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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2000
Commission file numbers: 333-64449-02
333-64449-01
333-64449
Coaxial LLC
Coaxial Financing Corp.
Insight Communications of Central Ohio, LLC
(Exact name of registrants as specified in their respective charters)
Delaware 13-4080422
Delaware 13-4061992
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
c/o Insight Communications Company, Inc.
810 Seventh Avenue
New York, NY 10019
(917) 286-2300
(Address and telephone number of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes....X... No........
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_] Not Applicable
State the aggregate market value of the common equity held by non-
affiliates of the registrants: Not Applicable
Indicate the number of shares outstanding of the registrants' common stock:
Not Applicable
Forward-Looking Statements
This annual report contains "forward-looking statements," including
statements containing the words "believes," "anticipates," "expects" and words
of similar import, which concern, among other things, the operations, economic
performance and financial condition of the System (as defined below). All
statements other than statements of historical fact included in this annual
report regarding Coaxial LLC, Coaxial Financing Corp. and Insight Communications
of Central Ohio, LLC ("Insight Ohio") or any of the transactions described in
this report, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Such forward-looking statements
are based upon a number of assumptions and estimates, which are inherently
subject to significant uncertainties and contingencies, many of which are beyond
the control of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio, and
reflect future business decisions which are subject to change. Although Coaxial
LLC, Coaxial Financing Corp. and Insight Ohio believe that the expectations
reflected in such forward-looking statements are reasonable, they can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from expectations include,
without limitation:
. the ability of Coaxial LLC and Coaxial Financing Corp. to make scheduled
payments with respect to the Senior Discount Notes (as defined below) will
depend on the financial and operating performance of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is
required to be dedicated to the payment of principal and interest on its
indebtedness and the required distributions with respect to its Series A
Preferred Interest and its Series B Preferred Interest, thereby reducing
the funds available to Insight Ohio for its operations and future business
opportunities;
. Coaxial LLC and Coaxial Financing Corp. have no significant assets other
than the common equity of Coaxial Communications of Central Ohio, Inc.
("Coaxial") owned by Coaxial LLC and notes issued by Coaxial DJM LLC (an
owner of 22.5% of the common equity of Coaxial) and Coaxial DSM LLC (an
owner of 10.0% of the common equity of Coaxial) to Coaxial LLC; and
. the indenture governing the terms of the Senior Discount Notes imposes
restrictions on Coaxial LLC, Coaxial Financing Corp. and Insight Ohio and
the Senior Credit Facility of Insight Ohio imposes restrictions on Insight
Ohio.
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not intend to update
these forward-looking statements.
PART I
Item 1. Business
Overview
Insight Ohio owns and operates a cable television system in the Columbus,
Ohio metropolitan area (the "System"). As of December 31, 2000, the System
passed approximately 184,400 homes and served approximately 85,400 basic
customers in the eastern portion of the City of Columbus and the surrounding
suburban communities. All of the System's customers are served from a single
headend allowing for efficient capital deployment for new services. Insight
Communications Company, Inc. ("Insight"), through its wholly-owned subsidiary
Insight Communications Company, L.P., serves as the manager of the System.
Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common
equity interest in Insight Ohio, resulting in Insight owning 100% of the common
equity of Insight Ohio. The purchase price was 800,000 shares of common stock of
Insight and cash paid by Insight to the principals of Coaxial in the amount of
$2.6 million. In connection with the purchase, Insight Ohio's operating
agreement was amended to, among other things, remove certain participating
rights of the principals of Coaxial, and vest, in the common equity interests of
Insight Ohio, 70% of its total voting power and in the preferred equity
interests 30% of its total voting power.
Contribution of Insight Ohio
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and an indirect subsidiary of AT&T Broadband,
entered into definitive agreements with Insight and certain subsidiaries of AT&T
Corp. (the "AT&T Cable Subsidiaries") for the acquisition of additional cable
television systems, including Insight Ohio. Through a series of transactions,
Insight Midwest acquired all of Insight's wholly-owned systems serving
approximately 280,000 customers, including the approximately 85,400 customers
served by Insight Ohio and including systems which Insight purchased from AT&T
Cable Subsidiaries. At the same time, Insight Midwest acquired from AT&T Cable
Subsidiaries systems serving approximately 250,000 customers. Insight Ohio is an
unrestricted subsidiary under the indentures governing Insight's and Insight
Midwest's senior notes and is prohibited by the terms of its indebtedness from
making distributions to Insight Midwest. Insight Midwest remains equally owned
by Insight and AT&T Broadband, and Insight continues to serve as the general
partner and manages and operates the Insight Midwest systems, including Insight
Ohio.
Insight Ohio's conditional guarantee of the Senior Notes and the Senior
Discount Notes remains in place. If at any time the Senior Notes or the Senior
Discount Notes are repaid or significantly modified, or in any case after August
15, 2008, the principals of the Coaxial Entities may require Insight to purchase
their preferred interests for a purchase price equal to the difference, if any,
of $32.6 million less the then market value of the 800,000 shares of Insight
common stock issued on August 8, 2000.
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The System
The System is located in the eastern portion of the City of Columbus and
the surrounding suburban communities. The City of Columbus is the 34th largest
designated market area ("DMA") in the United States, is the capital of Ohio and
is the home of The Ohio State University. Besides the state government and
university, the Columbus economy is well diversified with a significant presence
of prominent companies such as The Limited, Merck, Wendy's, Nationwide
Insurance, Borden and Worthington Industries. The area's strong economy provides
for a well-paid employment base with a current unemployment rate of 2.3%. The
median household income of the System's service area is approximately $47,800
per year, while the median family income is approximately $57,000 per year. As
of December 31, 2000, the System passed approximately 184,400 homes and served
approximately 85,400 basic customers from a single headend.
The System enjoys a high level of population growth in the suburban
communities east of Columbus. Since December 31, 1996, approximately 23,400
homes passed have been added to the System through new plant extensions,
primarily in new housing developments. This represents a 3.5% compound annual
growth rate of homes passed for the System for the four years ended December 31,
2000, as compared to the industry average of 1.0% for the same period.
