KNOLOGY INC - FORM 10-Q - November 9, 2011

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EX-32.2 - EX-32.2 - KNOLOGY INC	d234083dex322.htm
EX-32.1 - EX-32.1 - KNOLOGY INC	d234083dex321.htm
EX-31.2 - EX-31.2 - KNOLOGY INC	d234083dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - KNOLOGY INC	Financial_Report.xls
EX-31.1 - EX-31.1 - KNOLOGY INC	d234083dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

COMMISSION FILE NUMBER: 000-32647

KNOLOGY, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)”

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

As of October 31, 2011, Knology, Inc. had 37,720,990 shares of common stock outstanding.

KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED SEPTEMBER 30, 2011

INDEX


		PAGE
PART I	FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

	Condensed Consolidated Balance Sheets as of December 31, 2010 and Unaudited as of September 30, 2011		3

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2011		4

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2011		5

	Notes to Unaudited Condensed Consolidated Financial Statements		6

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk		25

ITEM 4	Controls and Procedures		27

PART II	OTHER INFORMATION

ITEM 1	Legal Proceedings		28

ITEM 1A	Risk Factors		28

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		29

ITEM 3	Defaults Upon Senior Securities		29

ITEM 4	(Removed and Reserved)		29

ITEM 5	Other Information		29

ITEM 6	Exhibits		30

	Signatures		31

PART 1. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


	December 31, 2010			September 30, 2011 (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	47,120		$	65,031
Restricted cash		1,401			2,164
Certificates of deposit		6,105			1,220
Accounts receivable, net of allowance for doubtful accounts of $1,439 and $1,657 as of December 31, 2010 and September 30, 2011, respectively		37,504			38,616
Prepaid expenses and other		3,373			4,723

Total current assets		95,503			111,754
PROPERTY, PLANT AND EQUIPMENT, NET		400,347			420,294
GOODWILL		253,933			267,732
CUSTOMER BASE, NET		19,250			18,097
DEFERRED DEBT ISSUANCE AND DEBT MODIFICATION COSTS, NET		8,167			11,403
INVESTMENTS		4,011			11,894
OTHER INTANGIBLES AND OTHER ASSETS, NET		6,467			5,447

Total assets	$	787,678		$	846,621

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long term debt	$	9,561		$	14,257
Accounts payable		28,217			28,577
Accrued liabilities		20,360			22,617
Unearned revenue		16,949			17,401
Interest rate swap (nonhedge instrument)		0			2,802

Total current liabilities		75,087			85,654
NONCURRENT LIABILITIES:
Long term debt, net of current portion		721,751			733,140
Interest rate swaps (hedge instruments)		6,699			20,348

Total noncurrent liabilities		728,450			753,488

Total liabilities		803,537			839,142

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value per share; 199,000,000 shares authorized, none outstanding		0			0
Non-voting common stock, $.01 par value per share; 25,000,000 shares authorized, none outstanding		0			0
Common stock, $.01 par value per share; 200,000,000 shares authorized, 37,160,283 and 37,705,386 shares issued and outstanding at December 31, 2010 and September 30, 2011, respectively		372			377
Additional paid-in capital		610,492			617,446
Accumulated other comprehensive loss		0			(20,348	)
Accumulated deficit		(626,723	)		(589,996	)

Total stockholders’ equity (deficit)		(15,859	)		7,479

Total liabilities and stockholders’ equity	$	787,678		$	846,621

See notes to condensed consolidated financial statements.

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010 (as restated)			2011
OPERATING REVENUES:
Video	$	50,510		$	58,591		$	150,173		$	177,468
Voice		31,797			34,562			95,575			100,675
Data		26,195			32,853			77,911			95,455
Other		4,375			3,961			12,323			15,696

Total operating revenues		112,877			129,967			335,982			389,294

OPERATING EXPENSES:
Direct costs (excluding depreciation and amortization)		36,710			41,233			109,210			124,348
Selling, general and administrative		40,063			45,477			116,609			130,272
Depreciation and amortization		20,832			24,715			64,525			71,618

Total operating expenses		97,605			111,425			290,344			326,238

OPERATING INCOME		15,272			18,542			45,638			63,056

OTHER INCOME (EXPENSE):
Interest income		74			1			288			67
Interest expense		(8,349	)		(9,606	)		(31,129	)		(29,422	)
Debt modification expense		0			0			0			(225	)
Gain (loss) on interest rate swaps		(651	)		1,748			2,963			3,898
Amortization of deferred loss on interest rate swaps		(451	)		0			(9,450	)		0
Other income (loss), net		37			(28	)		139			(317	)

Total other expense		(9,340	)		(7,885	)		(37,189	)		(25,999	)

INCOME FROM CONTINUING OPERATIONS	$	5,932		$	10,657		$	8,449		$	37,057
LOSS FROM DISCONTINUED OPERATIONS		0			(330	)		0			(330	)

NET INCOME	$	5,932		$	10,327		$	8,449		$	36,727

INCOME FROM CONTINUING OPERATIONS PER SHARE	$	0.16		$	0.28		$	0.23		$	0.99
LOSS FROM DISCONTINUED OPERATIONS PER SHARE		0.00			(0.01	)		0.00			(0.01	)


BASIC NET INCOME PER SHARE	$	0.16		$	0.27		$	0.23		$	0.98

DILUTED NET INCOME PER SHARE	$	0.15		$	0.26		$	0.22		$	0.94

BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		37,031,429			37,670,708			36,811,646			37,411,427

DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		39,128,436			39,176,974			38,856,821			38,994,227

See notes to condensed consolidated financial statements.

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN THOUSANDS)


	Nine Months Ended September 30,
	2010 (as restated)			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,449		$	36,727
Loss on discontinued operations		0			330

Income from continuing operations		8,449			37,057
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		64,525			71,618
Non-cash stock compensation		4,441			5,070
Non-cash bank loan interest expense		2,176			1,634
Non-cash gain on interest rate swaps		(2,963	)		(3,898	)
Non-cash amortization of deferred loss on interest rate swaps		9,450			0
Non-cash interest income		(40	)		0
Provision for bad debt		4,683			5,663
Gain on sale of short term investments		(10	)		0
Gain on disposition of property		(42	)		(3	)
Changes in operating assets and liabilities:
Accounts receivable		(7,760	)		(6,584	)
Prepaid expenses and other assets		(676	)		(949	)
Accounts payable		6,908			(577	)
Accrued liabilities		(2,610	)		2,159
Unearned revenue		1,763			206

Total adjustments		79,845			74,669

Net cash provided by operating activities		88,294			111,396

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(57,486	)		(80,544	)
Acquisition of businesses, net of cash acquired		0			(29,622	)
Sale of discontinued operations		0			10,749
Maturities of certificates of deposit		20,000			6,115
Proceeds from sale of short term investments		14,979			0
Investment in certificates of deposit and other short term investments		(30,023	)		(1,230	)
Investment in Tower Cloud, Inc.		(328	)		(7,883	)
MDU signing bonuses and other intangible expenditures		(596	)		(558	)
Proceeds from sale of property		106			72
Change in restricted cash		(676	)		(763	)

Net cash used in investing activities		(54,024	)		(103,664	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt		0			20,000
Principal payments on debt and short-term borrowings		(17,996	)		(6,840	)
Expenditures related to modification of long term debt		0			(4,870	)
Stock options exercised		1,076			1,889

Net cash provided by (used in) financing activities		(16,920	)		10,179

NET INCREASE IN CASH AND CASH EQUIVALENTS		17,350			17,911
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		44,016			47,120

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	61,366		$	65,031

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for interest	$	32,373		$	24,998

Non-cash financing activities:
Debt acquired in capital lease transactions	$	3,253		$	2,924

See notes to condensed consolidated financial statements.

KNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. ORGANIZATION AND NATURE OF BUSINESS

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

Knology owns and operates an advanced interactive broadband network 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 and Midwestern United States. Certain subsidiaries are subject to regulation by state public service commissions of applicable states for intrastate telecommunications services. For applicable interstate matters related to telephone service, certain subsidiaries are subject to regulation by the Federal Communications Commission.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and all of its subsidiaries. The information included in the unaudited condensed consolidated balance sheet at December 31, 2010 has been derived from audited financial statements. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normally recurring adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010. The Company operates as one operating segment.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to collectability of accounts receivable, valuation of investments, valuation of stock based compensation, useful lives of property, plant and equipment, recoverability of goodwill and intangible assets, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These changes in estimates are recognized in the period they are realized.

REVENUE RECOGNITION

Knology accounts for the revenue, costs and expense related to residential cable services (including video, voice, data and other services) in accordance with the proper FASB accounting guidance relating to financial reporting by cable television companies. These deliverables together constitute “Cable Services” for the Company and are bundled together in various combinations to our customers. All deliverables are billed in advance on a monthly basis and revenue is recognized in the same manner with the passage of time for these deliverables. The revenues are allocated between these deliverables based upon the relative estimated selling price of each component which is the same for all customers in a market taking the particular package sold. The deliverables in the arrangement do not qualify as separate units of accounting since there is no right of return associated with the delivered portion of the services. Installation revenue for residential cable services is recognized to the extent of direct selling costs incurred. Direct selling costs, or commissions, have exceeded installation revenue in all reported periods and are expensed as period costs in accordance with the FASB guidance. Credit risk is managed by disconnecting services to customers who are delinquent.

All other revenue is accounted for in accordance with the FASB’s revenue recognition guidance. In accordance with this guidance, revenue from advertising sales is recognized as the advertising is transmitted over the Company’s broadband network. Revenue derived from other sources, including commercial data and other services, is recognized as services are provided, as persuasive evidence of an arrangement exists, the price to the customer is fixed and determinable and collectability is reasonably assured.

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

RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2010, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance concerning when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. The new guidance is effective for financial statements issued for interim and annual periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In December 2010, the FASB issued new accounting guidance updating the pro forma financial reporting and disclosure requirements for material business combinations. The new guidance is effective prospectively for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In February 2010, the FASB issued new accounting guidance that amends and establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance is effective for interim and annual financial periods ending after February 24, 2010. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In January 2010, the FASB issued new accounting guidance that improves fair value measurement disclosures by requiring new disclosures about transfers into and out of levels of the fair value hierarchy. It also requires separate disclosures about purchases, sales, issuances, and settlements related to the fair value hierarchy. The new guidance is effective for interim and annual financial periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

RECENT ACCOUNTING STANDARDS NOT YET ADOPTED

In September 2011, the FASB issued new accounting guidance simplifying how all entities test goodwill for impairment. The new guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect that the adoption of this guidance will have a material impact on the Company’s results of operations or financial position.

In June 2011, the FASB issued new accounting guidance updating the presentation requirements of comprehensive income. The new guidance is effective for interim and annual financial periods beginning after December 15, 2011 and should be applied retrospectively. The Company does not expect that the adoption of this guidance will have a material impact on the Company’s results of operations or financial position.

In May 2011, the FASB issued new accounting guidance updating common fair value measurement and disclosure requirements. The new guidance is effective prospectively during interim and annual financial periods beginning after December 15, 2011. The Company does not expect that the adoption of this guidance will have a material impact on the Company’s results of operations or financial position.

4. CASH

Cash

Cash and cash equivalents are highly liquid investments with a maturity of three months or less at the date of purchase and consist of time deposits and investment in money market accounts with commercial banks and financial institutions. At times throughout the year and at quarter-end, cash balances held at financial institutions were in excess of federally insured limits.

Restricted Cash

Restricted cash is presented as a current asset since the associated maturity dates expire within one year of the balance sheet date. The Company has $1,401 and $2,164 at December 31, 2010 and September 30, 2011, respectively, of cash that is restricted in use, all of which the Company has pledged as collateral related to certain insurance, franchise and surety bond agreements.

5. CERTIFICATES OF DEPOSIT

Certificates of deposit are short-term investments with original maturities of more than three months and up to twelve months.

6. GOODWILL AND INTANGIBLE ASSETS

The Company performs a goodwill impairment test in accordance with the FASB’s accounting guidance annually on January 1. There was no impairment identified as a result of the January 1, 2011 impairment test, nor has there been any event in the nine months ended September 30, 2011 that indicated a need for reassessment.

7. DERIVATIVE FINANCIAL INSTRUMENTS

On April 18, 2007, the Company entered into an interest rate swap contract to mitigate interest rate risk on an initial notional amount of $555,000 in connection with the term loan associated with the acquisition of PrairieWave Holdings, Inc. (“PrairieWave”). The swap agreement became effective on May 3, 2007 and ended on July 3, 2010.

On December 19, 2007, the Company entered into a second interest rate swap contract to mitigate interest rate risk on an initial notional amount of $59,000, amortizing 1% annually, in connection with the incremental term loan incurred in connection with the acquisition of Graceba Total Communications Group, Inc. (“Graceba”). The swap agreement became effective on January 4, 2008 and ended on September 30, 2010.

Until December 31, 2008, the Company matched 3-month LIBOR rates on the term loans and the interest rate swaps, creating effective hedges under the FASB’s guidance on accounting for derivative instruments and hedging activities. Due to a significant difference between the 1-month and 3-month LIBOR rates, the Company decided to reset the borrowing rate on the debt using 1-month LIBOR.

•

On December 31, 2008, the Company reset the borrowing rate on the $59,000 term loan to 1-month LIBOR (although this became an ineffective hedge under the FASB’s accounting guidance, there was no material effect on the Company’s financial results for the one day in 2008).

•

On January 2, 2009, the Company reset the borrowing rate on the $555,000 term loan to 1-month LIBOR.

•

The Company will determine LIBOR rates on future reset dates based on prevailing conditions at the time.

As a result of the LIBOR rates on the term loans (1-month LIBOR) not matching the LIBOR rate on the interest rate swaps (3-month LIBOR), the Company was no longer eligible for hedge accounting related to the interest rate swaps associated with both of these loans.

Until the December 31, 2008 reset of the borrowing rate on the $59,000 term loan, changes in the fair value of the Company’s swap agreements were recorded as “Accumulated other comprehensive loss” in the equity section of the balance sheet, and the swap in variable to fixed interest rate was recorded as “Interest expense” on the statement of operations when the interest was incurred. Starting with the reset of the borrowing rate on December 31, 2008, changes in the fair value of the interest rate swaps were recorded as “Gain (loss) on interest rate swaps” in the “Other income (expense)” section of the statement of operations as they were incurred. The remaining balance in “Accumulated other comprehensive loss” in the stockholders’ equity section of the balance sheet that is related to the interest rate swaps was amortized as “Amortization of deferred loss on interest rate swaps” on the statement of operations over the remaining life of the derivative instruments. The Company recorded amortization expense related to the deferred loss on interest rate swaps in the amounts of $451 and $9,450 for the three and nine months ended September 30, 2010 (as restated). The Company recorded $0 of amortization expense related to the deferred loss on interest rate swaps for the three and nine months ended September 30, 2011. As of September 30, 2010, the entire remaining amount in accumulated other comprehensive loss related to these interest rate swaps had been amortized.

