest
    
    
    24,779
    
    
    
    28,798Deferred revenues
    
    
    179
    
    
    
    170Alternative minimum tax credit carryforward
    
    
    2,334
    
    
    
    2,334Debt issuance costs
    
    
    1,466
    
    
    
    1,216Other
    
    
    7,367
    
    
    
    8,055Depreciation and amortization
    
    
    (32,076
    )
    
    
    (33,857
    )Valuation allowance
    
    
    (119,775
    )
    
    
    (144,859
    )Total non-current deferred tax assets
    
    
    0
    
    
    
    0Net deferred income taxes
    
    $
    0
    
    
    $
    0
 At December 31, 2004, the Company had available federal net operating loss carryforwards of
approximately $364 million that expire from 2007 to 2024. The utilization of $115 million of
these loss carryforwards and $2.3 million AMT carryforwards is subject to an annual
limitation as a result of a change in ownership of the Company, as defined in the Internal
Revenue Code. The limitation does not reduce the total amount of net operating losses that
may be taken, but rather substantially limits the amount that may be used during a particular
year. The Company also had various state net operating loss carryforwards totaling
approximately $333 million. Unless utilized, the state net operating loss carryforwards
expire from 2007 to 2024. Management has recorded a total valuation allowance of $147 million
against its deferred tax assets including the operating loss carryforwards. The increase in
the valuation allowance of approximately $25.2 million is related to the increase in the net
operating loss carryforward. In addition, as a result of recent changes in stockholders, the
Company expects that any future change in its ownership will result in significant additional
limitations of current net operating losses. The Company has not quantified any future
limitations of net operating losses as of December 31, 2004. A reconciliation of the income tax provision computed at statutory tax rates to the income
tax provision for the years ended December 31, 2002, 2003, and 2004 is as follows: 2002
    
    
    2003
    
    
    2004Income tax benefit at statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income taxes, net of federal benefit
    
    
    4
    %
    
    
    4
    %
    
    
    4
    %Non taxable book gain on early extinguishment
    
    
    1,587
    %
    
    
    0
    %
    
    
    0
    %Reduction in deferred interest on senior
discount notes
    
    
    (1,883
    )%
    
    
    0
    %
    
    
    0
    %Interesthigh yield debt
    
    
    (13
    )%
    
    
    (3
    )%
    
    
    (4
    )%
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##### Table of Contents