Portions of the System operate in a competitive environment. Customers in
those areas have access to two wired cable television providers -- Insight Ohio
and a cable subsidiary of Ameritech Corporation, the telephone local exchange
carrier in Columbus. The System also competes with direct broadcast satellite
television systems ("DBS") and multipoint multichannel distribution systems
("MMDS"). The areas of the System served by both Insight Ohio and Ameritech pass
approximately 142,700 homes, representing 77.3% of the System's total homes
passed. In this competitive environment, the System's basic customers decreased
from approximately 86,000 at the end of 1995, prior to Ameritech's entry into
the marketplace, to approximately 85,400 as of December 31, 2000.
As of December 31, 2000, the System had 2,685 miles of plant, including
1,240 miles of 870 MHz plant and 1,445 miles of 450 MHz. Insight Ohio estimates
that as of December 31, 2000, approximately 70% of its customers were served by
its upgraded network which enables delivery of an advanced suite of
entertainment, information and communications services, including interactive
digital video, high-speed data access and telephony services. Insight Ohio is
continuing to upgrade the technical capability of the System by increasing its
bandwidth to 870 MHz and activating its reverse plant. Insight Ohio plans to
enhance the technical platform of the System by continuing to upgrade the plant
passing approximately 84% of the homes passed in the System by the end of 2001.
The Manager
Insight is the eighth largest cable television system operator in the United
States based on customers served. Through its wholly-owned and managed systems,
Insight Communications currently serves approximately 1.4 million customers, 99%
of which are concentrated in the four contiguous states of Indiana, Kentucky,
Illinois and Ohio. In addition to its geographic concentration, our manager's
network is efficiently clustered. After giving effect to the network upgrades,
expected to be substantially completed during 2001, approximately 95% of our
manager's customers will be served from thirteen headends. Technical clustering
is critical in order to efficiently deploy a bundled suite of entertainment,
information and communications services. This combination of geographic
concentration and technical clustering has enabled Insight Communications to
lead the cable television industry in offering, under the Insight Digital brand,
a complete bundle of interactive digital video, high-speed data access and
telephony services.
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To facilitate delivery of telephony services, we have entered into a ten-
year agreement with AT&T Broadband, LLC that will allow us to deliver to our
customers local telephone service under the AT&T Digital brand. Under the terms
of the agreement, we will lease certain capacity on our network to AT&T
Broadband for which we will receive a monthly fee based upon the number of
telephone lines ordered by its customers. We will be responsible for marketing
and billing these services, as well as the installation and maintenance support
for which we will receive additional payments. The capital required to deploy
telephony over its networks will be shared, with AT&T Broadband responsible for
switching and transport facilities. Our manager believes that we will be able to
achieve higher penetration levels by marketing its telephony services under the
AT&T brand and leveraging AT&T's telephony expertise with our strong local
presence and established customer relationships. Furthermore, our manager
believes that the expected penetration levels, combined with shared capital
costs, will result in higher returns for our investors.
Insight Business Strategy
Our manager's strategy is to become a competitive, full-service provider of
entertainment, information and communications services. This strategy is
centered on the development of new and enhanced products and services for the
communities served by our networks and consists of the following elements:
. Focus on operating large, tightly-grouped clusters of cable systems with
attractive technical and demographic profiles;
. Expeditiously upgrade our network;
. Introduce new and enhanced products and services, including interactive
Insight Digital service, high-speed data service and telephony service;
. Leverage strong local presence to enhance customer and community
relations; and
. Pursue value-enhancing transactions in nearby or adjacent geographies.
Our manager's marketing strategy is to offer our customers a bundled suite of
services. By bundling our products and services, we provide our customers with
an increased choice of services in value-added packages, which we believe
results in higher customer satisfaction, increased use of our services and
greater customer retention. Our manager began deploying new and enhanced
products and services, such as interactive digital video and high-speed data
access, during 1999, and during 2001 will add a telephony service marketed under
the AT&T brand.
The System is an integral part of Insight's long-term business strategy. The
System has a strong market presence in a state capital and academic center with
a diverse, growing economy. All of the System's customers are served from a
single headend allowing for efficient capital deployment for new services.
Moreover, Insight Ohio estimates that as of December 31, 2000, it served
approximately 70% of the subscribers in the System with upgraded plant. Insight
Ohio began launching the interactive Insight Digital service on a node-by-node
basis in November 1999, including a video-on-demand and interactive
informational service and launched its high-speed Internet service during the
second quarter of 2000.
System Operating Strategy
The System fits the profile of cable television systems that Insight seeks to
own and operate. The
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System is large enough to have a significant market presence and all customers
are serviced from one headend. In addition, Columbus is geographically proximate
to other Insight cable systems with a customer universe having the type of
demographic profile that Insight believes will widely accept new
telecommunications offerings. Insight Ohio intends to aggressively implement
Insight's upgrade strategy in Columbus.
Insight is in the process of rebuilding the System to 870 MHz, and began
servicing customers from the rebuilt network in November 1999. Insight Ohio is
currently launching digital service, on a node-by-node basis, including a video-
on-demand service and an interactive information service. As of December 31,
2000, the System passed 47,800 homes with its digital service and served
approximately 13,400 customers with such service, representing a penetration
level of over 28%. Management expects to increase revenues as the System
upgrade is completed by increasing the deployment of its digital cable and
adding new services such as high-speed modems and other newly developing
telecommunications services. Insight Ohio has entered into an affiliation
agreement with Road Runner and a network service agreement with High Speed
Access Corp. to deploy the Road Runner service over cable modems. As of
December 31, 2000, over 4,800 customers subscribed to the Road Runner service.
In November 1999, Insight Ohio introduced its signature interactive Insight
Digital service with exclusive interactive programming including Local Source,
an Internet-styled information service, and a video-on-demand service by DIVA.