On November 25, 2009, the Company entered into a third interest rate swap contract to mitigate interest rate risk on an initial notional amount of $400,000. The swap agreement, which became effective July 3, 2010 and ends April 3, 2012, fixes $380,200 of the floating rate debt at 1.98% as of September 30, 2011.

The notional amount for the next annual period is summarized below:


Start date	End date	Amount
July 3, 2011	October 2, 2011	$	380,200
October 3, 2011	January 2, 2012	$	379,000
January 3, 2012	April 2, 2012	$	362,800

As with the previous two interest rate swaps, this interest rate instrument is not designated as a hedge and therefore does not utilize hedge accounting. Changes in the fair value of the swap agreement are recorded as “Gain (loss) on interest rate swaps” in the “Other income (expense)” section of the statement of operations and the swap in variable to fixed interest rate is recorded as “Interest expense” on the statement of operations when the interest is incurred. The Company recorded a gain (loss) on the change in the fair value of the interest rate swaps in the amounts of $(651) and $2,963 for the three and nine months ended September 30, 2010 (as restated). The Company also recorded a gain on the change in the fair value of the interest rate swaps in the amounts of $1,748 and $3,898 for the three and nine months ended September 30, 2011.

On February 22, 2011, the Company entered into two new interest rate swap contracts to mitigate interest rate risk on an initial notional amount of a combined $377,000. The first of these two swap agreements, which does not become effective until April 2, 2012 and ends July 1, 2016, will fix the scheduled notional amount of the floating rate debt at 3.383%. The second swap agreement, which does not become effective until April 2, 2012 and ends January 1, 2015, will fix the scheduled notional amount of the floating rate debt at 2.705%.

Unlike the other interest rate swaps, these two new interest rate instruments are designated as hedges under the appropriate FASB guidance. The Company is committed to place the term debt on 3-month LIBOR prior to the effective date of the interest rate swaps and to remain on the 3-month LIBOR rate throughout the term of the interest rate swaps. As a result, the LIBOR rates on the term loans (3-month LIBOR) will match the LIBOR rate on the interest rate swaps (3-month LIBOR), and the Company will remain eligible for hedge accounting related to these swap agreements. Changes in the fair value of these swaps are recorded as “Accumulated other comprehensive loss” in the equity section of the balance sheet and the swap in variable to fixed interest rate is recorded as “Interest expense” on the statement of operations when the interest is incurred. The Company assesses for ineffectiveness on its derivative instruments on a quarterly basis, and there was no ineffectiveness as of September 30, 2011.

8. DEBT

On October 15, 2010, the Company entered into a new credit agreement that provided for a $770,000 second credit facility with proceeds used to partially fund the $165,000 Sunflower Broadband (“Sunflower”) acquisition purchase price, refinance the company’s existing credit facility, and pay related transaction costs. The new credit agreement includes a $50,000 revolving credit facility, a $175,000 Term Loan A and a $545,000 Term Loan B. The Term Loan A bore interest at LIBOR plus a margin ranging from 3.5% to 4.25% and had a term of five years with annual amortization of $8,750, $8,750, $17,500 and $26,250 in 2012, 2013, 2014 and 2015, respectively, with the balance due at maturity. The Term Loan B bore interest at LIBOR plus 4%, with a LIBOR floor of 1.5%, and had a term of six years with 1% principal amortization annually with the balance due at maturity.

On February 18, 2011, the Company amended and restated the new credit agreement (the “Amended and Restated Credit Agreement”). The interest rate on Term Loan A was repriced to LIBOR plus a margin ranging from 2.5% to 3.25% and the maturity was extended to February 2016. The interest rate on Term Loan B was repriced to LIBOR plus 3%, with a LIBOR floor of 1%, and the maturity was extended to August 2017. In connection with the terms of the repricing, the credit facility was amended to increase the capacity of the incremental basket from $200,000 to $250,000, and the Term Loan A principal was increased $20,000 with the proceeds to be used to partially fund the future acquisition from CoBridge Broadband, LLC of certain cable and broadband operations in Fort Gordon, Georgia and Troy, Alabama.

Long-term debt at December 31, 2010 and September 30, 2011 consisted of the following:


	December 31, 2010		September 30, 2011
Term Loan A, at a rate of LIBOR plus a margin ranging from 2.5% to 3.25% (3.22% total rate at September 30, 2011), with annual principal amortization as noted above, principal payable quarterly with final principal and any unpaid interest due February 18, 2016	$	175,000	$	195,000
Term Loan B, at a rate of LIBOR plus 3%, with a LIBOR floor of 1% (4% total rate at September 30, 2011), with $5,450 annual principal amortization, principal payable quarterly with final principal and any unpaid interest due August 18, 2017		545,000		542,275
Capitalized lease obligations, at various rates, with monthly principal and interest payments through April 2017		11,312		10,122

		731,312		747,397
Less current portion of long-term debt		9,561		14,257

Total long-term debt, net of current portion	$	721,751	$	733,140

The term loans are guaranteed by all of the Company’s subsidiaries. The term loans are also secured by first liens on all of the Company’s assets and the assets of its guarantor subsidiaries.

The Amended and Restated Credit Agreement contains defined events of default. The Amended and Restated Credit Agreement also contains defined representations and warranties and various affirmative and negative covenants, including:

•

limitations on the incurrence of additional debt;

•

limitations on the incurrence of liens;

•

restrictions on investments;

•

restrictions on the sale of assets;

•

restrictions on the payment of cash dividends on and the redemption or repurchase of capital stock;

•

mandatory prepayment of amounts outstanding, as applicable, with excess cash flow, proceeds from asset sales, use of proceeds from the issuance of debt obligations, proceeds from any equity offerings, and proceeds from casualty losses;

•

restrictions on mergers and acquisitions, sale/leaseback transactions and fundamental changes in the nature of our business;

•

limitations on capital expenditures; and

•

maintenance of minimum ratios of debt to EBITDA (as defined in the credit agreements) and EBITDA to cash interest.

As of September 30, 2011, the Company was in compliance with its debt covenants.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted the required provisions of the FASB’s accounting guidance pertaining to the valuation of financial instruments on January 1, 2008. This guidance defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB accounting guidance establishes a three-tier fair value of hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 – Unobservable inputs that are supported by little or no market activity, which require management judgment or estimation.

Assets and liabilities measured at fair value on a recurring basis are summarized below:


	September 30, 2011
	Level 1		Level 2		Level 3		Total Assets/Liabilities, at Fair Value
Liabilities
Interest rate swaps	$	0	$	23,150	$	0	$	23,150

Total Liabilities	$	0	$	23,150	$	0	$	23,150

The Company used a discounted cash flow analysis applied to the LIBOR forward yield curves to value the interest rate swaps on its balance sheet at September 30, 2011.

The carrying values of cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable and accrued liabilities are reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

The estimated fair value of the Company’s variable-rate debt is subject to the effects of interest rate risk. On September 30, 2011, the estimated fair value of that debt, based on a dealer quote considering current market rates, was approximately $717,000, compared to a carrying value of $737,275.

10. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

The Company is subject to litigation in the normal course of its business. However, in the Company’s opinion, there is no legal proceeding pending against it that would have a material adverse effect on its financial position, results of operations or liquidity. The Company is also a party to regulatory proceedings affecting the segments of the communications industry generally in which it engages in business.

UNUSED LETTERS OF CREDIT

The Company’s unused letters of credit for vendors and suppliers was $2,012 as of September 30, 2011, which reduces the funds available under the $50,000 five-year senior secured revolving loan and letter of credit facility.

11. NONCASH COMPENSATION EXPENSE

The Company utilizes the recognition provisions of the related FASB accounting guidance, which requires all share-based payments to employees, including employee stock option and restricted stock awards, to be recognized in the financial statements based on their fair values as the awards vest. The fair value of a stock award is estimated at the date of grant using the Black-Scholes option pricing model. There have been no changes in the methodology for calculating the expense since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

During the third quarter of 2011, the Company granted certain employees and directors options to purchase 19,110 shares of common stock with a market value of $261. These options vest equally over the next four years.

The Company recognized stock-based compensation of $1,500 and $4,441 for the three and nine months ended September 30, 2010, respectively, and $1,562 and $5,070 for the three and nine months ended September 30, 2011, respectively.

12. INCOME TAXES

On January 1, 2007, the Company adopted the provisions of the appropriate FASB accounting guidance in accounting for uncertainty in income taxes. The guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Also, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The accounting literature also provides further guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. Since the date of adoption, the Company has not recorded a liability for unrecognized tax benefits at any time.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense (as applicable). As of September 30, 2011, the Company made no provisions for interest or penalties related to uncertain tax positions.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. For federal tax purposes, the Company’s 2007 through 2010 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. Generally, for state tax purposes, the Company’s 2007 through 2010 tax years remain open for examination by the tax authorities under a three year statute of limitations. Should the Company utilize any of its U.S. or state loss carryforwards, its carryforward losses, which date back to 1995, would be subject to examination.

13. ACQUISITION

CoBridge Broadband, LLC

On June 15, 2011, the Company completed its acquisition from CoBridge Broadband, LLC of certain cable and broadband operations in Fort Gordon, Georgia and Troy, Alabama. The Company’s purchase of these assets is a strategic acquisition that fits well in its existing operations in Augusta, Georgia and Dothan, Alabama.

In order to fund the $30,000 purchase price, the Company used $10,000 of cash on hand and $20,000 from the additional Term Loan A proceeds received in connection with the debt repricing transaction (see Note 8 – Debt). The financial position and results of operations for the new operations are included in the Company’s consolidated financial statements since the date of acquisition. Supplemental pro forma results of operations were not required to be presented as the acquisition was determined not to be a material transaction. The total purchase price for the assets acquired, net of liabilities assumed, was $29,622. Goodwill represents the excess of the cost of the business acquired over fair value or net identifiable assets at the date of acquisition. Since the Company purchased the assets, the goodwill is deductible for tax purposes.

The following table summarizes the allocation of purchase price to the estimated fair values of the assets acquired, net of liabilities, as of June 15, 2011.


	June 15, 2011
Assets acquired:
Accounts receivable	$	693
Prepaid expenses		125
Property, plant and equipment		12,833
Goodwill		15,758
Customer base		2,100

Total assets acquired		31,509
Liabilities assumed:
Accounts payable		1,032
Accrued liabilities		301
Unearned Revenue		554

Total liabilities assumed		1,887

Purchase price, net of cash acquired of $2	$	29,622

For the three and nine months ended September 30, 2011, it is impracticable for the Company to provide the financial results of the new acquisitions since they were absorbed by the operations of the Augusta and Dothan divisions. We do not record the revenues or expenses for the acquisitions separately from the divisions and no separate financial statements are produced.

14. DISPOSAL OF DISCONTINUED OPERATIONS

On July 22, 2011, the Company sold its recently acquired assets in Troy, Alabama for $10,750. The Company received cash proceeds of $10,750, of which $538 was placed in escrow, and will be paid out in July 2012, subject to any indemnification claims by the purchaser. After disposing of $11,684 in net assets, offset by $604 in net liabilities, the company recorded a loss of $330 on the disposal of the discontinued operations.

15. PRIOR RESTATEMENT OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Starting with the reset of the borrowing rate on December 31, 2008, changes in the fair value of the interest rate swaps are recorded as “Gain (loss) on interest rate swaps” in the “Other income (expense)” section of the statement of operations as they are incurred. The remaining balance in “Accumulated other comprehensive loss” in the stockholders’ equity section of the balance sheet that was related to the interest rate swaps was amortized as “Amortization of deferred loss on interest rate swaps” on the statement of operations over the remaining life of the derivative instruments. As of December 31, 2010, the entire remaining amount in accumulated other comprehensive loss relating to these interest rate swaps has been amortized.

The interest rate swaps (see Note 7 - Derivative Financial Instruments) are valued by an independent third party. An error occurred due to a misinterpretation of the valuation information, specifically related to the inclusion of accrued interest in the third party valuation as well as separately accruing interest payable. The correction of the error in the valuation of the derivative resulted in a debit to other expense in the amount of $4,307 in the first and second quarters of 2010. The correction had no impact on the results of the third quarter of 2010. The impact of this correction of an error on the affected line items of the Company’s September 30, 2010 quarterly financial statement is set forth below:

Consolidated Statement of Operations

for the Nine Months Ended September 30, 2010


	As Previously Reported on Form 10-Q			Adjustments			As Restated
Gain on interest rate swaps	$	8,144		$	(5,181	)	$	2,963
Amortization of deferred loss on interest rate swaps		(10,324	)		874			(9,450	)
Total other expense		(32,882	)		(4,307	)		(37,189	)
Net Income (Loss)	$	12,756		$	(4,307	)	$	8,449
Basic Income (Loss) per Share	$	0.35		$	(0.12	)	$	0.23
Duluted Income (Loss) per Share	$	0.33		$	(0.11	)	$	0.22

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management’s Discussion and Analysis of Financial Condition and Results of Operations and other portions of this quarterly report on Form 10-Q 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,

•

that we will not retain or grow our customer base:

•

that we will fail to be competitive with existing and new competitors:

•

that we will not adequately respond to technological developments that impact our industry and markets:

•

that needed financing will not be available to us if and as needed:

•

that a significant change in the growth rate of the overall U.S. economy will occur such that there is a material impact on consumer and corporate spending:

•

that we will not be able to complete future acquisitions, that we may have difficulties integrating acquired businesses, or that the cost of such integration will be greater than we expect: and

•

that some other unforeseen difficulties occur, as well as those risks set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2010, and our other filings with the SEC.

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. Forward-looking statements relating to expectations about future results or events are based upon information available to us as of today’s date, and we do not assume any obligation to update any of these statements.

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

Overview

We were formed as a Delaware corporation in September 1998. Our shares of common stock are publicly traded on the NASDAQ Global Market. We are a fully integrated provider of video, voice, data and advanced communications services to residential and business customers in ten markets in the southeastern United States and three markets in the midwestern United States. We provide a full suite of video, voice and data services in Dothan, Huntsville and Montgomery, Alabama; Panama City and portions of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South Carolina; Knoxville, Tennessee; Lawrence, Kansas; and Rapid City and Sioux Falls, South Dakota, as well as portions of Minnesota and Iowa. Our primary business is the delivery of bundled communication services over our own network. In addition to our bundled package offerings, we sell these services on an unbundled basis.

