10-K/A 1 d10ka.txt FORM 10-K/A FOR 12-31-01 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER: 333-43339 KNOLOGY BROADBAND, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 58-2203141 -------- ---------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) Knology Broadband, 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: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Not Applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|* No |_| Indicate by check mark 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 herein by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates is not applicable as no public market exists for the voting stock of the registrant. As of January 31, 2002, we had 100 shares of Common Stock outstanding; all shares are owned indirectly by Registrants's parent, Knology, Inc. The registrant meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is filing this Form with the reduced disclosure format. ---------- * The registrant does not have any class of equity securities registered under the Securities Exchange Act of 1934 and files periodic reports with the Securities and Exchange Commission pursuant to contractual obligations with third parties. TABLE OF CONTENTS Page ---- PART I ITEM 1. BUSINESS ....................................................... 1 ITEM 2. PROPERTIES ..................................................... 1 ITEM 3. LEGAL PROCEEDINGS .............................................. 2 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 2 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .......................................... 3 ITEM 6. SELECTED FINANCIAL DATA ........................................ 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................................... 4 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..... 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................... 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE ......................................... 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............. 10 ITEM 11. EXECUTIVE COMPENSATION ......................................... 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............................................... 10 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .................................................. 11 SIGNATURES .............................................................. 16 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .............................. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULES ............................................................. S-1 PART I ITEM 1. BUSINESS OUR STRUCTURE. ITC Holding formed Knology Broadband, Inc., formerly KNOLOGY Holdings, Inc., in 1995. Its percentage ownership fell below 50% during 1996. ITC Holding acquired additional stock in Knology Broadband, Inc. in 1998, becoming the holder of approximately 85% of Knology Broadband, Inc. In November 1999, ITC Holding contributed its 85% interest in Knology Broadband to Knology, Inc. in exchange for shares of Knology, Inc. stock. Additionally, other minority shareholders exchanged the remaining 15% of Knology Broadband for shares of Knology, Inc. stock. Knology Broadband, Inc. is a wholly-owned subsidiary of Knology, Inc. Knology Broadband, Inc. has been providing cable television service since 1995, telephone and high-speed Internet access services since 1997 and broadband carrier services since 1998. We own, operate and manage interactive broadband networks in the six metropolitan areas of Montgomery and Huntsville, Alabama; Columbus and Augusta, Georgia; Panama City, Florida and Charleston, South Carolina. In 1995 we began providing cable television service by acquiring cable television systems in Montgomery, Alabama and Columbus, Georgia and using those systems as a base for constructing new interactive broadband networks. Since acquiring the Montgomery and Columbus systems, we have significantly expanded these networks and upgraded the acquired networks to offer additional broadband communications services. In December 1997, we acquired a cable television system in Panama City Beach, Florida. During 2000 we completed upgrading this cable system and extending the network into the Panama City metro area. In early 1998, we began expanding into Augusta, Georgia and Charleston, South Carolina by obtaining new franchise agreements with the local governments and by constructing new interactive broadband networks. We expect to complete construction of these networks by 2005. In June 1998, TTE Inc., a reseller of local, long distance and operator services to small and medium-sized business customers throughout South Carolina was acquired and was accounted for as a purchase. In October 1998, we acquired the Cable Alabama cable television system serving the Huntsville, Alabama area which was accounted for as a purchase. We completed the upgrade of this cable system to an interactive broadband network in 2001. In 1995 Knology Broadband, Inc. was originally formed as a limited liability company and later was incorporated in the State of Delaware. The Company's principal executive offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833 and its telephone number is (706)645-8553. OVERVIEW OF OUR SERVICES. We offer our customers facilities based broadband communications services, including: - traditional and digital cable television; - local and long distance telephone; and - high-speed Internet access service. ITEM 2. PROPERTIES We own or lease property in the following locations: 1

Our principal physical assets consist of fiber optic and coaxial broadband cable and equipment, located either at the equipment site or along the networks. Our distribution equipment along the networks is generally attached to utility poles we own or use under standard pole attachment agreements with local public utilities, although in some areas the distribution cable is buried in underground ducts or trenches. Under our pole attachment agreements, local public utilities and other pole owners rent us space on utility poles to attach our network cables and equipment. The rate a pole owner charges us for space varies, but the rate is generally based upon the amount of space we rent. Our franchises give us rights-of-way for our networks. The physical components of the networks require maintenance and periodic upgrading to keep pace with technological advances. We believe that our properties, taken as a whole, are in good operating condition and are suitable for our business operations. ITEM 3. LEGAL PROCEEDINGS In the normal course of business, we are subject to litigation. 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 party to regulatory proceedings affecting the relevant segments of the communications industry generally. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not required under reduced disclosure format. 2 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our stock is not traded on any exchange or quoted on the Nasdaq National Market or any other established trading market. No market makers currently make a market in our stock and we do not plan to engage a market maker. Therefore, there is no established public trading market and no high and low bid information or quotations available. As of January 31, 2001, we had 100 shares of common stock outstanding; all shares are owned indirectly by the registrant's parent, Knology, Inc. We have never declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends on our capital 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. 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 the board of directors deems relevant. In addition, our ability to pay dividends is limited by the terms of the indenture governing our outstanding notes and by the terms of our credit facility. ITEM 6. SELECTED FINANCIAL DATA Not required under reduced disclosure format. 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE MANAGEMENT'S DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS ANNUAL REPORT INCLUDE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORS THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT OUR SUPPLIERS AND CUSTOMERS MAY REFUSE TO CONTINUE DOING BUSINESS WITH US OR MAY REFUSE TO EXTEND TRADE CREDIT TO US AS A RESULT OF A GOING CONCERN OPINION WE RECEIVED FROM OUR INDEPENDENT ACCOUNTANTS WITH RESPECT TO OUR AUDITED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 2001. (3) THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEW COMPETITORS, (4) THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS IMPACTING OUR INDUSTRY AND MARKETS, (5) THAT NEEDED FINANCING WILL NOT BE AVAILABLE, (6) THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT CONSUMER AND CORPORATE SPENDING ARE MATERIALLY IMPACTED, AND (7) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR. THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN. The following is a discussion of our consolidated financial condition and results of operations for the three years ended December 31, 2001 and certain factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read in conjunction with our financial statements and related notes elsewhere in this Annual Report. Background ITC Holding formed Knology Broadband, Inc., formerly KNOLOGY Holdings, Inc., in 1995. Its percentage ownership fell below 50% during 1996. ITC Holding acquired additional stock in Knology Broadband, Inc. in 1998, becoming the holder of approximately 85% of Knology Broadband, Inc. In November 1999, ITC Holding contributed its 85% interest in Knology Broadband to Knology, Inc. in exchange for shares of Knology, Inc. stock. Additionally, other minority shareholders exchanged the remaining 15% of Knology Broadband for shares of Knology, Inc. stock. Knology Broadband, Inc. is a wholly-owned subsidiary of Knology, Inc. Knology Broadband, Inc. has been providing cable television service since 1995, telephone and high-speed Internet