In addition, the System provides exclusive sports programming under the "Central
Ohio Sport!" brand, featuring sporting events from Ohio State University.
Overbuild
In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus. Ameritech has built its citywide franchise, both in our
service area and in the Time Warner service area on the west side of Columbus.
Insight Ohio and Time Warner service virtually distinct areas and therefore do
not compete with one another. As of December 31, 2000 the areas of the System
served by both Insight Ohio and Ameritech pass approximately 142,700 homes,
representing 77.3% of the System's total homes passed.
When the System was acquired by Insight Ohio in August 1999, it implemented
a strategy to end deep discounting as a defense against Ameritech. Management
believed that a relatively small customer loss, caused by discontinuing
discounts, would be preferable in exchange for achieving an increase in the
average monthly revenue per customer. As a result of this strategy, from June
30, 1998 to December 31, 2000, the average monthly revenue per customer
increased from $43.30 to $48.87 while the number of customers decreased from
91,100 to 85,400. Ameritech seems to have responded to this strategy by
announcing a $1.25 increase in the price of their standard cable service
effective March 1, 2000.
Technological Developments
Management believes that in order to achieve consistently high levels of
customer service, maintain a strong competitive posture and deploy important new
technologies, a state-of-the-art technical platform needs to be built. Presently
the System is comprised of 2,685 miles of plant passing approximately 184,400
homes resulting in a density of 69 homes per mile. As of December 31, 2000
approximately 70% of the customers were served by a network upgraded to 870 MHz,
which enables delivery of an advanced suite of entertainment, information and
communications services, including our interactive digital video, high-speed
data access and telephony services.
Insight Ohio plans to enhance the technical platform of the System by
continuing to upgrade the
4
plant passing 84% of the homes passed in the System by the end of 2001. The
capability for high-speed data transmission, video-on- demand, interactive
digital cable, additional analog channels and telephony is intended to be
provided by further deployment of fiber optics, an increase in the bandwidth to
870 MHz, activation of the reverse plant to allow two-way communications and the
installation of digital equipment.
All of the System's basic customers currently have access to addressable
technology and approximately 80% have addressable converters in their homes as
of December 31, 2000. Addressable technology enables the System to
electronically control the cable television services being delivered to the
customer's home. As a result, the System can electronically upgrade or downgrade
services to a customer immediately, from its customer service center, without
the delay or expense associated with dispatching a technician to the customer's
home. Addressable technology also reduces premium service theft, is an effective
enforcement tool in the collection of delinquent payments and enables the System
to offer pay-per-view services, including movies and special events.
Management believes that active use of fiber optic technology as an
alternative to coaxial cable plays a major role in expanding channel capacity
and improving the performance of the System. Fiber optic strands are capable of
carrying hundreds of video, data and voice channels over extended distances
without the extensive signal amplification typically required for coaxial cable.
The System will continue to deploy fiber optic cable further reducing amplifier
cascades while improving picture quality and system reliability.
High-speed cable modems and set-top boxes using digital compression
technology have become commercially viable. These developments allow for the
introduction of high-speed data services and Internet access and will increase
the programming services available to customers. Digital compression technology
provides for a significant expansion of channel capacity with up to 12 digital
channels to be carried in the bandwidth of one analog channel. The upgrade of
the System has given the System the ability to package a "Digital Gateway"
brand. For $6.95 customers receive the following services:
. A digital converter box;
. An interactive navigational program guide for all analog and digital
channels;
. A local, interactive Internet-style service;
. A significant multiplexing of premium channels for customers who separately
subscribe to premium channels, such as HBO and Showtime;
. Pay-per-view video-on-demand; and
. A digital 40-channel audio music service.
Insight Ohio began launching the Insight Digital service in the System on a
node-by-node basis in November 1999, including DIVA's video-on-demand service
and the Local Source interactive information service and as of December 31, 2000
served approximately 13,400 subscribers with its digital service. Insight Ohio
launched the Road Runner high-speed Internet service during the second quarter
of 2000 and served approximately 4,800 customers with this service as of
December 31, 2000.
Marketing, Programming and Rates
Marketing
The System's marketing programs and campaigns are based upon offering a
variety of cable services creatively packaged and tailored to appeal to its
different markets and to segments within its markets. The System surveys its
customer base to ensure that it is meeting the demands of its customers and
stays abreast of its competition in order to effectively counter competitors'
promotional campaigns. The System uses a
5
coordinated array of marketing tactics to attract and retain customers and to
increase premium service penetration, including door-to-door and direct mail
solicitation, telemarketing, media advertising, local promotional events
typically sponsored by programming services and cross-channel promotion of new
services. The rebuild of the plant allows Insight Ohio to deploy its suite of
services including interactive digital, high-speed data and by the end of 2001,
telephony. In November 1999, Insight Ohio began to launch its interactive
digital, video-on-demand and Local Source informational product on a
node-by-node basis. Insight Ohio has also launch its Road Runner high-speed
Internet service during. Using a skilled team of marketing professionals, the
System has competed by supporting an innovative variety of marketing activities.
Programming
Insight has various contracts to obtain basic and premium programming for
the System from program suppliers whose compensation is typically based on a
fixed fee per customer. Because of our relationship with AT&T Broadband, we have
the right to purchase programming services for our systems either directly
through AT&T Broadband's programming supplier Satellite Services, Inc. or
through our own purchasing power. We believe that Satellite Services has
attractive programming costs. In addition, some program suppliers provide
volume discount pricing structures or offer marketing and launch support to the
System. The System's successful marketing of multiple premium service packages
emphasizing customer value enables the System to take advantage of such cost
incentives. The System's overall programming costs are expected to increase in
the future due to additional programming being provided to its customers,
inflationary increases and other factors affecting the cable television
industry. The System also has various retransmission consent arrangements with
commercial broadcast stations which generally have been renewed through 2003.
None of these consents require payment of fees for carriage.