2002
    
    
    2003
    
    
    2004Other
    
    
    (28
    )%
    
    
    1
    %
    
    
    0
    %(Increase) decrease in valuation allowance
    
    
    299
    %
    
    
    (36
    )%
    
    
    (34
    )%Income tax benefit (provision)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Investment tax credits related to telephone plant have been deferred and are being
amortized as a reduction of federal income tax expense over the estimated useful lives of the
assets giving rise to the credits. 8. Equity Interests Capital transactions The Company has authorized 200,000,000 shares of $.01 par value common stock, 199,000,000
shares of $.01 par value preferred stock, and 25,000,000 shares of $.01 par value non-voting
common stock. On November 28, 2003, a one-for-10 reverse stock split of shares of the Companys common
stock and non-voting common stock became effective. As a result, each
of the outstanding shares of common stock was reclassified as one-tenth (1/10) of a share of common stock and
each of the outstanding shares of non-voting common stock was reclassified as one-tenth
(1/10) of a share of non-voting common stock. On December 23, 2003, the Company completed a public offering of 6,000,000 common shares for
$9.00 per share. On January 13, 2004, the Companys underwriters exercised in full their
over-allotment option to purchase an additional 900,000 shares of common stock. Including the
over-allotment, the Company sold 6,900,000 shares for net proceeds of approximately $56,300.
Concurrent with the completion of the of the public offering on December 23, 2003, the
outstanding Series A preferred stock converted to common stock and were reclassified as
..10371 of a share of common stock; the Series B preferred stock converted to common stock and
were reclassified as .14865 of a share of common stock; and, all remaining classes of
preferred stock converted to common stock and were reclassified as one-tenth (1/10) of a
share of common stock. Additionally the options to purchase Series A preferred stock and the
warrants to purchase Series A preferred stock converted to options and warrants to purchase
common stock and were reclassified as options to and warrants to purchase .10371 of a share
of common stock. On May 7, 2004, pursuant to a proposal ratified by a shareholder vote, all outstanding
options to purchase common stock granted prior to December 18, 2003 under the 2002 Long-Term
Incentive Plan with an exercise price of $16.33 per share were cancelled and replaced with
new options with an exercise price of $6.87 per share. In accordance with SFAS 123,
Accounting for Stock-Based Compensation, the Company has computed the value of the new
options granted using the Black-Sholes model. During the fourth quarter of 2004, a significant shareholder liquidated their equity position
in the Company, including 2,170,127 shares of non-voting stock. As a result of the
transaction, the non-voting stock converted into common stock. As of December 31, 2004, the
Company has no shares of non-voting stock outstanding. Knology, Inc. stock option plans In December 2002, the board of directors and stockholders approved the Knology, Inc. 2002
Long-Term Incentive Plan (the 2002 Plan). Effective December 31, 2002 all outstanding
awards previously granted under the Broadband 1995 stock option plan (the 1995 Plan) and
the Knology 1999 Long-Term Incentive Plan (the 1999 Plan) were canceled. Also effective
December 31, 2002, an equal number of the awards canceled under these plans were granted,
along with additional awards, under the 2002 Plan. The 1995 Plan and the 1999 Plan are no
longer maintained by the Company. In 2004, the board of directors and stockholders approved the amendment and restatement of
the 2002 Plan (the Amended 2002 Plan). The Amended 2002 Plan authorizes the issuance of up
to 3 million shares of common stock pursuant to stock option awards. The Amended 2002 Plan
is administered by the compensation and stock option committee of the board of directors.
Options granted under the plans are intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended. All options are granted at an
exercise price equal to the estimated fair value of the common stock at the dates of grant as
determined by the board of directors based on private equity transactions and other analyses.
The options expire 10 years from the date of grant, with the exception of options that were
granted to replace canceled options. The expiration date of replacement options is the same
as the expiration date of the related canceled options. On May 7, 2004, pursuant to a proposal ratified by a shareholder vote, all outstanding
options to purchase common stock granted prior to December 18, 2003 under the 2002 Plan with
an exercise price of $16.33 per share were canceled and replaced with new options granted
under the Amended 2002 Plan with an exercise price of $6.87 per share. Statement of Financial Accounting Standards No. 123 The Company follows SFAS No. 123, Accounting for Stock-Based Compensation, which defines a
fair value-based method of F-18




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accounting for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation cost for those
plans using the method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with
the accounting methodology required by APB Opinion No. 25 must make pro forma disclosures of
net income and, if presented, earnings per share as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied. In 2002, the Company elected to adopt the fair value recognition of compensation cost
provisions of SFAS No. 123. The Company also elected to report the change in accounting
principle from APB No. 25 using the prospective method in accordance with SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure. Under the prospective
method, the recognition of compensation cost is applied to all employee awards granted,
modified, or settled after the beginning of the fiscal year in which the recognition
provisions are first applied. In December 2002, the Company canceled all outstanding awards
for common stock as of December 31, 2002 and granted an equal number of replacement options
at the current fair market value with the same expiration date as the related canceled
option. The replacement options, as well as all other awards granted and settled during 2002,
were included in the calculation of compensation cost in accordance with SFAS No. 123 and
SFAS No. 148. The Company recorded a non-cash stock option compensation charge of $3,266
related to the replacement and the adoption of the provisions of SFAS No. 123 and SFAS no.
148. The following represent the expected stock option compensation expense for the next five
years assuming no additional grants. 2005
    
    $
    1,3042006
    
    
    9902007
    
    
    6032008
    
    
    562009
    
    
    0$
    2,953
 The fair value of stock options was estimated at the date of grant using a Black-Scholes
option pricing model and the following weighted average assumptions in 2002, 2003, and 2004: Common
    
    2002
    
    2003
    
    2004Risk-free interest rate
    
    2.79%
    
    2.82%
    
    2.80-3.94%Expected dividend yield
    
    0%
    
    0%
    
    0%Expected lives
    
    Four years
    
    Four years
    
    Four yearsExpected volatility
    
    38%
    
    28%
    
    28%
 A summary of the status of the Companys stock options at December 31, 2004 is presented in
the following table: WeightedaverageWeighted average
    
    
    Series A
    
    
    exerciseexercise price per
    
    
    preferred
    
    
    price perCommon shares
    
    
    share
    
    
    shares
    
    
    shareOutstanding at December 31, 2001
    
    
    705,805
    
    
    