access services since 1997 and broadband carrier services since 1998. We own, operate and manage interactive broadband networks in the six metropolitan areas of Montgomery and Huntsville, Alabama; Columbus and Augusta, Georgia; Panama City, Florida and Charleston, South Carolina. In 1995 Knology Broadband, Inc. was originally formed as a limited liability company and later was incorporated in the State of Delaware. The Company's principal executive offices are located at 1241 O.G. Skinner Drive, West Point, Georgia 31833 and its telephone number is (706) 645-8553. Significant Accounting Policies Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements included in Item 8 of this form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's revenues are recognized when services are provided, regardless of the period in which they are billed. Fees billed in advance are recorded in the consolidated balance sheets as unearned revenue and are deferred until the month the service is provided. Recent Accounting Pronouncements The Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" in June 2001. SFAS No. 141 requires all business combinations initiated after June 4 30, 2001 to be accounted for using the purchase method. The Company had no business combinations initiated after June 30, 2001. SFAS No. 142 provides that goodwill is no longer subject to amortization over its estimated useful life. It requires that goodwill be assessed for impairment on at least an annual basis by applying a fair-value-based test. The Company adopted SFAS No. 142 on January 1, 2002. The Company has performed a goodwill impairment test in accordance with SFAS No. 142. Based on the results of the goodwill impairment test the Company expects to record an impairment loss of $1.3 million in the first quarter of 2002 as a cumulative effect of change in accounting principle. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143, addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of this new standard. 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. The Company is currently assessing the impact of this new standard. REVENUES AND EXPENSES We can group our revenues into four categories: video revenues, voice revenues, data revenues and other revenues. - VIDEO REVENUES. Our video revenues consist of fixed monthly fees for basic, premium and digital cable television services, as well as fees from pay-per-view movies and events such as boxing matches and concerts, that involve a charge for each viewing. Video revenues accounted for approximately 75.7%, 68.5% and 58.6% of our consolidated revenues for the years ended December 31, 1999, December 31, 2000 and December 31, 2001, respectively. In providing video services we currently compete with AT&T Broadband, Comcast Cable Communications, Inc., Time Warner Cable, Mediacom Communications Corporation and Charter Communications, Inc. We also compete with satellite television providers DirecTV, Inc. and Echostar Communications Corporation. Our other competitors include other cable television providers; broadcast television stations; and other satellite television companies. We expect in the future to compete with telephone companies providing cable television service within our service areas and with wireless cable companies. - VOICE REVENUES. Our voice revenues consist primarily of fixed monthly fees for local service, enhanced services such as call waiting and voice mail and usage fees for long distance service. Voice revenues accounted for approximately 18.2%, 22.2% and 24.4% of our consolidated revenues for the years ended December 31, 1999, December 31, 2000 and December 31, 2001, respectively. - DATA REVENUES AND OTHER REVENUES. Our data revenues consist primarily of fixed monthly fees for high-speed Internet access service and rental of cable modems. Other revenues resulted principally from broadband carrier services and video production services. These combined revenues accounted for approximately 6.1%, 9.3% and 17.0% of our consolidated revenues for the years ended December 31, 1999, December 31, 2000 and December 31, 2001, 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 providers that provide digital subscriber lines, or DSL; providers of satellite-based Internet access services; long-distance telephone companies; and cable television companies. We also expect to compete in the future with providers of wireless high-speed data services. Our operating expenses include cost of services expenses, selling, operations and administrative expenses and depreciation and amortization expenses. Cost of service expenses include: - VIDEO COST OF SERVICES. Video cost of services consist primarily of monthly fees to the National Cable Television Cooperative and other programming providers, and are generally based on the average number of subscribers to each program. Programming costs as a percentage of video revenues were approximately 42.7%, 43.8% and 47.1% for the years ended December 31, 1999, December 31, 2000 and December 31, 2001, respectively. Programming costs is our largest single cost and we expect this to continue. Since programming cost is primarily based on numbers of subscribers, it will increase as we add more subscribers. Additionally, programming cost will increase as costs per channel increase over time. - VOICE COST OF SERVICES. Voice cost of services consist primarily of transport cost and network access fees. The voice cost of services as a percentage of revenues were approximately 80.1%, 58.8% and 30.5% for the years ended December 31, 1999, December 31, 2000 and 2001, respectively. - DATA AND OTHER COST OF SERVICES. Data and other cost of services consist primarily of transport cost and network access fees. The data and other cost of services as a percentage of revenues were approximately 10.4%, 11.1% and 18.2% for the years ended December 31, 1999, December 31, 2000 and 2001, respectively. We expect the growth of new video connections to decrease as the video segment matures in our current markets. While the number of new video connections may decrease, management feels that the opportunity to increase revenue and video margins is available with the introduction of new products and new technology. New voice and data connections are expected to increase with sales and marketing efforts directed at selling customers a bundle of services and penetrating untapped market segments and offering new services. Relative to our current product mix, voice and data revenue will become larger percentages of our overall revenue, and potentially will provide higher margins. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of our consolidated revenues will decrease. 5 Selling, operations and administrative expenses include: - SALES AND MARKETING COSTS. Sales and marketing costs 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 and maintenance monitoring. - CUSTOMER SERVICE EXPENSES. Customer service expenses include payroll and departmental costs incurred for customer service representatives and management. - GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist of corporate and subsidiary general management and administrative costs. Depreciation and amortization expenses include depreciation of our interactive broadband networks and equipment, and amortization of cost in excess of net assets and other intangible assets related to acquisitions. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUES. Operating revenues increased 36.7% from $59.6 million for the year ended December 31, 2000 to $81.5 million for the year ended December 31, 2001. The increased revenues for video, voice and data and other services are primarily due to an increase in the number of connections, from 149,950 as of December 31, 2000 to 206,052 as of December 31, 2001. The additional connections resulted primarily from: o The extension of our broadband networks, through the construction of additional facilities and the extension of additional cables passing marketable homes and businesses in the Augusta and Charleston markets, which provide opportunities for sales to new customers. o The upgrade of our existing broadband networks in Huntsville and Panama City to allow for high capacity interactive communication, which allows these markets to provide voice, data and enhanced products, including digital video and video-on-demand where not previously available. This provides opportunity for new sales to existing customers and sales to new customers in response to requests for bundles of services. We expect the growth in the number of new video connections to decrease as the video segment matures in its current markets. While the number of new video connections may decrease, management believes that the opportunity to increase revenue and video margins is available with the introduction of new products and new technology. New voice and data connections are expected to increase with sale and marketing efforts directed at selling customers a bundle of services and penetrating untapped market segments and offering new services. Relative to our current product mix, voice and data revenue will become larger percentages of our overall revenue, and potentially will provide higher margins. Based on the anticipated changes in our revenue mix, management expects that our consolidated cost of services as a percentage of consolidated revenues will decrease. COST OF SERVICES. Cost of services increased 18.4% from $26.3 million for the year ended December 31, 2000, to $31.1 million for the year ended December 31, 2001. Cost of services for video services increased 25.8% from $17.9 million for the year ended December 31, 2000, to $22.5 million for the same period in 2001. Cost of services for voice services decreased 21.7% from $7.8 million for the year ended December 31, 2000, to $6.1 million for the same period in 2001. Cost of services for data and other services increased 309% from $615,000 for the year ended December 31, 2000, to $2.5 million for the same period in 2001. We expect our cost of services to continue to increase as we add more connections. Programming costs, which are our largest single expense item, have been increasing over the last several years on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. Management expects this trend to continue. We may not be able to pass these higher costs on to customers because of competitive forces, which would adversely affect our cash flow and operating margins. OPERATING MARGINS. Margins increased 51.2% from $33.3 million for the year ended December 31, 2000, to $50.4 million for the year ended December 31, 2001. Margins for video services increased 9.9% from $23.0 million for the year ended December 31, 2000, to $25.2 million for the same period in 2001. Margins for voice services increased 155% from $5.4 million for the year ended December 31, 2000, to $13.9 million for the same period in 2001. Margins for data and other services increased 128% from $4.9 million for the year ended December 31, 2000, to $11.3 million for the same period in 2001. OPERATING EXPENSES. Operating expenses, excluding depreciation and amortization, increased 17.6% from $49.1 million for the year ended December 31, 2000, to $57.8 million for the year ended December 31, 2001. 