The System offers a "basic service tier," consisting primarily of local
television channels (network and independent stations) available over-the-air,
and local public, governmental and educational access channels. The System also
offers, for a monthly fee, an expanded basic tier of various satellite-
delivered, non-broadcast channels (such as CNN, ESPN, MTV, TNT, and USA). In
addition to these services, the System provides premium services such as HBO,
Cinemax, Showtime, The Movie Channel and Starz!, which have unique appeal to
various segments of the viewing audience. These services are satellite-delivered
channels consisting principally of feature films, original programming, live
sports events, concerts and other special entertainment features, usually
presented without commercial interruption. Such premium programming services are
offered by the System both on a per-channel basis and as part of premium service
packages designed to enhance customer value and to enable the System to take
advantage of programming agreements offering cost incentives based on premium
service unit growth. Customers may subscribe to one or more premium service
units. A "premium service unit" is a single premium service for which a customer
must pay an additional monthly fee in order to receive the service.
Management is upgrading the System to digital using fiber optic technology,
which has allowed the System to expand the number of multiplexed premium screens
(additional channels such as Showtime 2 and HBO Family) providing greater value
for the customer. Moreover, the upgrade has given the System the ability to
offer its Insight Digital service including interactive television and multiple
packaging options through the addition of niche programming services.
Management believes that these additional features and options will increase
basic and premium penetration as well as revenue per basic customer. The System
also provides video-on-demand, a digital service consisting principally of
feature films, adult movies, concerts and other special events, presented
without commercial interruption. Such services are offered by the System on a
"per viewing" basis, with customers only paying for programs which they select
for viewing.
6
Rates
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of December 31, 2000, the
System's stated monthly basic service rate for residential customers was $11.47,
the System's monthly expanded basic service rates for residential customers
ranged from $14.93 to $18.65, and per-channel premium service rates (not
including special promotions) ranged from $5.95 to $13.95 per service.
A one-time installation fee, which the System may wholly or partially waive
during a promotional period, is charged to new customers. The System charges
monthly fees for converters and remote control devices. The System also charges
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. MDU accounts may be offered a bulk rate in exchange
for single-point billing and basic service to all units.
On February 11, 1997, a Petition for Determination of Effective Competition
filed by the prior owner of the System challenging the certification of the City
of Columbus was granted by the FCC. This petition effectively revoked the City
of Columbus' right to regulate the System's basic cable and equipment rates.
Employees
As of December 31, 2000, the System employed 201 full-time equivalent
employees, none of whom is represented by a union or covered by a collective
bargaining obligation. Management believes that its relations with its employees
are good. Approximately 50% of the full-time employees have tenure of five years
or longer. Although the Columbus area has relatively low unemployment and
competition in hiring is intense, management believes that it will continue to
be successful in attracting and retaining highly qualified employees and
maintaining good working relationships with its current employees.
Customer Service and Community Relations
The System is dedicated to quality customer service. Plans to make
significant system improvements are designed in part to strengthen customer
service through greater system reliability and the introduction of new services.
Management seeks a high level of customer satisfaction by also employing a well-
trained staff of customer service representatives and experienced field
technicians.
The System is dedicated to fostering strong community relations in the
communities served by the System. The System supports local charities and
community causes through staged events and promotional campaigns, including
Children's Hospital Miracle Network Telethon, the Penny-A-Day for Children
Program and Red Cross Blood Drive donations. The System also installs and
provides free cable television service and Internet access to public schools,
government buildings and not-for-profit hospitals in its franchise areas. The
System has teamed up with its neighboring cable operator Time Warner to develop
a local sports package called "Central Ohio Sport!" which features Ohio State
University sporting events on an exclusive basis to cable customers. Management
believes that its relations with the communities in which the System operates
are generally excellent.
Franchises
Cable television systems are generally operated under non-exclusive
franchises granted by local
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governmental authorities. These franchises typically contain many conditions,
such as:
. time limitations on commencement and completion of construction;
. conditions of service, including number of channels, types of programming and
the provision of free service to schools and certain other public
institutions; and
. the maintenance of insurance and indemnity bonds.
The provisions of local franchises are subject to federal regulation under
the Communications Act of 1934, as amended (the "Communications Act").
The System provides cable television service to residents of 42
governmental jurisdictions. Within each of these governmental jurisdictions, the
System operates under authority granted by the local community or the State of
Ohio. Actual franchise agreements are maintained with the 28 jurisdictions that
possess the legal basis to grant such franchises consistent with federal and
state law. These franchises, which are non-exclusive, provide for the payment of
fees to the issuing authority. In the System, such franchise fees are passed
through directly to the customers. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the Cable Communications
Policy Act of 1984 (the "1984 Cable Act" and, together with the 1992 Cable Act,
the "Cable Acts") prohibit franchising authorities from imposing franchise fees
in excess of 5% of gross revenue and also permit the cable television system
operator to seek renegotiation and modification of franchise requirements if
warranted by changed circumstances.
The majority of the System's basic customers are in governmental
jurisdictions that require a franchise. The table below groups all of the
System's governmental jurisdictions by date of expiration of the authority to
operate and presents the approximate number and percentage of basic customers
for each group as of December 31, 2000.
Number of Percentage of Percentage of Total
Year of Franchise Expiration Franchises Total Franchises Basic Customers
- ---------------------------- ---------- ---------------- --------------
Expired*...................................... 1 3.5% 1.5%
2001 and 2002................................. 5 17.9% 5.7%
2003 and beyond............................... 22 78.6% 92.8%
---------- -------- ---------
Total...................................... 28 100.0% 100.0%
========== ======== =========
________________
* Such franchises are operated on a month-to-month basis and are in the process
of being renewed.
The Cable Acts provide, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by such
franchise. In addition, the Cable Acts established comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications.
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Management believes that it generally has good relationships with its
franchising communities. The System has never had a franchise revoked or failed
to have a franchise renewed. In addition, all of the franchises of the System
eligible for renewal have been renewed or extended at or prior to their stated
expirations, and no franchise community has refused to consent to a franchise
transfer to the System.