We have built our business through:

•

construction and expansion of our broadband network to offer integrated video, voice and data services;

•

organic growth of connections through increased penetration of services to new marketable homes and our existing customer base, along with new service offerings;

•

upgrades of acquired networks to introduce expanded broadband services including bundled video, voice and data services; and

•

acquisitions of other broadband companies.

The following is a discussion of our consolidated financial condition and results of operations for the three and nine months ended September 30, 2011, and certain factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Acquisition and Expansion

On October 15, 2010, we completed the acquisition of Sunflower, a provider of video, voice and data services to residential and business customers in Douglas County, Lawrence, Kansas and the surrounding area for $165 million. In connection with the acquisition, Knology entered into a $770 million secured credit facility with proceeds used to partially fund the acquisition purchase price, refinance the company’s existing credit facility, and pay related transaction costs. Knology also used approximately $48 million of cash on hand to partially fund the transaction.

On June 15, 2011, the Company completed its acquisition from CoBridge Broadband, LLC of certain cable and broadband operations in Fort Gordon, Georgia and Troy, Alabama for approximately $30 million. The Company’s purchase of these assets is a strategic acquisition that fits well in its existing operations in Augusta, Georgia and Dothan, Alabama.

In order to fund the purchase price, the Company used $10 million of cash on hand and $20 million from the additional Term Loan A proceeds received in connection with the debt repricing transaction discussed below. The financial position and results of operations for the new operations are included in the Company’s presented consolidated financial statements since the date of acquisition. Supplemental pro forma results of operations were not required to be presented here as the acquisition was determined not to be material. The total purchase price for the assets acquired, net of liabilities assumed, was $29.6 million. Goodwill represents the excess of the cost of the business acquired over fair value or net identifiable assets at the date of acquisition. Since the Company purchased the assets, the goodwill is deductible for tax purposes.

In connection with the CoBridge acquisition discussed above, on February 18, 2011, we entered into a debt repricing transaction that reduced our annual interest expense under our secured credit facility by approximately $10 million. The interest rate on Term Loan A was repriced to LIBOR plus a margin ranging from 2.5% to 3.25% and the maturity was extended to February 2016. The interest rate on Term Loan B was repriced to LIBOR plus 3%, with a LIBOR floor of 1%, and the maturity was extended to August 2017. In connection with the terms of the repricing, the credit facility was amended to increase the capacity of the incremental basket from $200 million to $250 million, and the Term Loan A principal was increased $20 million with the proceeds used to partially fund the acquisition, as noted above.

On July 22, 2011, the Company sold its recently acquired assets in Troy, Alabama for approximately $10.8 million.

Homes Passed and Connections

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

As we continue to sell bundled services, we expect more of our video customers to purchase voice, data and other enhanced services in addition to basic video services. Further, business customers primarily take voice and data services, with relatively smaller amounts of video products. On the other hand, we believe some of our phone customers, especially customers who are only taking our voice product, are moving to alternative voice products (e.g., mobile phones). As a result of these various factors, we expect that our data connections will grow the fastest and that voice connections will benefit from our growing commercial business.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. See our consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K/A for the year ended December 31, 2010, which contains accounting policies including those that may involve a higher degree of judgment and complexity and other disclosures required by accounting principles generally accepted in the United States.

Revenues

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

•

Video revenues. Our video revenues consist of fixed monthly fees for expanded basic, premium and digital cable television services, as well as fees from pay-per-view movies, fees for video-on-demand and events such as boxing matches and concerts that involve a charge for each viewing. Video revenues accounted for approximately 45.1% and 45.6% of our consolidated revenues for the three and nine months ended September 30, 2011, respectively, compared to 44.7% of our consolidated revenues for both the three and nine months ended September 30, 2010, respectively.

•

Voice revenues. Our voice revenues consist primarily of fixed monthly fees for local service and enhanced services, such as call waiting, voice mail and measured and flat rate long-distance service. Voice revenues accounted for approximately 26.6% and 25.9% of our consolidated revenues for the three and nine months ended September 30, 2011, respectively, compared to 28.2% and 28.4% for the three and nine months ended September 30, 2010, respectively.

•

Data revenues. Our data revenues consist primarily of fixed monthly fees for data service and rental of cable modems. Data revenues accounted for approximately 25.3% and 24.5% of our consolidated revenues for both the three and nine months ended September 30, 2011, respectively, compared to 23.2% for the three and nine months ended September 30, 2010.

•

Other revenues. Other revenues result principally from broadband carrier services and dark fiber sales. Other revenues accounted for approximately 3.0% and 4.0% of our consolidated revenues for the three and nine months ended September 30, 2011, respectively, compared to 3.9% and 3.7% of our consolidated revenues for the three and nine months ended September 30, 2010, respectively.

Our ability to increase the number of our connections and, as a result, our revenues is directly affected by the level of competition we face in each of our markets with respect to each of our service offerings:

•

In providing video services, we currently compete with AT&T, Bright House, CenturyLink, Charter, Comcast, Mediacom, MidCo, Qwest, Time Warner and Verizon. We also compete with satellite television providers such as DirecTV and Echostar. Our other competitors include broadcast television stations and other satellite television companies. We expect in the future to face additional competition from telephone companies providing video services within their service areas.

•

In providing local and long-distance telephone services, we compete with the ILEC and various long-distance providers in each of our markets. AT&T, CenturyLink, Qwest and Verizon are the incumbent local phone companies in our markets. They offer both local and long-distance services in our markets and are particularly strong competitors. We also compete with providers of long-distance telephone services, such as AT&T, CenturyLink (which acquired Embarq Communications in 2009) and Verizon. We expect an increase in the deployment of VoIP services and expect to continue to compete with Vonage Holding Company, cable competitors as they roll out VoIP and other providers.

•

In providing data services, we compete with ILECs that offer dial-up and DSL services, providers of satellite-based Internet access services, cable television companies, providers of wireless high-speed data services, and providers of dial-up Internet service. Data services and Internet access 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.

Costs and Expenses

Our operating expenses include direct costs of services, selling, general and administrative expenses, and depreciation and amortization.

Direct costs of services include:

•

Direct costs of video services. Direct costs of video services consist primarily of monthly fees to the National Cable Television Cooperative and other programming providers. Programming costs are our largest single cost and we expect this trend to continue. Programming costs as a percentage of video revenue were approximately 52.5% and 51.4% for the three and nine months ended September 30, 2011, respectively, compared to 51.9% for both the three and nine months ended September 30, 2010. We have entered into contracts with various entities to provide programming to be aired on our network. We pay a monthly fee for these programming services, generally based on the average number of subscribers to the program, although some fees are adjusted based on the total number of subscribers to the system and/or the system penetration percentage. Since programming cost is partially based on number of subscribers, it will increase as we add more subscribers. It will also increase as costs per channel increase over time.

• Direct costs of voice services. Direct costs of voice services consist primarily of transport cost and network access fees. The direct cost of voice services as a percentage of voice revenues was approximately 16.9% and 17.5% for the three and nine months ended September 30, 2011, respectively, compared to 17.9% and 18.3% for the three and nine months ended September 30, 2010, respectively.

•

Direct costs of data services. Direct costs of data services consist primarily of transport cost and network access fees. The direct cost of data services as a percentage of data revenue was approximately 6.1% and 6.4% for the three and nine months ended September 30, 2011, respectively, compared to 7.9% and 7.7% for the three and nine months ended September 30, 2010, respectively.