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. Selling, operations and administrative expenses will increase operating expenses as we expand in our markets. Our depreciation and amortization expenses increased 31.3% from $52.0 million for the year ended December 31, 2000 to $68.2 million for the year ended December 31, 2001. The increase in depreciation is primarily due to the expansion of our networks and growth in to new markets. OTHER INCOME AND EXPENSES. Our interest income was $174,000 for the year ended December 31, 2000, compared to $69,000 for the year ended December 31, 2001. The decrease in interest income is due to the draw down of marketable securities to fund planned expansion and acquisitions. Our interest expense increased from $39.1 million for the year ended December 31, 2000 to $44.3 million for the year ended December 31, 2001. The increase in interest expense reflects the accrual of the interest attributable to the senior discount notes issued in October 1997. INCOME TAX. We recorded an income tax benefit of $3.4 million for the year ended December 31, 2000 compared to an income tax provision of $2.4 million for the year ended December 31, 2001. The income tax benefit resulted from our utilizing net tax losses under a tax sharing agreement with ITC Holding, which became effective in August 1998. Effective February 7, 2000, the date of our spin-off from ITC Holding, we no longer participate in the tax agreement. Therefore the tax effect of taxable losses incurred subsequent to February 7, 2000 are not realized as a tax benefit, but reserved for until we experience taxable income, at which time a tax benefit will be recorded. Included in prior years was an alternative minimum tax ("AMT") credit carry-forward. An AMT credit can be carried forward indefinitely as a credit against regular tax liability. However, because the Company has historically had, and is expected to have, net operating losses, it is more likely than not that the benefit of the tax credit will not be realized. Accordingly, a reserve has been recorded against the AMT credit in 2001. NET LOSS. We incurred a net loss of $104.5 million for the year ended December 31, 2000 compared to a net loss of $122.9 million for the year ended December 31, 2001. The increase in net loss is a result of the expansion of our operations and 6 the increase in the number of employees associated with such expansion and growth into new markets. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 REVENUES. Operating revenues increased 32.7% from $44.9 million for the year ended December 31, 1999 to $59.6 million for the year ended December 31, 2000. The increased revenues for video, voice and data and other services are primarily due to an increase in the number of connections, from 111,859 as of December 31, 1999 to 149,950 as of December 31, 2000. The additional connections resulted primarily from: o The extension of our broadband networks, through the construction of additional facilities and the extension of additional cables passing marketable homes and businesses in the Augusta and Charleston markets, which provide opportunities for sales to new customers. o The upgrade of our existing broadband networks in Huntsville and Panama City to allow for high capacity interactive communication, which allows these markets to provide voice, data and enhanced products, including digital video and video-on-demand where not previously available. This provides opportunity for new sales to existing customers and sales to new customers in response to requests for bundles of services. We expect the growth in the number of new video connections to decrease as the video segment matures in its current markets. While the number of new video connections may decrease, management believes that the opportunity to increase revenue and video margins is available with the introduction of new products and new technology. New voice and data connections are expected to increase with sale and marketing efforts directed at selling customers a bundle of services and penetrating untapped market segments and offering new services. Relative to our current product mix, voice and data revenue will become larger percentages of our overall revenue, and potentially will provide higher margins. Based on the anticipated changes in our revenue mix, management expects that our consolidated cost of services as a percentage of consolidated revenues will decrease. COST OF SERVICES. Cost of services increased 23.0% from $21.4 million for the year ended December 31, 1999, to $26.3 million for the year ended December 31, 2000. Cost of services for video services increased 23.1% from $14.5 million for the year ended December 31, 1999, to $17.9 million for the same period in 2000. Cost of services for voice services increased 18.9% from $6.5 million for the year ended December 31, 1999, to $7.8 million for the same period in 2000. Cost of services for data and other services increased 108% from $296,000 for the year ended December 31, 1999, to $615,000 for the same period in 2000. We expect our cost of services to continue to increase as we add more connections. Programming costs, which are our largest single expense item, have been increasing over the last several years on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. Management expects this trend to continue. We may not be able to pass these higher costs on to customers because of competitive forces, which would adversely affect our cash flow and operating margins. OPERATING MARGINS. Margins increased 41.5% from $23.6 million for the year ended December 31, 1999, to $33.3 million for the year ended December 31, 2000. Margins for video services increased 18.0% from $19.5 million for the year ended December 31, 1999, to $23.0 million for the same period in 2000. Margins for voice services increased 235% from $1.6 million for the year ended December 31, 1999, to $5.4 million for the same period in 2000. Margins for data and other services increased 99.2% from $2.4 million for the year ended December 31, 1999, to $4.9 million for the same period in 2000. OPERATING EXPENSES. Operating expenses, excluding depreciation and amortization, increased 31.9% from $37.2 million for the year ended December 31, 1999, to $49.1 million for the year ended December 31, 2000. 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. Selling, operations and administrative expenses will increase operating expenses as we expand in our markets. Our depreciation and amortization expenses increased 47.1% from $35.3 million for the year ended December 31, 1999 to $52.0 million for the year ended December 31, 2000. The increase in depreciation is primarily due to the expansion of our networks and growth in to new markets. OTHER INCOME AND EXPENSES. Our interest income was $1.5 million for the year ended December 31, 1999, compared to $174,000 for the year ended December 31, 2000. The interest income reflects the interest earned from the investment of certain proceeds received from the issuance of the senior discount notes in October 1997. The decrease in interest income is due to the draw down of marketable securities to fund planned expansion and acquisitions. Our interest expense increased from $33.5 million for the year ended December 31, 1999 to $39.1 million for the year ended December 31, 2000. The increase in interest expense reflects the accrual of the interest attributable to the senior discount notes issued in October 1997. INCOME TAX. We recorded an income tax benefit of $20.7 million for the year ended December 31, 1999 compared to an income tax benefit $3.4 million for the year ended December 31, 2000. The income tax benefit resulted from our utilizing net tax losses under a tax sharing agreement with ITC Holding, which became effective in August 1998. Effective February 7, 2000, the date of our spin-off from ITC Holding, we no longer participate in the tax agreement. Therefore the tax effect of taxable losses incurred subsequent to February 7, 2000 are not realized as a tax benefit, but reserved for until we experience taxable income, at which time a tax benefit will be recorded. NET LOSS. We incurred a net loss of $60.3 million for the year ended December 31, 1999 compared to a net loss of $104.5 million for the year ended December 31, 2000. The increase in net loss is a result of the expansion of our operations and the increase in the number of employees associated with such expansion and growth into new markets. Liquidity and Capital Resources As of December 31, 2001, we had net working capital deficit of $27.0 million, compared to a net working capital deficit of $24.5 million as of December 31, 2000. The increase in the deficit from December 31, 2000 to December 31, 2001 is due to increase in cash of $4.5 million, a reduction of $9.3 million in accounts payable offset by an increase of $15.5 million in the current portion of notes payable primarily for the maturity of the Wachovia Corporation credit facility. Net cash used in operations totaled $4.4 million for the year ended December 31, 1999, net cash provided by operations totaled $14.7 million for the year ended December 31, 2000, and net cash used by operations totaled $18.7 million for the year ended December 31, 2001. 