Competition
Cable systems face increasing competition from alternative methods of
receiving and distributing their core video business. Both wireline and wireless
competitors have made inroads in competing against incumbent cable operators.
The extent to which a cable operator is competitive depends, in part, upon its
ability to provide to customers, at a reasonable price, a greater variety of
programming and other communications services than are available off-air or
through alternative delivery sources and upon superior technical performance and
customer service.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies, in particular direct broadcast satellite television systems
operators, that have the potential to provide increased competition to cable
systems. Recently enacted legislation permits direct broadcast satellite
companies to retransmit local television signals, eliminating one of the
objections of consumers about switching to satellites.
The 1996 Telecom Act makes it easier for local exchange telephone
companies and others to provide a wide variety of video services competitive
with services provided by cable systems. Various local exchange telephone
companies currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including the
deployment of broadband cable networks and the use of wireless transmission
facilities. Local exchange telephone companies in various states have either
announced plans, obtained local franchise authorizations or are currently
competing with our cable communications systems. Local exchange telephone
companies and other companies also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The
ability of local exchange telephone companies to cross-subsidize video, data and
telecommunication services also poses some threat to cable operators.
The major source of competition for the System is the wireline overbuild
by Ameritech. Ameritech has overbuilt approximately 142,700 homes passed in the
System's service area, or approximately 77.3% of the total homes in the service
territory as of December 31, 2000.
Franchised cable systems compete with private cable systems for the right
to service condominiums, apartment complexes and other multiple unit residential
developments. The operators of these private systems, known as satellite master
antenna television systems often enter into exclusive agreements with apartment
building owners or homeowners' associations that preclude franchised cable
television operators from serving residents of such private complexes. However,
the 1984 Cable Act gives franchised cable operators the right to use existing
compatible easements within their franchise areas on nondiscriminatory terms and
conditions. Accordingly, where there are preexisting compatible easements, cable
operators may not be unfairly denied access or discriminated against with
respect to access to the premises served by those easements. Conflicting
judicial decisions have been issued interpreting the scope of the access right
granted by the 1984 Cable Act, particularly with respect to easements located
entirely on private property.
9
The 1996 Telecom Act may exempt some of our competitors from regulation
as cable systems. The 1996 Telecom Act amends the definition of a "cable system"
such that providers of competitive video programming are only regulated and
franchised as "cable systems" if they use public rights-of-way. Thus, a broader
class of entities providing video programming, including operators of satellite
master antenna television systems, may be exempt from regulation as cable
television systems under the 1996 Telecom Act. This exemption may give these
entities a competitive advantage over us. As of December 31, 2000, the System
passed approximately 440 MDU complexes within its service territory and had
entry agreements, either exclusive or non-exclusive, with complexes totaling
approximately 62,300 MDUs. As of December 31, 2000 the System provided
programming to approximately 31,500 of these MDUs, or 51% of the total MDUs
passed.
Direct broadcast satellite television systems use digital video
compression technology to increase the channel capacity of their systems. Direct
broadcast satellite television systems' programming is currently available to
individual households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar Communications Corporation. Direct broadcast satellite
television systems have some advantages over cable systems that were not
upgraded, such as greater channel capacity and digital picture quality. In
addition, legislation was recently enacted which permits direct broadcast
satellite television systems to retransmit the signals of local television
stations in their local markets. However, direct broadcast satellite television
systems have a limited ability to offer locally produced programming, and do not
have a significant local presence in the community. In addition, direct
broadcast satellite television systems packages can be more expensive than
cable, especially if the subscriber intends to view the service on more than one
television in the household. Finally, direct broadcast satellite television
systems do not have the same full two-way capability, which we believe will
limit their ability to compete in a meaningful way in high-speed data and voice
communications. Management estimates that there were approximately 9,900 DBS
customers in the System's service areas as of December 31, 2000.
Several telephone companies are introducing digital subscriber line
technology, which allows Internet access over traditional phone lines at data
transmission speeds greater than those available by a standard telephone modem.
Although these transmission speeds are not as great as the transmission speeds
of a cable modem, we believe that the transmission speeds of digital subscriber
line technology are sufficiently high that such technology will compete with
cable modem technology. The FCC is currently considering its authority to
promulgate rules to facilitate the deployment of these services and regulate
areas including high-speed data and interactive Internet services. We cannot
predict the outcome of any FCC proceedings, or the impact of that outcome on the
success of our Internet access services or on our operations.
Additionally, the FCC adopted regulations allocating frequencies in the
28 GHz band for a new service called local multipoint distribution service that
can be used to provide video services similar to multipoint multichannel
distribution systems. The FCC has completed spectrum auctions for local
multipoint distribution service licenses.
As we expand our offerings to include telephony services, our AT&T
branded services will be subject to competition from existing providers,
including both local exchange telephone companies and long-distance carriers.
The telecommunications industry is highly competitive and many telephone service
providers may have greater financial resources than we have, or have established
relationships with regulatory authorities. We cannot predict the extent to which
the presence of these competitors will influence customer penetration in our
telephony service areas.
Other new technologies may become competitive with services that cable
communications
10
systems can offer. Advances in communications technology, as well as changes in
the marketplace and the regulatory and legislative environment are constantly
occurring. Thus, we cannot predict the effect of ongoing or future developments
on the cable communications industry or on our operations.