•

Direct costs of other services. Direct costs of other services consist primarily of transport cost, network access fees and costs of dark fiber sales. The direct cost of other services as a percentage of other revenue was approximately 32.6% and 34.4% for the three and nine months ended September 30, 2011, respectively, compared to 34.0% and 33.7% for the three and nine months ended September 30, 2010, respectively. The change is due mainly to the costs of dark fiber sales recorded during the time periods.

•

Pole attachment and other network rental expenses. Pole attachment and other network rental expenses consist primarily of pole attachment rents paid to utility companies for space on their utility poles to deliver our various services and network hub rents. Pole attachment and other network rental expenses as a percentage of total revenue was approximately 1.0% for both the three and nine months ended September 30, 2011, compared to 1.1% for both the three and nine months ended September 30, 2010.

Selling, general and administrative expenses include:

•

Sales and marketing expenses. Sales and marketing expenses include the cost of sales and marketing personnel and advertising and promotional expenses.

•

Network operations and maintenance expenses. Network operations and maintenance expenses include payroll and departmental costs incurred for network design, 24 hours a day, seven days a week maintenance monitoring and plant maintenance activity.

•

Service and installation expenses. Service and installation expenses include payroll and departmental costs incurred for customer installation and service technicians.

•

Customer service expenses. Customer service expenses include payroll and departmental costs incurred for customer service representatives and customer service management, primarily at our centralized call center.

•

General and administrative expenses. General and administrative expenses consist of corporate and subsidiary management and administrative costs.

Depreciation and amortization expenses include depreciation of our interactive broadband networks and equipment and amortization of costs in excess of net assets and other intangible assets related to acquisitions.

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

Results of Operations

Three months ended September 30, 2011 compared to three months ended September 30, 2010

The following table sets forth financial data as a percentage of operating revenues for the three months ended September 30, 2010 and 2011.


	Three months ended September 30,
	2010			2011
Operating revenues:
Video		45	%		45	%
Voice		28			27
Data		23			25
Other		4			3

Total		100			100
Operating expenses:
Direct costs		32			32
Selling, general and administrative		36			35
Depreciation and amortization		19			19

Total		87			86


Operating income	13		14
Interest income	0		0
Interest expense	(7	)	(7	)
Debt modification expense	0		0
Gain (Loss) on interest rate derivative instrument	(1	)	1
Other income (expense), net	0		0

Total other expense	(8	)	(6	)

Income from continuing operations	5		8

Net income	5		8

Revenues. Operating revenues increased 15.1% from $112.9 million for the three months ended September 30, 2010, to $130.0 million for three months ended September 30, 2011. Operating revenues from video services increased 16.0% from $50.5 million for the three months ended September 30, 2010, to $58.6 million for the same period in 2011. Operating revenues from voice services increased 8.7% from $31.8 million for the three months ended September 30, 2010, to $34.6 million for the same period in 2011. Operating revenues from data services increased 25.4% from $26.2 million for the three months ended September 30, 2010, to $32.9 million for the same period in 2011. Operating revenues from other services decreased 9.5% from $4.4 million for the three months ended September 30, 2010, to $4.0 million for the same period in 2011.

The increased revenues are due primarily to an increase in the number of connections, from 700,476 as of September 30, 2010, to 793,583 as of September 30, 2011 and rate increases effective in the first quarter of 2011. The additional connections resulted primarily from:

•

the acquisition of Sunflower;

•

continued growth in our bundled customers;

•

continued growth in business data sales; and

•

continued penetration in our mature markets.

The increased voice services revenues are due primarily to the Sunflower and CoBridge acquisitions. There continues to be a decrease in revenue from voice services among our existing customer base as a result of customers choosing service plans offering discounted features such as voice mail, call waiting, and call forwarding.

The decrease in operating revenues from other services included $1.4 million of dark fiber sales recorded during the three months ended September 30, 2010, compared to $1.2 million for the same period of 2011. The company also experienced a decline in other broadband carrier services revenue for the period.

Direct Costs. Direct costs increased 12.3% from $36.7 million for the three months ended September 30, 2010, to $41.2 million for the three months ended September 30, 2011. Direct costs of video services increased 17.3% from $26.2 million for the three months ended September 30, 2010, to $30.7 million for the same period in 2011. Direct costs of voice services increased 2.5% from $5.7 million for the three months ended September 30, 2010, to $5.8 million for the same period in 2011. Direct costs of data services decreased 3.5% from $2.1 million for the three months ended September 30, 2010, to $2.0 million for the same period in 2011. Direct costs of other services decreased 13.1% from $1.5 million for the three months ended September 30, 2010, to $1.3 million for the same period in 2011. Pole attachment and other network rental expenses increased 9.2% from $1.2 million for the three months ended September 30, 2010, to $1.4 million for the same period in 2011. We expect our cost of services to increase in amount as we add more connections. The increase in direct costs of video services is primarily due to programming costs increases, which have been increasing over the 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. Further, local commercial television broadcast stations are charging retransmission fees similar to fees charged by other program providers.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased 13.5% from $40.1 million for the three months ended September 30, 2010, to $45.5 million for the three months ended September 30, 2011. The increase in our operating costs, included in selling, general and administrative expenses was affected by the Sunflower acquisition and is consistent with our growth in connections and customers since the third quarter of 2010, and consists mainly of increases in employee-related expenses, taxes and licenses, fuel costs, repair and maintenance costs and professional services. Our non-cash stock compensation expense, included in selling, general and administrative expenses, increased from $1.5 million for the three months ended September 30, 2010, to $1.6 million for the three months ended September 30, 2011 as a result of the issuance of additional stock awards.

Depreciation and amortization. Our depreciation and amortization increased from $20.8 million for the three months ended September 30, 2010, to $24.7 million for the three months ended September 30, 2011, primarily due to the Sunflower acquisition in the fourth quarter of 2010 and the Company’s increased buildout of its network to add additional homes passed

Interest expense. Interest expense increased from $8.3 million for the three months ended September 30, 2010, to $9.6 million for the three months ended September 30, 2011. The increase in interest expense is primarily a result of the increase in interest rates on our term loans. In addition, we recorded $451,000 in amortization of deferred loss associated with our derivative instruments for the three months ended September 30, 2010. A loss of $651,000 and a gain of $1.7 million were recorded on the value of the interest rate swaps for the three months ended September 30, 2010 and 2011, respectively.

Income taxes. No income tax expense was recorded for all periods presented. The Company continues to have net operating losses, or NOLs, available to offset any taxable income recorded by the Company. The deferred tax asset created by these NOLs is currently offset by a valuation allowance.

Net income. We earned net income of $5.9 million and $10.3 million for the three months ended September 30, 2010 and 2011, respectively.

Nine months ended September 30, 2011 compared to nine months ended September 30, 2010

The following table sets forth financial data as a percentage of operating revenues for the nine months ended September 30, 2010 and 2011.