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 and loss on disposition of assets. 7 Net cash used for investing activities was $23.2 million, $116.3 million and $75.1 million for the years ended December 31, 1999, 2000 and 2001, respectively. Our investing activities for the year ended December 31, 1999 consisted of $83.0 million of capital expenditures partially offset by $60.2 million in proceeds from the sale of short-term investments. Investing activities in 2000 consisted of $118.9 million of capital expenditures offset by $2.4 million in net proceeds from the sale of short-term investments. In 2001 investing activities consisted of $74.8 million of capital expenditures and an additional investment in for additions to our subscriber base of $328,000. We received net cash flow from financing activities of $28.9 million, $95.4 million and $98.3 million for the years ended December 31, 1999, 2000 and 2001, respectively. Financing activities in 1999 consisted primarily of $19.0 million of short-term borrowings through our existing credit facility, $1.1 million from the issuance of warrants and advances from our parent of $8.9 million. Financing activities in 2000 consisted primarily of $10.0 million of short-term borrowings through our parent and an equity infusion of $104.0 million from our parent offset by repayment of advances from our parent of $15.0 million. Financing activities in 2001 consisted of an equity infusion of $98.4 million from our parent. Funding to Date We have raised equity capital and borrowed money to finance a significant portion of our operating, investing and financing activities in the development of our business. On October 22, 1997, we received net proceeds of $242.4 million from the offering of units consisting of senior discount notes due 2007 and warrants to purchase preferred stock. The notes were sold at a substantial discount from their principal amount at maturity, and there will not be any payment of cash interest on the notes prior to April 15, 2003. The notes will fully accrete to face value of $444.1 million on October 15, 2002. From and after October 15, 2002, the notes will bear interest, which will be payable in cash, at a rate of 11 7/8% per annum on April 15 and October 15 of each year, commencing April 15, 2003. The indenture contains covenants that affect, and in certain cases restrict, the ability of Knology Broadband to: o incur indebtedness; o pay dividends; o prepay subordinated indebtedness; o redeem capital stock; o make investments; o engage in transactions with stockholders and affiliates; o create liens; o sell assets; and o engage in mergers and consolidations. On December 22, 1998, we entered into a $50 million four-year senior secured credit facility with First Union National Bank and First Union Securities, Inc. On November 7, 2001, First Union National Bank and First Union Securities, Inc. agreed to amend the credit facility. The credit facility, as amended, allows us to borrow up to the greater of (i) $15.5 million or (ii) three times our annualized consolidated cash flow. The credit facility may be used for working capital and other purposes, including capital expenditures and permitted acquisitions. At our option, interest will accrue based on either the prime or federal funds rate plus applicable margin or the LIBOR rate plus applicable margin. The applicable margin may vary from 4.0% for Base Rate Loans to 5.0% for LIBOR Rate Loans. The credit facility contains a number of covenants that restrict our ability to take certain actions, including the ability to: o incur indebtedness; o create liens; o pay dividends; o make distributions or stock repurchases; o make investments; 8 o engage in transactions with affiliates; o sell assets; and o engage in mergers and acquisitions. The credit facility also includes covenants requiring compliance with certain operating and financial ratios on a consolidated basis, including the number of customer connections and average revenue per subscriber. We are currently in compliance with these covenants, as amended, but there can be no assurances that we will remain in compliance. Should we not be in compliance with the covenants, we 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 facility could be payable to the lender on demand. A change of control of Knology Broadband, as defined in the credit facility agreement, would constitute a default under the covenants. In connection with the amendment of the credit facility, we paid First Union National Bank $250,000. The maximum amount available under the amended credit facility as of December 31, 2001 was approximately $15.5 million. As of December 31, 2001, $15.5 million had been drawn against the credit facility. In January 2002, we also entered into a secured intercompany credit facility with Knology, Inc. The secured intercompany credit facility is intended to provide a mechanism for any funding Knology, Inc. chooses to advance to us; however, the facility does not represent a present commitment from Knology, Inc. to fund any our future cash needs. The intercompany credit facility is secured by substantially all of the assets of Knology Broadband and is subordinate to the Wachovia Credit Facility. Future Funding Our business requires substantial investment to finance capital expenditures and related expenses, incurred in connection with the expansion and upgrade of our interactive broadband networks, funding subscriber equipment, maintaining the quality of our networks, and to finance the repayment, extinguishment or repurchase of our debt. We have completed the construction of our networks in Montgomery, Alabama; Columbus, Georgia and Panama City, Florida. We expect that, with sufficient funds, the construction of our networks in our other existing markets will be substantially completed during 2005. We will not have sufficient funds to complete this construction without significant additional financing. Following are the cash obligations for maturities of long-term debt for each of the next five years as of December 31, 2001: In millions 2002 ...................................................... $16.0 2003 ...................................................... 52.7 2004 ...................................................... 52.7 2005 ...................................................... 52.7 2006 ...................................................... 52.7 Thereafter ................................................ 496.8 Total......................................................$723.8 Knology leases office space, utility poles, and other assets for varying periods. Leases that expire are generally expected to be renewed or replaced by other leases. Future minimum rental payments required under the operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 are as follows: In millions 2002 .......................................................$0.9 2003 ....................................................... 0.8 2004 ........................................................0.7 2005 ........................................................0.6 2006 ........................................................0.5 Thereafter ..................................................2.6 Total minimum lease payments ...............................$5.9 Funding to complete the construction of our networks throughout our markets and for our working capital needs, current and future operating losses, and debt service requirements will require continuing capital investment. The Company has historically relied on capital infusions from its parent company to meet its funding requirements and plans to continue to rely on its parent, however, there can be no assurance that sufficient funding will continue to be available in the future or that it will be available on terms acceptable to the Company. If we are not successful in raising additional capital, we may not be able to complete the construction of our networks throughout our markets. This may cause us to violate our franchise agreements, which could adversely affect us, or may limit our growth within these markets. Failure to obtain additional funding would also limit our ability continue in business or to expand our business. As a result of the aforementioned factors and related uncertainties, there is substantial doubt about the Company's ability to continue as a going concern. 9 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 utilized, 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 facility which are based on either a prime or federal funds rate plus applicable margin or LIBOR plus applicable margin. Any changes in these rates would affect the rate at which we could borrow funds under our bank credit facility. 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-16 and S-1 through S-2 herein. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Not required under reduced disclosure format. ITEM 11. EXECUTIVE COMPENSATION Not required under reduced disclosure format. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Not required under reduced disclosure format. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not required under reduced disclosure format. 10 PART IV ITEM 14. 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. Report of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 2000 and 2001. Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001. Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001. Consolidated Statements of Stockholders' (Deficit) Equity for the Years Ended December 31, 1999, 2000 and 2001. Notes to Consolidated Financial Statements. (a)(2) The following financial statement schedule is filed as part of this report and is attached hereto as pages S-1 and S-2. Independent Auditor's Report on the Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts. 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. 11 (a)(3) The following exhibits are either provided with this Form 10-K or are incorporated herein by reference: Exhibit Number Exhibit Description --------- ------------------- 3.1 Certificate of Incorporation of KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 3.1 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 3.2 Certificate of Amendment of Certificate of Incorporation of KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 3.1 to KNOLOGY Holdings, Inc.'s Form 10-Q for the quarter ended March 31, 1998)). 3.3 Certificate of Amendment of Certificate of Incorporation of Knology Broadband, Inc. (Incorporated herein by reference from Exhibit 3-1 to Knology Broadband's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 3.4 Certificate of Amendment to Certificate of Designation of Preferred Stock. (Incorporated herein by reference from Exhibit 3.2 to KNOLOGY Holdings, Inc.'s Form 10-Q for the quarter ended March 31, 1998)). 3.5 Certificate of Amendment to Certificate of Designation of Preferred Stock of Knology Broadband, Inc. (Incorporated herein by reference to Exhibit 3.2 to Knology Broadband's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 3.6 Amended and Restated Bylaws of KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 3.2 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 4.1 Indenture dated as of October 22, 1997 between KNOLOGY Holdings, Inc. and United States Trust Company of New York, as Trustee, relating to the 11 7/8% Senior Discount Notes Due 2007 of KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 4.1 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 4.2 Form of Senior Discount Note (contained in Exhibit 4.1). 4.3 Form of Exchange Note (contained in Exhibit 4.1). 10.1 Unit Purchase Agreement, dated as of October 16, 1997 between KNOLOGY Holdings, Inc. and SCANA Communications, Inc. (Incorporated herein by reference from Exhibit 10.1 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 10.2 Lease Agreement dated April 15, 1996 by and between D.L. Jordan and American Cable Company, Inc. (Incorporated herein by reference from Exhibit 10.5 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 10.3 Pole Attachment Agreement dated January 1, 1998 by and between Gulf Power Company and Beach Cable, Inc. (Incorporated herein by reference from Exhibit 10.7 to KNOLOGY Holdings, 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 from Exhibit 10.16 to KNOLOGY Holdings, 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 from Exhibit 10.17 to KNOLOGY Holdings, 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 from Exhibit 10.25 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 12 10.7 Certificate of Membership with National Cable Television Cooperative, dated January 29, 1996, of Cybernet Holding, Inc. (Incorporated herein by reference from Exhibit 10.34 to KNOLOGY Holdings, 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 from Exhibit 10.18 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.9 Ordinance No. 16-90 (Montgomery, Alabama) dated March 6, 1990 (Incorporated herein by reference from Exhibit 10.44 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 10.10 Ordinance No. 50-76 (Montgomery, Alabama) (Incorporated herein by reference from Exhibit 10.45 to KNOLOGY Holdings, Inc.'s Registration Statement on Form S-4 (File No. 333-43339)). 10.11 Ordinance No. 9-90 (Montgomery, Alabama) dated January 16, 1990 (Incorporated herein by reference from Exhibit 10.45.1 to KNOLOGY Holdings, 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 from Exhibit 10.46 to KNOLOGY Holdings, 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 from Exhibit 10.49 to KNOLOGY Holdings, 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 from Exhibit 10.53 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997). 10.15 Ordinance No. 1723 (Panama City, Florida) dated March 10, 1998 (Incorporated herein by reference from Exhibit 10.54 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997). 10.16 Franchise Agreement (Charleston County, South Carolina) dated December 15, 1998 (Incorporated herein by reference from Exhibit 10.31 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.17 Ordinance No. 1998-47 (North Charleston, South Carolina) dated May 28, 1998 (Incorporated herein by reference from Exhibit 10.32 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.18 Ordinance No. 1998-77 (Charleston, South Carolina) dated April 28, 1998 (Incorporated herein by reference from Exhibit 10.33 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.19 Ordinance No. 98-5 (Columbia County, Georgia) dated August18, 1998 (Incorporated herein by reference from Exhibit 10.34 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.20 Network Access Agreement dated July 1, 1998 between SCANA Communications, Inc., f/k/a PX Systems, Inc. and KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 10.36 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 13 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 from Exhibit 10.38 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.23 Lease Agreement dated October 12, 1998 between Southern Company Services, Inc. and KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 10.39 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.24 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 from Exhibit 10.40 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.25 License Agreement dated March 3, 1998 between BellSouth Telecommunications, Inc. and KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 10.41 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.26 Pole Attachment Agreement dated February 18, 1998 between KNOLOGY Holdings, Inc. and Georgia Power Company (Incorporated herein by reference from Exhibit 10.44 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.27 Assignment Agreement dated March 4, 1998 between Gulf Power Company and KNOLOGY of Panama City, Inc. (Incorporated herein by reference from Exhibit 10.46 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.28 Adoption Agreements dated March 1, 1999 between KNOLOGY Holdings, Inc. and BellSouth Telecommunications, Inc. (Incorporated herein by reference from Exhibit 10.47 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.29 Carrier Services Agreement dated September 30, 1998 between Business Telecom, Inc. and KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 10.50 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.30 Reseller Services Agreement dated September 9, 1998 between Business Telecom, Inc. and KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 10.51 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.31 Private Line Services Agreement dated September 10, 1998 between BTI Communications Corporation and KNOLOGY Holdings, Inc. (Incorporated herein by reference from Exhibit 10.52 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.32 Credit Facility Agreement between First Union National Bank, First Union Capital Markets Corp. and KNOLOGY Holdings, Inc. dated December 22, 1998 (Incorporated herein by reference to Exhibit 10.53 to KNOLOGY Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998). 10.32.1 First Amendment to Credit Facility Agreement, dated as of July 8, 1999 (Incorporated herein by reference to Exhibit 10.4.1 to KNOLOGY, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.32.2 Second Amendment to Credit Facility Agreement, dated as of November 24, 1999 (Incorporated herein by reference to Exhibit 10.4.2 to KNOLOGY, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.32.3 Third Amendment to Credit Facility Agreement, dated as of March 31, 2000 (Incorporated herein by reference to Exhibit 10.4.3 to KNOLOGY, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.32.4 Fourth Amendment to Credit Facility Agreement, dated as of September 30, 2000 (Incorporated herein by reference to Exhibit 10.4.4 to KNOLOGY, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 14 10.32.5 Fifth Amendment to Credit Facility Agreement, dated as of March 31, 2001 (Incorporated herein by reference to Exhibit 10.4.5 to KNOLOGY, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). 10.32.6 Sixth Amendment to Credit Facility Agreement, dated as of November 7, 2001 (Incorporated herein by reference to Exhibit 10.3.1 to KNOLOGY, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 10.32.7 Seventh Amendment to Credit Facility Agreement, dated as of January 1, 2002 (Incorporated herein by reference to Exhibit 10.32.7 to KNOLOGY, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001). 10.43 Subordinated Intercompany Credit Agreement Promissory Note, dated January 1, 2002 made by KNOLOGY Broadband, Inc. in favor of KNOLOGY, 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, 2001). 10.43.1 Intercompany Loan Guaranty, dated as of January 1, 2002, executed by KNOLOGY of Columbus, Inc., KNOLOGY of Montgomery, Inc., KNOLOGY of Panama City, Inc., KNOLOGY of Augusta, Inc., KNOLOGY of Charleston, Inc., KNOLOGY of South Carolina, Inc., KNOLOGY of Alabama, Inc., KNOLOGY of Florida, Inc., KNOLOGY of Huntsville, Inc., and KNOLOGY Broadband, Inc., as Guarantors in favor of KNOLOGY, Inc. (Incorporated herein by reference to Exhibit 10.56.1 to KNOLOGY, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001). 10.43.2 Security Agreement, dated as of January 1, 2002, made by KNOLOGY Broadband, Inc., and certain undersigned Subsidiaries of KNOLOGY Broadband, Inc. in favor of KNOLOGY, Inc. (Incorporated herein by reference to Exhibit 10.56.2 to KNOLOGY, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001). 