Cable television systems are operated under non-exclusive franchises
granted by local authorities thereby allowing more than one cable system to be
built in the same area. Although the number of municipal and commercial
overbuild cable systems is small, the potential profitability of a cable system
is adversely affected if the local customer base is divided among multiple
systems. Additionally, constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We believe that in order
to be successful, a competitor's overbuild would need to be able to serve the
homes in the overbuilt area on a more cost-effective basis than we can. Any such
overbuild operation would require either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a number of rulemakings to implement the legislation, some of
which have yet to be completed, and such proceedings may materially affect the
cable television industry.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-ownership
between cable television systems and other communications businesses, carriage
of television broadcast programming, cable rates, consumer protection and
customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
11
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation
for premium channels and optional non-basic program tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the previous statutory and FCC rate regulation standards. The 1992 Cable
Act replaced the FCC's old standard for determining effective competition, under
which most cable television systems were not subject to rate regulation, with a
statutory provision that resulted in nearly all cable television systems
becoming subject to rate regulation of basic service. The 1996 Telecom Act
expanded the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except direct broadcast satellite television systems. Satisfaction of this test
deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable
Act required the FCC to adopt a formula for franchising authorities to assure
that basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers, other than per-channel or per-program services, in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring basic customers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of compliance; required the FCC to adopt
regulations to establish, on the basis of actual costs, the price for
installation of cable service, remote controls, converter boxes and additional
outlets; and allowed the FCC to impose restrictions on the retiring and
rearrangement of cable services under certain limited circumstances. The 1996
Telecom Act limited the class of complainants regarding cable programming
service tier rates to franchising authorities only, and ended FCC regulation of
cable programming service tier rates on March 31, 1999. The 1996 Telecom Act
also relaxes existing uniform rate requirements by specifying that such
requirements do not apply where the operator faces effective competition, and by
exempting bulk discounts to multiple dwelling units, although complaints about
predatory pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation
of basic service rates. Local franchising authorities and the FCC, respectively,
are empowered to order a reduction of existing rates which exceed the maximum
permitted level for basic services and associated equipment, and refunds can be
required. The FCC adopted a benchmark price cap system for measuring the
reasonableness of existing basic service rates. Alternatively, cable operators
have the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment, converter boxes and remote control devices,
for example, and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable
television operator adds or deletes channels. There is also a streamlined cost-
of-service methodology available to justify a rate increase on the basic tier
for "significant" system upgrades.
As a further alternative, in 1995 the FCC adopted a simplified cost-of-
service methodology which can be used by "small cable systems" owned by "small
cable companies." A "small system" is defined as a cable television system which
has, on a headend basis, 15,000 or fewer basic customers. A "small cable
company" is defined as an entity serving a total of 400,000 or fewer basic
customers that is not affiliated with a larger cable television company, that is
to say that a larger cable television company does not own more than a 20
percent equity share or exercise de jure control. This small system rate-setting
methodology almost
12
always results in rates that exceed those produced by the cost-of-service rules
applicable to larger cable television operators. Once the initial rates are set
they can be adjusted periodically for inflation and external cost changes as
described above. When an eligible "small system" grows larger than 15,000 basic
customers, it can maintain its then current rates but it cannot increase its
rates in the normal course until an increase would be warranted under the rules
applicable to systems that have more than 15,000 customers. When a "small cable
company" grows larger than 400,000 basic customers, the qualified systems it
then owns will not lose their small system eligibility. If a small cable company
sells a qualified system, or if the company itself is sold, the qualified
systems retain that status even if the acquiring company is not a small cable
company. We were a "small cable company" prior to the October 30, 1998
completion of the AT&T Broadband transaction but we no longer enjoy this status
and as a result, we are no longer entitled to this benefit. However, as noted
above, the systems with less than 15,000 customers owned by us prior to the
completion of the AT&T Broadband transaction remain eligible for "small system"
rate regulation.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, that is to say that the system is located in the station's area of
dominant influence, to elect every three years whether to require the cable
television system to carry the station, subject to certain exceptions, or
whether the cable television system will have to negotiate for "retransmission
consent" to carry the station. The next election between must-carry and
retransmission consent will be October 1, 2002. A cable television system is
generally required to devote up to one-third of its activated channel capacity
for the carriage of local commercial television stations whether pursuant to
mandatory carriage requirements or the retransmission consent requirements of
the 1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger of:
(i) a 50 mile radius from the station's city of license; or (ii) the station's
Grade B contour, a measure of signal strength. Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable television systems
have to obtain retransmission consent for the carriage of all "distant"
commercial broadcast stations, except for certain "superstations," which are
commercial satellite-delivered independent stations such as WGN. To date,
compliance with the "retransmission consent" and "must carry" provisions of the
1992 Cable Act has not had a material effect on us, although this result may
change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
recently completed a rulemaking proceeding on the carriage of television signals
in high definition and digital formats. The outcome of this proceeding could
have a material effect on the number of services that a cable operator will be
required to carry. Local television broadcast stations transmitting solely in a
digital format are entitled to carriage. Stations transmitting in both digital
and analog formats, which is permitted during the current transition period,
have no carriage rights for the digital format during the transition.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the
appropriate request
13
of a local television station, delete the simultaneous or nonsimultaneous
network programming of a distant station when such programming has also been
contracted for by the local station on an exclusive basis. FCC regulations also
enable television stations that have obtained exclusive distribution rights for
syndicated programming in their market to require a cable television system to
delete or "black out" such programming from other television stations which are
carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures
and criteria designed to protect incumbent franchisees against arbitrary denials
of renewal and to provide specific grounds for franchising authorities to
consider in making renewal decisions, including a franchisee's performance under
the franchise and community needs. Even after the formal renewal procedures are
invoked, franchising authorities and cable television operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
Similarly, if a franchising authority's consent is required for the purchase or
sale of a cable television system or franchises, such authority may attempt to
impose burdensome or onerous franchise requirements in connection with a request
for such consent. Historically, franchises have been renewed for cable
television operators that have provided satisfactory services and have complied
with the terms of their franchises. At this time, we are not aware of any
current or past material failure on our part to comply with our franchise
agreements. We believe that we have generally complied with the terms of our
franchises and have provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a
cable television operator seeks to enforce its renewal rights which could make
it easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it fails to respond to a written notice from the cable
television operator of its failure or inability to cure. Courts may not reverse
a denial of renewal based on procedural violations found to be "harmless error."