	Nine months ended September 30,
	2010			2011
Operating revenues:
Video		45	%		46	%
Voice		28			26
Data		23			24
Other		4			4

Total		100			100
Operating expenses:
Direct costs		32			32
Selling, general and administrative		35			34
Depreciation and amortization		19			18

Total		86			84

Operating income		14			16
Interest income		0			0
Interest expense		(9	)		(8	)
Debt modification expense		0			0
Loss on interest rate derivative instrument		(2	)		1
Other income (expenses), net		0			0

Total other expense		(11	)		(7	)

Income from continuing operations		3			9

Net income		3			9

Revenues. Operating revenues increased 15.9% from $336.0 million for the nine months ended September 30, 2010, to $389.3 million for the nine months ended September 30, 2011. Operating revenues from video services increased 18.2% from $150.2 million for the nine months ended September 30, 2010, to $177.5 million for the same period in 2011. Operating revenues from voice services increased 5.3% from $95.6 million for the nine months ended September 30, 2010, to $100.7 million for the same period in 2011. Operating revenues from data services increased 22.5% from $77.9 million for the nine months ended September 30, 2010, to $95.5 million for the same period in 2011. Operating revenues from other services increased 27.4% from $12.3 million for the nine months ended September 30, 2010, to $15.7 million for the same period in 2011.

•

the acquisition of Sunflower;

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continued growth in our bundled customers;

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continued growth in business data sales; and

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continued penetration in our mature markets.

The increase in operating revenues from other services included $3.4 million of fiber sales recorded during the nine months ended September 30, 2010, compared to $6.9 million for the same period of 2011.

Direct Costs. Direct costs increased 13.9% from $109.2 million for the nine months ended September 30, 2010, to $124.3 million for the nine months ended September 30, 2011. Direct costs of video services increased 16.9% from $77.9 million for the nine months ended September 30, 2010, to $91.1 million for the same period in 2011. Direct costs of voice services increased 1.1% from $17.5 million for the nine months ended September 30, 2010, to $17.7 million for the same period in 2011. Direct costs of data services increased 1.7% from $6.0 million for the nine months ended September 30, 2010, to $6.1 million for the same period in 2011. Direct costs of other services increased 30.2% from $4.2 million for the nine months ended September 30, 2010, to $5.4 million for the same period in 2011. Pole attachment and other network rental expenses increased 10.4% from $3.7 million for the nine months ended September 30, 2010, to $4.1 million for the same period in 2011. We expect our cost of services to increase in amount as we add more connections. The increase in direct costs of video services is primarily due to programming costs increases, which have been increasing over the 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. Further, local commercial television broadcast stations are charging retransmission fees similar to fees charged by other program providers.

Selling, general and administrative. Our selling, general and administrative expenses increased 11.7% from $116.6 million for both the nine months ended September 30, 2010 to $130.3 million for the same period in 2011. The increase in our operating costs, included in selling, general and administrative expenses was affected by the Sunflower acquisition and is consistent with our growth in connections and customers since the third quarter of 2010, and consists mainly of increases in employee-related expenses, rents, bad debt expense, taxes and licenses, fuel costs, repair and maintenance costs and professional services for the nine months ended September 30, 2011. Our non-cash stock compensation expense, included in selling, general and administrative, increased from $4.4 million for the nine months ended September 30, 2010, to $5.1 million for the nine months ended September 30, 2011 as a result of the issuance of additional stock awards.

Depreciation and amortization. Our depreciation and amortization increased from $64.5 million for the nine months ended September 30, 2010, to $71.6 million for the nine months ended September 30, 2011, primarily due to the Sunflower acquisition in the fourth quarter of 2010 and the Company’s increased buildout of its network to add additional homes passed.

Interest expense. Interest expense decreased from $31.1 million for the nine months ended September 30, 2010, to $29.4 million for the nine months ended September 30, 2011. The decrease in interest expense is primarily a result of the decrease in interest on our existing hedges. In addition, we recorded $9.5 million in amortization of deferred loss associated with our derivative instruments for the nine months ended September 30, 2010 (as restated). A gain of $3.0 million and $3.9 million was recorded on the value of the interest rate swaps for the nine months ended September 30, 2010 (as restated) and 2011, respectively.

Income taxes. No income tax expense was recorded for all periods presented. The Company continues to have NOLs available to offset any taxable income recorded by the Company. The deferred tax asset created by these NOLs is currently offset by a valuation allowance.

Net income. We earned net income of $8.4 million and $36.7 million for the nine months ended September 30, 2010 (as restated) and 2011, respectively.

Liquidity and Capital Resources

Overview.

As of September 30, 2011, we had approximately $68.4 million of cash, cash equivalents and restricted cash, certificates of deposit and U.S. Treasury Bills on our balance sheet. Our net working capital on September 30, 2011 and December 31, 2010 was $26.1 million and $20.4 million, respectively.

On October 15, 2010, the Company entered into a new credit agreement that provided for a $770.0 million secured credit facility with proceeds used to partially fund the $165.0 million Sunflower acquisition purchase price, refinance the company’s existing credit facility, and pay related transaction costs. The new credit agreement includes a $50.0 million revolving credit facility, a $175.0 million Term Loan A and a $545.0 million Term Loan B. The Term Loan A bore interest at LIBOR plus a margin ranging from 3.5% to 4.25% and had a term of five years with annual amortization of $8.75 million, $8.75 million, $17.5 million and $26.25 million in 2012, 2013, 2014 and 2015, respectively, with the balance due at maturity. The Term Loan B bore interest at LIBOR plus 4%, with a LIBOR floor of 1.5%, and had a term of six years with 1% principal amortization annually with the balance due at maturity. On November 25, 2009, the Company entered into an interest rate swap contract to mitigate interest rate risk on an initial notional amount of $400.0 million. The swap agreement, which became effective July 3, 2010 and ends April 3, 2012, fixed $380.2 million of the floating rate debt at 1.98% as of September 30, 2011. This interest rate instrument was not designated as a hedge and therefore did not utilize hedge accounting. Changes in the fair value of the swap agreement were recorded as “Gain (loss) on interest rate swaps” in the “Other income (expense)” section of the statement of operations and the swap in variable to fixed interest rate was recorded as “Interest expense” on the statement of operations when the interest was incurred.

On February 18, 2011, the Company amended and restated the new credit agreement (the “Amended and Restated Credit Agreement”). The interest rate on Term Loan A was repriced to LIBOR plus a margin ranging from 2.5% to 3.25% and the maturity was extended to February 2016. The interest rate on Term Loan B was repriced to LIBOR plus 3%, with a LIBOR floor of 1%, and the maturity was extended to August 2017. In connection with the terms of the repricing, the credit facility was amended to increase the capacity of the incremental basket from $200.0 million to $250.0 million, and the Term Loan A principal was increased $20.0 million with the proceeds used to partially fund the acquisition from CoBridge Broadband, LLC of certain cable and broadband operations in Fort Gordon, Georgia and Troy, Alabama.

On February 22, 2011, the Company entered into two new interest rate swap contracts to mitigate interest rate risk on an initial notional amount of a combined $377.0 million. The first of these two swap agreements, which does not become effective until April 2, 2012 and ends July 1, 2016, will fix the scheduled notional amount of the floating rate debt at 3.383%. The second swap agreement, which does not become effective until April 2, 2012 and ends January 1, 2015, will fix the scheduled notional amount of the floating rate debt at 2.705%.

The Amended and Restated Credit Agreement is guaranteed by all of the Company’s subsidiaries and secured by a first-priority lien and security interest in substantially all of the Company’s assets and the assets of its subsidiaries. The Amended and Restated Credit Agreement contains customary representations, warranties, various affirmative and negative covenants and customary events of default. As of September 30, 2011, we are in compliance with all of our debt covenants.

We believe there is adequate liquidity from cash on hand, cash provided from operations and funds available under our $50.0 million revolving credit facility to meet our capital spending requirements and to execute our current business plan.