10.43.3 Pledge Agreement, dated as of January 1, 2002, made by KNOLOGY Broadband, Inc., in favor of KNOLOGY, Inc. (Incorporated herein by reference to Exhibit 10.56.3 to KNOLOGY, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001). 23.1 ** Consent of Arthur Andersen LLP 99.1 ** Letter From Knology Broadband, Inc. to the SEC regarding Arthur Andersen LLP 99.2 Statement of the Chief Executive Officer and the Chief Financial Officer of Knology Broadband, Inc. pursuant to 18 U.S.C. S. 1350. __________________ ** Previously filed. (b) REPORTS ON FORM 8-K. On March 11, 2002 Knology Broadband, Inc. filed a current report on form 8-K reporting it 2001 fourth quarter and year-end results. (c) EXHIBITS We hereby file as part of this Form 10-K the Exhibits listed in the Index to Exhibits. (d) FINANCIAL STATEMENT SCHEDULE The following financial statement schedule is filed herewith: Schedule II--Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are inapplicable or the information required to be set forth therein is provided in our Consolidated Financial Statements or notes thereto. 15 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 as of the 29th day of October, 2002. KNOLOGY BROADBAND, INC. By: /s/ Rodger L. Johnson --------------------- President and Chief Executive Officer CERTIFICATIONS I, Rodger L. Johnson, President and Chief Executive Officer of Knology Broadband, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Knology Broadband, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 29, 2002 /s/ Rodger L. Johnson ________________________________ Rodger L. Johnson President and Chief Executive Officer I, Robert K. Mills, Chief Financial Officer of Knology Broadband, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Knology Broadband, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 29, 2002 /s/ Robert K. Mills ________________________________ Robert K. Mills Chief Financial Officer 16 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Knology Broadband, Inc.: We have audited the accompanying consolidated balance sheets of KNOLOGY BROADBAND, INC. (a Delaware corporation, a wholly owned subsidiary of Knology, Inc.) AND SUBSIDIARIES as of December 31, 2000 and 2001 and the related consolidated statements of operations, stockholders' deficit and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2001. These 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 auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Knology Broadband, Inc. and subsidiaries as of December 31, 2000 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and is in a working capital deficit and uncertain liquidity position that raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the company be unable to continue as a going concern. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia February 7, 2002 THE ABOVE REPORT OF ARTHUR ANDERSEN LLP IS A COPY OF THE PREVIOUSLY ISSUED REPORT OF ARTHUR ANDERSEN LLP, AND THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. F-2 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial statements. F-3 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial statements. F-4 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, ACCUMULATED DEFICIT AND COMPREHENSIVE LOSS (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial statements. F-5 KNOLOGY BROADBAND , INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial statements. F-16 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 2000, and 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION ORGANIZATION Knology Broadband, Inc. (the "Company"), formerly Knology Holdings, Inc., was incorporated in Delaware in November 1995 under the name CyberNet Holding, Inc. The Company was previously a subsidiary of ITC Holding Company ("ITC Holding"). In November 1999, ITC Holding completed a reorganization of the Company and its subsidiaries and certain of its other wholly owned and majority owned, subsidiaries ("the Reorganization"), in which ITC Holding contributed its 85% interest in the Company to Knology, Inc. The Company's minority stockholders exchanged the remaining 15% of the Company for shares in Knology, Inc. Knology, Inc., previously a wholly owned subsidiary of ITC Holding, was incorporated under the laws of the state of Delaware in September 1998 to enable ITC Holding to complete the Reorganization. As a result of the Reorganization, the Company is now a wholly owned subsidiary of Knology, Inc. NATURE OF BUSINESS The Company owns and operates advanced interactive broadband networks and provides residential and business customers broadband communications services, including analog and digital cable television, local and long distance telephone, high-speed Internet access and broadband carrier services to various markets in the southeastern United States. BASIS OF PRESENTATION The consolidated financial statements are prepared on the accrual basis of accounting and include the accounts of the Company and all subsidiaries. All significant intercompany balances have been eliminated. Certain prior year amounts have been reclassed to conform with the current year presentation. FINANCIAL CONDITION The Company has experienced operating losses as a result of the expansion of the advanced broadband communications networks and services into new and existing markets. While management expects its expansion plans to result in profitability, there can be no assurance that growth in the Company's revenue or customer base will continue or that the Company will be able to achieve or sustain profitability and/or positive cash flow. The Company is subject to various risks in connection with the operation of its business including, among other things, (i) the Company's inability to satisfy anticipated working capital or other cash requirements, (ii) the Company's lack of liquidity and its inability to raise additional capital, (iii) changes in the Company's business strategy or an inability to execute is strategy due to unanticipated changes in the market, and (iv) various competitive factors that may prevent the Company from competing successfully in the marketplace. The Company has an accumulated deficit of $337,560, a working capital deficit of $26,965 and long-term debt of $412,667 as of December 31, 2001. Management is evaluating alternatives to improve the Company's capital structure, including restructuring its senior discount notes. Funding of the Company's working capital deficit, current and future operating losses, debt service requirements and expansion of the Company will require continuing capital investment. The Company has historically relied on capital infusion from its parent company to meet its funding requirements and plans to continue to rely on its parent, however, there can be no assurance that sufficient funding will continue to be available in the future or that it will be available on terms acceptable to the Company. Failure to obtain sufficient capital could materially affect the Company's operations and expansion strategies. As a result of the aforementioned factors and related uncertainties, there is substantial doubt about the Company's ability to continue as a going concern. F-7 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 are provided over the estimated useful lives as follows: Years ----- Buildings .................................. 25 System and installation equipment .......... 7-10 Production equipment ....................... 7 Test and office equipment .................. 3-7 Automobiles and trucks ..................... 5 Leasehold improvements ..................... 5 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. Interest is capitalized in connection with the construction of the Company's broadband networks. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Approximately $3,040, $2,329 and $2,430 of interest cost was capitalized in 1999, 2000 and 2001, respectively. INTANGIBLE ASSETS Intangible assets include the excess of the purchase price of acquisitions over the fair value of net assets acquired as well as various other acquired intangible assets. Intangible assets and the related useful lives and accumulated amortization at December 31, 2000 and 2001 are as follows: Amortization Period 2000 2001 (Years) ---- ---- ------------ Goodwill $10,915 $10,915 10-40 Subscriber base 34,429 34,757 3 Noncompete agreement 1,500 1,500 3 Other 405 405 10-15 ------- ------- 47,249 47,577 Less accumulated amortization 28,303 37,775 ------- ------- Intangibles, net $18,946 $ 9,802 ======= ======= The Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" in June 2001. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. The Company had no business combinations initiated after June 30, 2001. SFAS No. 142 provides that goodwill is no longer subject to amortization over its estimated useful life. It requires that goodwill be assessed for impairment on at least an annual basis by applying a fair-value-based test. Amortization expense was $4,794 for the year ended December 31, 2001. F-8 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The Company adopted SFAS No. 142 on January 1, 2002. The Company has performed a goodwill impairment test in accordance with SFAS No. 142. Based on the results of the goodwill impairment test the Company expects to record an impairment loss of $1,294 in the first quarter of 2002 as a cumulative effect of change in accounting principle. 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. The Company does not expect to be impacted by the adoption of this new standard. DEFERRED ISSUANCE COSTS Deferred issuance costs include costs associated with the issuance of debt and the consummation of a credit facility (Note 3). Deferred issuance costs and the related useful lives and accumulated amortization at December 31, 2000 and 2001 are as follows: Amortization Period 2000 2001 (Years) ---- ---- ------------ Deferred issuance costs ............. $ 9,434 $ 9,484 4-10 Accumulated amortization ............ (2,566) (3,661) ------- ------- Deferred issuance costs, net ........ $ 6,868 $ 5,823 ======= ======= LONG-LIVED ASSETS The Company reviews its long-lived assets such as property and equipment, goodwill, and other intangible assets for impairment at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of an asset should be assessed. Management evaluates the tangible and intangible assets related to each acquisition individually to determine whether an impairment has occurred. An impairment is recognized when the undiscounted future cash flows estimated to be generated by the assets are not sufficient to recover the unamortized balance of the asset. Estimates of future cash flows are based on many factors, including current operating results, expected market trends, and competitive influences. If an impairment has occurred, a loss equal to the difference between the carrying value of the asset and its fair value is recognized. The resulting reduced carrying amount of the asset is accounted for as its new cost and depreciated over the asset's remaining useful life. Management believes that the long-lived assets in the accompanying consolidated balance sheets are appropriately valued. INVESTMENTS Investments and equity ownership in associated companies consisted of the following at December 31, 2000 and 2001:

At December 31, 2001, the Company, through its wholly owned subsidiaries, owned approximately 5% of ClearSource, Inc. ("ClearSource"). ClearSource was formed during 1998 to build and operate advanced broadband networks offering a bundle of communications services to residential and business customers. The Company's investments in ClearSource and Grande are accounted for under the cost method of accounting. F-9 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ACCRUED LIABILITIES Accrued liabilities at December 31, 2000 and 2001 consists of the following:

REVENUE RECOGNITION The Company's revenues are recognized when services are provided, regardless of the period in which they are billed. Fees billed in advance are included in the accompanying consolidated balance sheets as unearned revenue and are deferred until the month the service is provided. ADVERTISING COSTS The Company expenses all advertising costs as incurred. Approximately $1,298, $1,660, and $2,962 of advertising expense are recorded in the Company's consolidated statements of operations for the years ended December 31, 1999, 2000, and 2001, respectively. INSTALLATION FEES The Company recognizes installation revenue when the customer is initially billed for the connection of services as the installation direct costs exceed installation revenue on a per customer basis. 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. 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 6). Effective August 1998, the Company was included in the consolidated federal income tax return of ITC Holding. Under a tax sharing arrangement, the Company recorded an income tax benefit of $3,422 and $0 and an affiliate receivable in the amount of $4,222 and $512 at December 31, 2000 and 2001, respectively, for the utilization of net operating losses included in the F-10 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE PER DATA) consolidated tax return of ITC Holding. Subsequent to the Reorganization, the Company files a consolidated federal income tax return with Knology, Inc. The Company recorded an income tax provision of $2,363 at December 31, 2001. The Company and all of its subsidiaries file a consolidated Alabama income tax return and the Company and its subsidiaries with all operations in Georgia file a consolidated Georgia income tax return with Knology, Inc. The remaining subsidiaries file separate state income tax returns. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143, addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of this new standard. 3. LONG-TERM DEBT Long-term debt at December 31, 2000 and 2001 consists of the following:

Following are maturities of long-term debt for each of the next five years and thereafter as of December 31, 2001: 2002 ............................. $15,465 2003 ............................. 0 2004 ............................. 0 2005 ............................. 10,000 2006 ............................. 0 Thereafter ....................... 444,100 -------- Total ........................ $469,565 ======== The fair value of the Senior Discount Notes at December 31, 2001 was estimated to be approximately $185,227, based on the closing bond price at year-end. On December 22, 1998, the Company entered into a $50,000 four-year senior secured credit facility with First Union National Bank and First Union Capital Markets Corp., which may be used for working capital and other purposes, including capital expenditures and permitted acquisitions. At the Company's option, interest will accrue based on either the Alternate Base Rate plus applicable margin or the LIBOR rate plus applicable margin as defined. Obligations under the credit facility will be secured by substantially all tangible and intangible assets of the Company and its current and future subsidiaries. The credit facility includes a number of covenants, including, among others, covenants limiting the ability of the Company and its subsidiaries and their present and future subsidiaries to incur debt, create liens, pay dividends, make distributions or stock repurchases, make certain investments, engage in transactions with affiliates, sell assets, and engage in certain mergers and acquisitions. The credit facility also includes covenants requiring compliance with certain operating and financial ratios on a F-11 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) consolidated basis. The credit facility allows the Company to borrow up to five times certain individual subsidiary's "consolidated adjusted cash flow" as defined in the credit facility. In connection with the initiation of the revolving credit facility, the Company incurred approximately $1,397 in related costs which are being amortized on a straight-line basis over the five-year term. In the fourth quarter of 1997, the Company issued units consisting of senior discount notes due in 2007 and warrants (the "Bond Warrants") to purchase Preferred Stock for gross proceeds of approximately $250,000. The notes were offered at a substantial discount from face value, with no interest payable for the first five years. Approximately $2,500 of the gross proceeds was allocated to the Bond Warrants. Each Bond Warrant allows the holder to purchase .003734 shares of the Company's preferred stock at an exercise price of $.01 per share. The Company incurred approximately $7,900 in costs to issue the Senior Discount Notes. These costs are being amortized at an effective rate over the life of the notes. The indenture relating to the notes contains certain covenants that, among other things, limit the ability of the Company to incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase) capital stock, make investments, engage in transactions with stockholders and affiliates, create liens, sell assets, and engage in mergers and consolidations. The proceeds from the offering of the units have been, and will be, used to repay certain indebtedness of the Company, to fund expansion of the Company's business, and for additional working capital and general corporate purposes. In connection with the Reorganization (Note 1), the Company's warrant holders elected to exchange the Bond Warrants of the Company for warrants to purchase Knology, Inc.'s Series A preferred stock. The Company's Bond Warrants were subsequently cancelled. On June 2, 1997, the Company borrowed $3,000 under a promissory note from SCANA Communications, Inc. ("SCANA") at 12% interest with an original maturity of June 30, 1997. In July 1997, and again in September 1997, the Company and SCANA amended the promissory note agreement to increase the borrowings to $10,000 and to extend the maturity date until January 1, 1998. On September 29, 1997, the Company borrowed an additional $1,000 at 12% interest under an oral agreement with SCANA with similar terms. In October 1999, the Company issued to SCANA warrants to purchase 753 shares of the Company's preferred stock in connection with these loans. SCANA exercised these warrants in November 1999. The weighted average exercise price of the warrant was $1,500 per share of preferred stock. The Company received net proceeds of $1,100 and recorded the fair value of the warrants, as determined by the Black-Scholes option pricing model, of $1,900 to additional paid in capital. Related interest expense of $800 was recorded in the accompanying consolidated statements of operations. SCANA elected to exchange its 753 shares of Knology Broadband preferred stock for 451,800 shares of Knology, Inc. preferred stock in connection with the Reorganization (Note 1). 4. OPERATING 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. 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, 2001 are as follows: 2002 ................................ $ 928 2003 ................................ 759 2004 ................................ 666 2005 ................................ 642 2006 ................................ 452 Thereafter .......................... 2,643 ----- Total minimum lease payments .... 6,090 ===== Total rental expense for all operating leases was approximately $213, $600, and $727 for the years ended December 31, 1999, 2000, and 2001, respectively. F-12 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 5. COMMITMENTS AND CONTINGENCIES PURCHASE COMMITMENTS The Company has entered into contracts with various entities to provide programming. The Company pays a monthly fee as cost for the programming services, generally based on the number of average subscribers to the program, although some fees are adjusted based on the total number of subscribers to the system and/or the system penetration percentage. Certain contracts have minimum monthly fees. The Company estimates that it will pay approximately $27,800 in programming fees under these contracts during 2002. LEGAL PROCEEDINGS In the normal course of business, the Company is subject to various litigation; however, in management's opinion, there are no legal proceedings pending against the Company which would have a material adverse effect on the financial position, results of operations, or liquidity of the Company. 