    29.90
    
    
    
    3,026,324
    
    
    
    1.59Granted
    
    
    895,886
    
    
    
    19.90
    
    
    
    0
    
    
    
    0Forfeited
    
    
    (796,366
    )
    
    
    29.90
    
    
    
    (68,220
    )
    
    
    2.36Exercised
    
    
    (100
    )
    
    
    26.30
    
    
    
    (49,567
    )
    
    
    45Outstanding at December 31, 2002
    
    
    805,227
    
    
    $
    18.70
    
    
    
    2,908,537
    
    
    $
    1.60Granted
    
    
    784,209
    
    
    
    10.64
    
    
    
    0
    
    
    
    0Forfeited
    
    
    (48,896
    )
    
    
    18.92
    
    
    
    (89,340
    )
    
    
    3.26Exercised
    
    
    (946
    )
    
    
    18.70
    
    
    
    (209,420
    )
    
    
    1.03Converted as a result of the public offering
    
    
    270,660
    
    
    
    15.41
    
    
    
    (2,609,777
    )
    
    $
    1.60Outstanding at December 31, 2003
    
    
    1,810,254
    
    
    $
    14.79
    
    
    
    0
    
    
    
    0Granted
    
    
    1,387,291
    
    
    
    7.48
    
    
    
    0
    
    
    
    0Forfeited
    
    
    (1,161,484
    )
    
    
    16.33
    
    
    
    0
    
    
    
    0Exercised
    
    
    (9,776
    )
    
    
    2.89
    
    
    
    0
    
    
    
    0Outstanding at December 31, 2004
    
    
    2,026,285
    
    
    $
    8.94
    
    
    
    0
    
    
    
    0Exercisable shares at December 31, 2004
    
    
    1,421,487
    
    
    $
    9.27
    
    
    
    0
    
    
    
    0
 F-19




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The following table sets forth the exercise price range, number of shares, weighted average
exercise price, and remaining contractual lives by groups of similar price and grant date: Common shares Weightedaverage
    
    
    WeightedOutstanding
    
    
    remaining
    
    
    average
    
    
    Exercisable
    
    
    Averageas of
    
    
    contractual
    
    
    exercise
    
    
    as of
    
    
    exerciseRange of exercise prices
    
    12/31/2004
    
    
    life
    
    
    price
    
    
    12/31/2004
    
    
    price$2.89-$6.76
    
    
    267,969
    
    
    
    6.31
    
    
    $
    5.43
    
    
    
    110,489
    
    
    $
    5.42$6.87-$6.87
    
    
    749,008
    
    
    
    5.50
    
    
    $
    6.87
    
    
    
    636,948
    
    
    $
    6.87$7.30-$8.85
    
    
    22,130
    
    
    
    9.29
    
    
    $
    7.99
    
    
    
    0
    
    
    $
    0$9.00-$9.00
    
    
    561,687
    
    
    
    8.96
    
    
    $
    9.00
    
    
    
    543,109
    
    
    $
    9.00$9.02-$18.80
    
    
    338,087
    
    
    
    8.35
    
    
    $
    10.82
    
    
    
    43,487
    
    
    $
    15.80$20.54-$35.68
    
    
    87,454
    
    
    
    4.43
    
    
    $
    30.05
    
    
    
    87,454
    
    
    $
    30.05
 At December 31, 2004, 1,421,487 options for the Companys common shares with a weighted
average price of $9.27 per share were exercisable by employees of the Company. At December
31, 2003, 909,451 options for the Companys common shares with a weighted average of $18.70
per share were exercisable by employees of the Company. At December 31, 2002, 443,314
options for the Companys common shares with a weighted average price of $18.70 per share
were exercisable by employees of the Company. At December 31, 2002, 257,643 options for the
Companys Series A preferred shares with a weighted average price of $12.50 per share were
exercisable by employees of the Company. 9. Related Party Transactions Relatives of the chairman of our board are stockholders and employees of one of the Companys
insurance provider. The costs charged to the Company for insurance services were
approximately $141, $927, and $1,962 for the years ended December 31, 2002, 2003, and 2004,
respectively. 10. Quarter-by-Quarter Comparison (Unaudited) Summarized quarterly financial data for the years ended December 31, 2003 and 2004 are as
follows: Quarters:
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth2003Operating revenues
    