Channel Set-Asides
14
The 1984 Cable Act permits local franchising authorities to require cable
television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers providing video programming directly to customers within their local
exchange telephone service areas. Consequently, the 1996 Telecom Act permits
telephone companies to compete directly with operations of cable television
systems. Under the 1996 Telecom Act and FCC rules adopted to implement the 1996
Telecom Act, local exchange carriers may provide video service as broadcasters,
common carriers, or cable operators. In addition, local exchange carriers and
others may also provide video service through "open video systems," a regulatory
regime that may give them more flexibility than traditional cable television
systems. Open video system operators (including local exchange carriers) can,
however, be required to obtain a local cable franchise, and they can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
In general, open video system operators must make their systems available to
programming providers on rates, terms and conditions that are reasonable and
nondiscriminatory. Where carriage demand by programming providers exceeds the
channel capacity of an open video system, two-thirds of the channels must be
made available to programmers unaffiliated with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers from
purchasing a greater than 10% ownership interest in a cable television system
located within the local exchange carrier's telephone service area, prohibits
cable operators from purchasing local exchange carriers whose service areas are
located within the cable operator's franchise area, and prohibits joint ventures
between operators of cable television systems and local exchange carriers
operating in overlapping markets. There are some statutory exceptions, including
a rural exemption that permits buyouts in which the purchased cable television
system or local exchange carrier serves a non-urban area with fewer than 35,000
inhabitants, and exemptions for the purchase of small cable television systems
located in non-urban areas. Also, the FCC may grant waivers of the buyout
provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repealed the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act have been eliminated, although the
FCC's regulations prohibiting broadcast/cable common-ownership currently remain
in effect. The FCC's rules also generally prohibit cable operators from offering
satellite master antenna service separate from their franchised systems in the
same franchise area, unless the cable operator is subject to "effective
competition" there.
The 1996 Telecom Act amended the definition of a "cable system" under the
Communications Act so that competitive providers of video services will be
regulated and franchised as "cable systems" only if they use public rights-of-
way. Thus, a broader class of entities providing video programming may be exempt
from regulation as cable television systems under the Communications Act.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number
of subscribers which
15
a single cable television operator can serve. In general, no cable television
operator can have an attributable interest in cable television systems which
serve more than 30% of all multichannel video programming subscribers
nationwide. Attributable interests for these purposes include voting interests
of 5% or more, unless there is another single holder of more than 50% of the
voting stock, officerships, directorships and general partnership interests. The
FCC has also adopted rules which limit the number of channels on a cable
television system which can be occupied by national video programming services
in which the entity which owns the cable television system has an attributable
interest. The limit is 40% of the first 75 activated channels. The U.S. Court of
Appeals for District of Columbia Circuit upheld the constitutionality of these
rules. A petition for certiorari has been denied by the Supreme Court. The U.S.
Court of Appeals for District of Columbia Circuit has recently decided an appeal
on the rules themselves. In that decision, the Court reversed and remanded the
horizontal and vertical ownership for further proceedings.
The 1996 Telecom Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators over competitors
and requires such programmers to sell their programming to other multichannel
video distributors. This provision limits the ability of vertically integrated
cable programmers to offer exclusive programming arrangements to cable
companies. The prohibition on certain types of exclusive programming
arrangements is set to expire on October 5, 2002, unless the FCC determines that
extension of the prohibition is necessary to preserve and protect competition in
video programming distribution. We expect the FCC to make a determination on
this issue in 2001.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable television operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
television operator was found to have violated the customer privacy provisions
of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and
other costs. Under the 1992 Cable Act, the privacy requirements were
strengthened to require that cable television operators take such actions as are
necessary to prevent unauthorized access to personally identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
Technical Requirements
16
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable television system
signal leakage. Periodic testing by cable television operators for compliance
with the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to periodically update its technical standards to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable television system's
use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable television systems and
consumer electronics equipment. These regulations, among other things, generally
prohibit cable television operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable television systems, and
otherwise to rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC
has adopted rules to assure the competitive availability to consumers of
customer premises equipment, such as converters, used to access the services
offered by cable television systems and other multichannel video programming
distributors. Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their multichannel video programming
distributors so long as the equipment does not harm the network, does not
interfere with the services purchased by other customers and is not used to
receive unauthorized services. As of July 1, 2000, multichannel video
programming distributors, other than operators of direct broadcast satellite
television systems, are required to separate security from non-security
functions in the customer premises equipment which they sell or lease to their
customers and offer their customers the option of using component security
modules obtained from the multichannel video programming distributors with set-
top units purchased or leased from retail outlets. As of January 1, 2005,
multichannel video programming distributors will be prohibited from distributing
new set-top equipment integrating both security and non-security functions to
their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
emergency alert system. The rules require all cable television systems to
provide an audio and video emergency alert system message on at least one
programmed channel and a video interruption and an audio alert message on all
programmed channels. The audio alert message is required to state which channel
is carrying the full audio and video emergency alert system message. The FCC
rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install EAS equipment capable
of providing audio and video emergency alert system messages on all programmed
channels by December 31, 1998. Cable television systems with 5,000 or more but
fewer than 10,000 basic customers per headend will have until October 1, 2002 to
comply with that requirement. Cable television systems with fewer than 5,000
basic customers per headend will have a choice of providing either a national
level emergency alert system message on all programmed channels or installing
emergency alert system equipment capable of providing audio alert messages on
all programmed channels, a video interrupt on all channels, and an audio and
video emergency alert system message on one programmed channel. This must be
accomplished by October 1, 2002.