6. INCOME TAXES The benefit for income taxes from continuing operations consisted of the following for the years ended December 31, 1999, 2000 and 2001: 1999 2000 2001 ---- ---- ---- Current ............................. $20,720 $ 3,422 $(2,363) Deferred ............................ 9,468 32,618 45,722 Increase in valuation allowance ..... (9,468) (32,618) (45,722) ------- ------- ------- Income tax benefit .................. $20,720 $ 3,422 $(2,363) ======= ======= ======= 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, 2000 and 2001 are as follows: 2000 2001 ---- ---- Deferred tax assets: Net operating loss carryforwards. ............... $ 39,619 $ 74,666 Deferred bond interest .......................... 38,914 54,186 Other ........................................... 1,548 3,578 Valuation allowance. ............................ (56,674) (102,396) -------- -------- Total deferred tax assets ................. 23,407 30,034 Deferred tax liabilities: Depreciation and amortization. .................. 23,407 30,034 -------- -------- Net deferred income taxes. ...................... $ 0 $ 0 ======== ======== At December 31, 2001, the Company had available federal net operating loss carryforwards of approximately $116,300 which expire from 2011 to 2021. The Company also has state net operating loss carryforwards totaling approximately $187,400. Unless utilized, the state net operating loss carryforwards expire from 2006 to 2021. Management has recorded a total valuation allowance of $100,300 on these operating loss carryforwards, the majority of which contain limitations on utilization. A reconciliation of the income tax provision computed at statutory tax rates to the income tax provision for the years ended December 31, 1999, 2000, and 2001 is as follows: F-13 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 2000 2001 ----- ---- ---- Income tax benefit at statutory rate ......... 34% 34% 34% State income taxes, net of federal benefit ... 3 3 3 Other ........................................ 0 (4) (3) Increase in valuation allowance .............. (12) (30) (36) --- --- --- Income tax benefit (provision) ......... 25% 3% (2)% === === === 7. EQUITY INTERESTS CAPITAL TRANSACTIONS At December 31, 2000, the Company has authorized 100 shares of $.01 par value common stock and 0 shares of $.01 par value convertible preferred stock at December 31, 2000. In February 1998, the Company completed a 150-for-1 stock split of the Company's common stock, par value $.01 per share, which was effected in the form of a stock dividend of new shares of common stock. In connection with the stock split, the Company increased the number of shares of authorized common stock from 200,000 to 16,000,000 and changed the conversion ratio between the common stock and the preferred stock from 1 to 1 to a ratio of 150 to 1. On June 30, 2000, the Company converted each share of its preferred stock into 150 shares of common stock. Subsequent to the conversion, the Company completed a 1-for-75,912 stock split, the financial statements have been retroactively restated to give effect to the conversion and stock split. The Company also decreased the number of shares authorized from 16,100 to 100 shares. On October 1, 2000, the Company entered into a note agreement with Knology, Inc. in the amount of $10,000. The note bears an annual interest rate of 10%, payable quarterly beginning January 1, 2001, and is payable in full on October 1, 2005. In connection with the note agreement, the Company reclassified all previously recorded advances from affiliates in excess of $10,000, or approximately $104,000, to additional paid in capital. 8. RELATED-PARTY TRANSACTIONS ITC Holding occasionally provides certain administrative services, such as legal and tax planning services, for the Company. The costs of these services are charged to the Company based primarily on the salaries and related expenses for certain of the ITC Holding executives and an estimate of their time spent on projects specific to the Company. For the years ended December 31, 1999, 2000, and 2001, the Company recorded approximately $29, $19, and $131 respectively, in selling, operations, and administrative expenses related to these services. In the opinion of management, amounts charged to the Company are consistent with costs that would be incurred from third party providers. Certain of ITC Holding's affiliates provide the Company with various services and/or receive services provided by the Company. These entities include InterCall, Inc., which provides conference calling services. In addition, the Company receives services from ITC DeltaCom, Inc., an affiliate of ITC Holding which provides wholesale long-distance and related services and which leases capacity on certain of its fiber routes. ITC Holding also holds equity investments in Powertel, Inc., which provides cellular services to the Company. In management's opinion, the Company's transactions with these affiliated entities are representative of arm's-length transactions. For the years ended December 31, 1999, 2000, and 2001, the Company received services from these affiliated entities in the amounts of approximately $1,984, $2,086, and $3,449, respectively, which are reflected in cost of services and selling, operations, and administrative expenses in the Company's consolidated statements of operations. The Company also received services from its affiliates, Interstate Telephone Company and Valley Telephone Company Inc., both of which are local exchange carriers. Services received for the years ended December 31, 1999, 2000 and 2001 totaled approximately $964, $2,243 and $0. The Company also provides switching, programming, and other services for various affiliated companies on a contracted or time and materials basis. Total amounts paid by the affiliated companies for these services approximated $322, $388 and $344 for the years ended December 31, 1999, 2000 and 2001 and are reflected in operating revenues in the Company's consolidated statements of operations. F-14 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Relatives of the stockholders of ITC Holding are stockholders and employees of the Company's insurance provider. The costs charged to the Company for insurance services were approximately $977, $1,164, and $1,187 for the years ended December 31, 1999, 2000, and 2001, respectively. 9. UNAUDITED QUARTER-BY-QUARTER COMPARISON Summarized quarterly financial data for the years ended December 31, 1999, 2000 and 2001 are as follows:

10. SEGMENT INFORMATION Effective January 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which established revised standards for the reporting of financial and descriptive information about operating segments in financial statements. Management has identified the reportable segments based on broadband services offered. While management of the Company monitors the revenue generated from each of the various broadband services, operations are managed and financial performance is evaluated based upon the delivery of a multiple of the services to customers over a single network. As a result of multiple services being provided over a single network, there are many shared expenses and shared assets related to providing the various broadband services to customers. Management believes that any allocation of the shared expenses or assets to the broadband services would be arbitrary and impractical. The Company owns and operates advanced interactive broadband networks and provides residential and business customers broadband communications services, including analog and digital cable television, local and long-distance telephone and Internet services. Internet services include high-speed Internet access via cable modems, local transport services, such as local Internet transport, special access, local private line, and local exchange transport services. F-15 KNOLOGY BROADBAND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DATA SERVICES VIDEO VOICE AND OTHER CONSOLIDATED ----- ----- ------------- ------------ 1999 Operating revenues .... $33,991 $8,158 $2,781 $44,930 Cost of services ...... 14,528 6,535 296 21,359 ------ - ----- --- ------ Gross margin .......... $19,463 $1,623 $2,485 $23,571 ======= ====== ====== ======= 2000 Operating revenues .... $40,841 $13,210 $5,564 $59,615 Cost of services ...... 17,883 7,772 615 26,270 ------ - ----- --- ------ Gross margin .......... $22,958 $5,438 $4,949 $33,345 ======= ====== ====== ======= 2001 Operating revenues .... $47,742 $19,959 $13,821 $81,522 Cost of services ...... 22,500 6,086 2,520 31,106 ------ - ----- ----- ------ Gross margin .......... $25,242 $13,873 $11,301 $50,416 ======= ======= ======= ======= F-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the financial statements of KNOLOGY BROADBAND, INC. AND SUBSIDIARIES included in this Annual Report on Form 10-K and have issued our report thereon dated February 7, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedule II--Valuation and Qualifying Accounts ("Schedule II") is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. The Schedule II has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia February 7, 2002 THE ABOVE REPORT OF ARTHUR ANDERSEN LLP IS A COPY OF THE PREVIOUSLY ISSUED REPORT OF ARTHUR ANDERSEN LLP, AND THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. S-1 SCHEDULE II KNOLOGY BROADBAND, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001 (DOLLARS IN THOUSANDS)

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KNOLOGY BROADBAND INC 10-K/A