    
    40,687
    
    
    
    42,869
    
    
    
    43,733
    
    
    
    45,649Operating (loss) income
    
    
    (13,688
    )
    
    
    (12,222
    )
    
    
    (11,670
    )
    
    
    (10,053
    )Net (loss) income
    
    
    (20,469
    )
    
    
    (19,450
    )
    
    
    (31,251
    )
    
    
    (16,618
    )Basic and diluted net loss per share
    
    
    (1.22
    )
    
    
    (1.16
    )
    
    
    (1.86
    )
    
    
    (.94
    )Basic and diluted weighted average shares outstanding
    
    
    16,753,231
    
    
    
    16,763,156
    
    
    
    16,767,700
    
    
    
    17,688,5032004Operating revenues
    
    
    53,794
    
    
    
    52,735
    
    
    
    52,065
    
    
    
    52,864Operating (loss) income
    
    
    (11,115
    )
    
    
    (11,323
    )
    
    
    (12,678
    )
    
    
    (10,880
    )Net (loss) income
    
    
    (18,366
    )
    
    
    (18,664
    )
    
    
    (20,039
    )
    
    
    (18,495
    )Basic and diluted net loss per share
    
    
    (.78
    )
    
    
    (.79
    )
    
    
    (.85
    )
    
    
    (.78
    )Basic and diluted weighted average shares outstanding
    
    
    23,552,210
    
    
    
    23,685,080
    
    
    
    23,685,333
    
    
    
    23,688,472
 11. Business Held for Sale During the second quarter 2004, the Company announced its intention to sell its cable assets
in Cerritos, California. The Company acquired the Cerritos cable system in December 2003
from Verizon Media Ventures Inc. in conjunction with its acquisition of Verizon Medias
Pinellas County, Florida operations. In March 2005, the Company entered into a
definitive asset purchase agreement to sell its cable assets located in Cerritos, California
to WaveDivision Holdings, LLC for $10.0 million in cash, subject to customary closing
adjustments. The Company expects the sale of the Cerritos system to close in the third
quarter of 2005, subject to the satisfaction of closing conditions, including receipt of
regulatory approvals with respect to the municipal franchise in Cerritos, California.
However, there can be no assurance that the Company will complete the sale of the Cerritos
cable system or that it completes the sale in a timely manner. In the event the purchaser
does not receive necessary regulatory or other approvals or the other conditions to closing
are not satisfied, the sale will not be completed. Following the guidance of SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, effective April 30, 2004, the Cerritos
cable system was deemed
to be a long-lived asset to be disposed of based on managements commitment, plan, and
actions taken to sell the property. Therefore, no depreciation expense related to the
Cerritos assets will be recorded subsequent to April F-20




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30, 2004. The assets and liabilities related to the Cerritos system are separately stated on
the Companys balance sheet. The table below summarizes the major classes of assets and
liabilities classified as held for sale. December 31, 2004Assets:Cash
    
    $
    53Accounts Receivable
    
    
    216Net Property, Plant, and Equipment
    
    
    594Prepayments and Other
    
    
    24Total Assets
    
    $
    887Liabilities:Accounts Payable
    
    
    215Accrued Liabilities
    
    
    48Unearned Revenue
    
    
    191Advance from Affiliate
    
    
    316Total Liabilities
    
    $
    770
 The net income associated with the Cerritos cable system since April 30, 2004 is presented
separately in the statement of operations as income from discontinued operations. The
Cerritos cable system generated approximately $2,288 of revenue for the period that the
assets have been classified as held for sale. F-21




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INDEX TO EXHIBITS Exhibit No.
    
    Exhibit Description10.62**
    
    Form of Stock Option Agreement.21.1
    
    Subsidiaries of Knology, Inc.23.1
    
    Consent of Deloitte & Touche LLP.31.1
    
    Certification of the Chief Executive Officer of Knology, Inc. pursuant to Securities
Exchange Act Rule 13a-14.31.2
    
    Certification of the Chief Financial Officer of Knology, Inc. pursuant to Securities
Exchange Act Rule 13a-14.32.1
    
    Statement of the Chief Executive Officer of Knology, Inc. pursuant to §18 U.S.C. S. 1350.32.2
    
    Statement of the Chief Financial Officer of Knology, Inc. pursuant to §18 U.S.C. S. 1350.
   **
    
    Compensatory plan or arrangement.