2004 Annual Report. Telephone Cable TV Internet

Transcription

1 2004 Annual Report Telephone Cable TV Internet

2 Company Profile Knology Inc., (Nasdaq: KNOL) headquartered in West Point, Georgia, is a leading provider of interactive communications and entertainment services in the Southeast. The Company began trading publicly on the Nasdaq National Market in December of Knology serves both residential and business customers with one of the most technologically advanced broadband networks in the country. Innovative offerings include over 200 channels of digital cable TV, local and long distance digital telephone service with the latest enhanced voice messaging features, and high-speed Internet access, which enables consumers to quickly download video, audio and graphic files using a cable modem. Knology also provides advanced communications services, such as video-on-demand (VOD), subscriber video-on-demand (SVOD), digital video recorders (DVR), High-Definition Television (HDTV), interactive television (itv), IP Centrex services, and Passive Optical Network services (PON). The Company provides these services over its wholly owned, fully upgraded 750 MHz interactive broadband network. Knology s network is designed with sufficient capacity to meet the growing demand for high-speed and high-bandwidth video, voice and data services, as well as the introduction of new communications services. Knology has delivered bundled service offerings for seven years and the Company is supported by a management team with decades of experience operating video, voice and data networks. The Company provides its full suite of video, voice and data services in Huntsville and Montgomery, Alabama; Panama City and Pinellas County, Florida; Augusta, Columbus, and West Point, Georgia; Charleston, South Carolina; and Knoxville, Tennessee. Knology targets markets based on certain criteria, including population densities, demographic profiles and other competitive dynamics, which allows it to be the first provider of fully bundled video, voice and data services in their markets. Knology has built its business through: acquisitions of other cable companies, networks and franchises; upgrades of acquired networks to introduce expanded broadband services, including bundled voice and data services; construction and expansion of its broadband network to offer integrated video, voice and data services; and organic growth of connections through increased penetration of services to new marketable homes and its existing customer base. For more information, visit the Company's web site at Annual Meeting The annual meeting of shareholders of Knology, Inc. will be held at 10:00 a.m. EST on May 24, 2005, at 1235 O. G. Skinner Drive, West Point, Georgia Shareholders of record as of March 28, 2005, will be entitled to vote at this meeting. Forward Looking Statements "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this annual report regarding Knology, Inc.'s business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

3 Letter to Shareholders Dear Knology Investor: 2004 was a challenging, but rewarding year for Knology. We dealt with the clean up, integration and roll out of our triple play product (video, voice, and data) in our new broadband market in Pinellas County, Florida. We navigated the impacts of four severe hurricanes that occurred in the Southeast during the third quarter. We completed the integration of our enterprise management system bringing all of our broadband markets to a common billing and service platform. While our results were impacted for the year, we saw progress in the third quarter, and our fourth quarter results were rewarding, as the performance of our business returned to traditional levels. We expect these positive trends to continue into Consistent Track Record of Growth Customer Connections Consistent Track Record of Growth (in thousands) The Pinellas market is a very important part of our long term growth 112 plan. For the near term, however, it has presented a unique set of transitional difficulties because of the status of the customer base and 57 network we acquired. For instance, we knew the customer base contained a higher than normal level of delinquent accounts. In addition, we were aware that many customers were on promotional CAGR 32% discount plans and were long overdue in terms of being moved to a full rate plan. During the first five months post-acquisition, we lost more customers than we originally anticipated as we started to correct these issues. In June, we began to see positive connection gains each month in Pinellas and expect to continue to grow our customer base there each quarter. In addition, we are focusing on improving product margins by offering the three part bundle of video, voice and data in the majority of that market. We are pleased with the recent trends we have seen in Pinellas and expect the market to be a contributor to our revenue and EBITDA growth during Consistent, Predictable Revenue Gro When we purchased the Pinellas and the Cerritos, California markets for $17 million, our motivation was more focused on the future value to be derived from the Pinellas assets than the current operating performance of either market. The seller, Verizon, had invested in excess of $300 million in those same assets. We are excited about the potential return on our investment in this acquisition. In March 2005, Knology entered into a definitive asset purchase agreement to sell its Cerritos cable system to WaveDivision Holdings, LLC for $10 million in cash. Because of Wave Division s existing operations and strong financial backing, we believe this acquisition will be good for the Cerritos customers, the city of Cerritos and for Knology. We expect the sale of the Cerritos system to close in the third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory approvals with respect to the municipal franchise in Cerritos, California. This will allow our total efforts regarding the acquisition to be directed to Pinellas. On a consolidated basis, we ended 2004 with over 398,000 connections and eclipsed the 400,000 connection mark early in the first quarter of I attribute our success to the focus we have maintained on selling the value of the three part bundle. Our capital expenditure requirements for our growth going forward are being driven more and more by a success-based model which will cause our capital expenditure dollars to decline relative to 2004 levels, as we are past our most significant network upgrade/build-out phase