Operating, Investing and Financing Activities.

Net cash provided by operating activities from continuing operations totaled $88.3 million and $111.4 million for the nine months ended September 30, 2010 and 2011, respectively. The net cash flow activity related to operations consists primarily of changes in operating assets and liabilities and adjustments to net income for non-cash transactions including:

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depreciation and amortization;

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non-cash stock compensation;

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non-cash amortization of deferred loss on interest rate swaps;

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non-cash bank loan interest expense;

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non-cash interest income;

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gain on sale of short term investments;

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non-cash gain on interest rate derivative instrument;

•

provision for bad debt;

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loss on discontinued operations; and

•

gain on disposition of property.

Net cash used in investing activities was $54.0 million and $103.7 million for the nine months ended September 30, 2010 and 2011, respectively. Our investing activities for the nine months ended September 30, 2010 consisted primarily of $57.5 million of capital expenditures and $30.0 million for the purchase of certificates of deposit, offset by $20.0 million of maturities of certificates of deposit and $15.0 million from the sale of U.S Treasury Bills. Investing activities for the nine months ended September 30, 2011 consisted primarily of $80.5 million of capital expenditures, $30.0 million for the CoBridge acquisition, $7.9 million additional investment in Tower Cloud, Inc. and $1.2 for the purchase of certificates of deposit, offset by $6.1 million of maturities of certificates of deposit and $10.7 million from the sale of discontinued operations relating to the Troy, Alabama market.

Net cash used by our financing activities was $16.9 million for the nine months ended September 30, 2010 and net cash provided by financing activities was $10.2 million for the nine months ended September 30, 2011. Financing activities for the nine months ended September 30, 2010 consisted of $18.0 million in principal payments on debt, offset by $1.1 million proceeds from the exercise of stock options. For the nine months ended September 30, 2011, our financing activities consisted of $20.0 million of proceeds from long term debt and $1.9 million proceeds from the exercise of stock options, offset by $6.8 million in principal payments on debt and $4.9 million of expenditures related to the debt modification.

Capital Expenditures.

We spent approximately $80.5 million in capital expenditures during the nine months ended September 30, 2011, of which $39.2 million related to the purchase and installation of customer premise equipment, $24.8 million related to plant extensions and enhancements and $16.5 million related to network equipment, billing and information systems and other capital items.

We expect to spend approximately $100.0 million in capital expenditures during 2011. We believe we will have sufficient cash on hand and cash from internally generated cash flow to cover our planned operating expenses and capital expenditures and to service our debt during 2011. Our existing indebtedness limits the amount of our capital expenditures on an annual basis.

Recent Accounting Pronouncements

See the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and the Notes to our Consolidated Financial Statements contained in our Annual Report on Form 10-K/A for the year ended December 31, 2010.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use interest rate swap and interest rate cap contracts to manage the impact of interest rate changes on earnings and operating cash flows. Interest rate swaps involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps involve the receipt of variable-rate amounts beyond a specified strike price over the life of the agreements without exchange of the underlying principal amount. We believe that these agreements are with counterparties who are creditworthy financial institutions.

Until the December 31, 2008 reset of the borrowing rate on the $59.0 million term loan, changes in the fair value of the Company’s swap agreements were recorded as “Accumulated other comprehensive loss” in the equity section of the balance sheet, and the swap in variable to fixed interest rate was recorded as “Interest expense” on the statement of operations when the interest was incurred. Starting with the reset of the borrowing rate on December 31, 2008, changes in the fair value of the interest rate swaps were recorded as “Gain (loss) on interest rate swaps” in the “Other income (expense)” section of the statement of operations as they were incurred. The remaining balance in “Accumulated other comprehensive loss” in the stockholders’ equity section of the balance sheet that is related to the interest rate swaps was amortized as “Amortization of deferred loss on interest rate swaps” on the statement of operations over the remaining life of the derivative instruments. The Company recorded amortization expense related to the deferred loss on interest rate swaps in the amounts of $451,000 and $9.45 million for the three and nine months ended September 30, 2010 (as restated). The Company recorded $0 of amortization expense related to the deferred loss on interest rate swaps for the three and nine months ended September 30, 2011. As of September 30, 2011, the entire remaining amount in accumulated other comprehensive loss related to these interest rate swaps had been amortized.

On November 25, 2009, the Company entered into a third interest rate swap contract to mitigate interest rate risk on an initial notional amount of $400.0 million. The swap agreement, which became effective July 3, 2010 and ends April 3, 2012, fixes $380,200 of the floating rate debt at 1.98% as of September 30, 2011.

The notional amount for the next annual period is summarized below (in thousands):


Start date	End date	Amount
July 3, 2011	October 2, 2011	$	380,200
October 3, 2011	January 2, 2012	$	379,000
January 3, 2012	April 2, 2012	$	362,800

As with the previous two interest rate swaps, this interest rate instrument is not designated as a hedge and therefore does not utilize hedge accounting. Changes in the fair value of the swap agreement are recorded as “Gain (loss) on interest rate swaps” in the “Other income (expense)” section of the statement of operations and the swap in variable to fixed interest rate is recorded as “Interest expense” on the statement of operations when the interest is incurred. The Company recorded a gain (loss) on the change in the fair value of the interest rate swaps in the amounts of $(651,000) and $2.96 million for the three and nine months ended September 30, 2010 (as restated). The Company also recorded a gain on the change in the fair value of the interest rate swaps in the amounts of $1.7 million and $3.9 million for the three and nine months ended September 30, 2011.

these swap agreements. Changes in the fair value of these swaps are recorded as “Accumulated other comprehensive loss” in the equity section of the balance sheet and the swap in variable to fixed interest rate is recorded as “Interest expense” on the statement of operations when the interest is incurred. The Company assesses for ineffectiveness on its derivative instruments on a quarterly basis, and there was no ineffectiveness as of September 30, 2011.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2011. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2011, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings

We are subject to litigation in the normal course of our business. However, in our opinion there is no legal proceeding pending against us which would have a material adverse effect on our financial position, results of operations or liquidity. We are also a party to regulatory proceedings affecting the segments of the communications industry generally in which we engage in business.

ITEM 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3.

Default Upon Senior Securities

None.

ITEM 4.

(Removed and Reserved)

ITEM 5.

Other Information

None

ITEM 6.

Exhibits


Exhibit Number		Exhibit Description

3.1		Amended and Restated Certificate of Incorporation of Knology, Inc. (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.’s Quarterly Report Form 10-Q for the period ended June 30, 2004).

3.2		Certificate of Designations of Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of Series X Junior Participating Preferred Stock of Knology, Inc. (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.’s Current Report on Form 8-K filed July 29, 2005).

3.3		Amended and Restated Bylaws of Knology, Inc. (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.’s Current Report Form 8-K filed August 4, 2011).

31.1		Certification of Chief Executive Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.

31.2		Certification of Chief Financial Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.

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

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

*101.INS		XBRL Instance Document.

*101.SCH		XBRL Taxonomy Extension Schema Document.

*101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

*101.LAB		XBRL Taxonomy Extension Labels Linkbase Document.

*101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

Pursuant to Rule 406T of SEC Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

SIGNATURES

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


	KNOLOGY, INC.

November 9, 2011	By:	/s/ RODGER L. JOHNSON
		Rodger L. Johnson
		Chairman and Chief Executive Officer


November 9, 2011	By:	/s/ ROBERT K. MILLS
		Robert K. Mills
		Chief Financial Officer

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