4 Consistent nsistent, Predictable Revenue Growth Revenue Growth (in millions) At the end of 2004, our overall RGU penetration of marketable passings was 52.7%, up from 51.8% in the third quarter. When Pinellas is excluded from our calculations, RGU penetration approaches 70% with our best market exceeding 90% RGU penetration. We feel that most of our markets, especially Pinellas, offer us an opportunity to grow as we continue to increase our penetration towards the levels we have achieved in our more mature markets. As our platform has continued to improve in Pinellas and our other markets, we have experienced churn reductions since the second quarter of this year. Our consolidated churn by quarter for the second, third and fourth quarters was 3.4%, 3.0% and 2.5%, respectively. A big factor driving the churn rate improvement is the success of the turn-around effort so far in the Pinellas market. Also, our base of three part bundle customers has increased significantly and that customer churn rate is only 1.5% During 2004, Knology successfully launched its High Definition television product and continued to grow its digital customer base. Digital CAGR 42% penetration of the company s cable customers now exceeds 32%. Digital subscribers provide the foundation for offering numerous advanced services. The company continued to sell its IP telephony product in addition to its circuit switched telephony services to commercial customers. Knology s business customer base has grown to about 10% of our total connections. We are currently managing our business to balance growth and cash generation. While we continue to grow our customer base and improve our cash position, we are also considering other alternatives to create additional liquidity. These include debt refinancing transactions, equity capital raises, sale/lease-back transactions, as well as other cash generating transactions. Total revenue for 2004 of $211.5 million represented a 22.3% increase over total revenue of $172.9 million for Knology reported EBITDA, as adjusted of $33.1 million for the full year 2004 compared with EBITDA, as adjusted of $33.0 million in Our net loss for 2004 of $75.6 million or $3.19 per share compared with a net loss of $87.8 million or $5.17 per share in All in all, I believe our financial results will continue to improve and our business is poised to grow and build shareholder value during 2005 and beyond. It is exciting to be a part of the Broadband Revolution that is sweeping our country. I want to thank all of our employees for their dedication and hard work during the year as well as you, our shareholders, for your interest and continued support of Knology. Sincerely, Rodger L. Johnson Chief Executive Officer 2

5 Corporate Information Corporate Office Knology, Inc O.G. Skinner Drive West Point, Georgia Stock Stock Symbol: KNOL Stock Traded on NASDAQ Investor Relations Contact Rob Mills Chief Financial Officer Knology, Inc. Phone: Transfer Agent Wachovia 1525 West W.T. Harris Blvd. (3C3) Charlotte, NC Independent Auditors Deloitte & Touche LLP Counsel Alston & Bird LLP Management Rodger L. Johnson President, Chief Executive Officer and Director Robert K. Mills Chief Financial Officer Marcus R. Luke, Ph.D Chief Technology Officer Michael B. Roddy Vice President, Marketing Felix L. Boccucci, Jr. Vice President of Business Development Allan H. Goodson Vice President of Regional Operations Andy M. Sivell Vice President of Network Operations Bret T. McCants Vice President of Network Services M. Todd Holt Vice President and Corporate Controller Richard D. Perkins Vice President of Information Technology & Billing Chad S. Wachter Vice President, General Counsel and Secretary Board of Directors Campbell B. Lanier, III Chairman of the Board Rodger L. Johnson Richard S. Bodman Alan A. Burgess Donald W. Burton Eugene I. Davis O. Gene Gabbard William Laverack, Jr. William H. Scott, III

6 1241. O.G. Skinner Drive West Point, Georgia