Inside Wiring; Customer Access
17
In a 1997 order, the FCC established rules that require an incumbent
cable operator upon expiration of a multiple dwelling unit service contract to
sell, abandon, or remove "home run" wiring that was installed by the cable
operator in a multiple dwelling unit building. These inside wiring rules are
expected to assist building owners in their attempts to replace existing cable
operators with new programming providers who are willing to pay the building
owner a higher fee, where such a fee is permissible. Additionally, the FCC has
proposed to restrict exclusive contracts between building owners and cable
operators or other multichannel video programming distributors. The FCC has also
issued an order preempting state, local and private restrictions on over- the-
air reception antennas placed on rental properties in areas where a tenant has
exclusive use of the property, such as balconies or patios. However, tenants may
not install such antennas on the common areas of multiple dwelling units, such
as on roofs. This order limits the extent to which multiple dwelling unit owners
may enforce certain aspects of multiple dwelling unit agreements which otherwise
would prohibit, for example, placement of direct broadcast satellite television
systems television receiving antennae in multiple dwelling unit areas, such as
apartment balconies or patios, under the exclusive occupancy of a renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they adequately regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they adequately regulate the
rates, terms and conditions for pole attachments. Illinois, Ohio and Kentucky,
states in which we operate, have made such a certification. In the absence of
state regulation, the FCC administers such pole attachment and conduit use rates
through use of a formula which it has devised. Pursuant to the 1996 Telecom Act,
the FCC has adopted a new rate formula for any attaching party, including cable
television systems, which offers telecommunications services. This new formula
will result in higher attachment rates than at present, but they will apply only
to cable television systems which elect to offer telecommunications services.
Any increases pursuant to this new formula begin in 2001, and will be phased in
by equal increments over the five ensuing years. The FCC ruled that the
provision of Internet services will not, in and of itself, trigger use of the
new formula. However, the U.S. Court of Appeals for the Eleventh Circuit held
that, since Internet provision is neither a "cable service" or a
"telecommunications service," neither rate formula applies and, therefore,
public utilities are free to charge what they please. The Supreme Court has
agreed to review this decision. The FCC has also initiated a proceeding to
determine whether it should adjust certain elements of the current rate formula.
If adopted, these adjustments could increase rates for pole attachments and
conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; equal employment opportunity; deletion of
syndicated programming; registration procedure and reporting requirements;
customer service; closed captioning; obscenity and indecency; program access and
exclusivity arrangements; and limitations on advertising contained in
nonbroadcast children's programming.
The FCC has recently issued a Notice of Inquiry covering a wide range of
issues relating to Interactive Television ("ITV"). Examples of ITV services are
interactive electronic program guides and access to a graphic interface that
provides supplementary information related to the video display. In the near
term, cable systems are likely to be the platform of choice for the distribution
of ITV services. The FCC has
18
posed a series of questions including the definition of ITV, the potential for
discrimination by cable systems in favor of affiliated ITV providers,
enforcement mechanisms, and the proper regulatory classification of ITV service.
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable television operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to over-
the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable television operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks, such as HBO, and basic cable networks, such as
USA Network, is licensed by the networks through private agreements with the
American Society of Composers and Publishers, generally known as ASCAP, and BMI,
Inc., the two major performing rights organizations in the United States. Both
the American Society of Composers and Publishers and BMI offer "through to the
viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising
19
authority's ability to control the operation of a cable television system. The
1992 Cable Act prohibits exclusive franchises, and allows franchising
authorities to exercise greater control over the operation of franchised cable
television systems, especially in the area of customer service and rate
regulation. The 1992 Cable Act also allows franchising authorities to operate
their own multichannel video distribution system without having to obtain a
franchise and permits states or local franchising authorities to adopt certain
restrictions on the ownership of cable television systems. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation of
cable television systems or decisions made on franchise grants, renewals,
transfers and amendments. The 1996 Telecom Act prohibits a franchising authority
from either requiring or limiting a cable television operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. To date, none of the states in
which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal, state
and local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at high
speeds via high capacity broadband transmission facilities and cable modems. We
compete with many other providers of Internet access services which are known as
Internet service providers. Internet service providers include such companies as
America Online and Mindspring Enterprises as well as major telecommunications
providers, including AT&T and local exchange telephone companies. Recently,
several Internet service providers asked the FCC as well as local authorities to
require cable companies offering Internet access services over their broadband
facilities to allow access to those facilities on an unbundled basis to other
Internet service providers. In a recent report on the deployment of advanced
telecommunications capability under Section 706 of the 1996 Telecom Act, the FCC
declined to convene a proceeding to consider whether to impose such an access
requirement on cable companies. However, the FCC indicated that it would
continue to monitor the issue of broadband deployment and, to that end, the FCC
has recently issued a notice of inquiry in which it asks, among other things,
questions regarding what regulatory approach it should pursue. Also, the FCC
denied requests by certain Internet service providers that it condition its
approval of the merger of AT&T Broadband and TCI, now known as AT&T Broadband,
on a requirement that those companies allow access by Internet service providers
to their broadband facilities. Several local jurisdictions also are reviewing
this issue. Last year, the Ninth Circuit overturned a requirement, imposed by a
local franchising authority in the context of a franchise transfer, that the
cable operator, if it chooses to provide Internet service, must provide open
access to its system for other Internet service providers on the ground that
Internet access is not a cable service and thus is not subject to local
franchising authority regulation. U.S. District Courts in Virginia and Florida
have also held that a local franchising authority cannot impose an open access
requirement. An appeal from the Virginia ruling is pending before the Fourth
Circuit.
There are currently few laws or regulations which specifically regulate
communications or
20
commerce over the Internet. Section 230 of the Communications Act, added to that
act by the 1996 Telecom Act, declares it to be the policy of the United States
to promote the continued development of the Internet and other interactive
computer services and interactive media, and to preserve the vibrant and
competitive free market that presently exists for the Internet and other
interactive computer services, unfettered by federal or state regulation. One
area in which Congress did attempt to regulate content over the Internet
involved the dissemination of obscene or indecent materials. The provisions of
the 1996 Telecom Act, generally referred to as the Communications Decency Act,
were found to be unconstitutional, in part, by the United States Supreme Court
in 1997. In response, Congress passed the Child Online Protection Act. The
constitutionality of this act is currently being challenged in the courts.
Local Telecommunications Services
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require fair and reasonable, competitively neutral and
non-discriminatory compensation for management of the public rights-of-way when
cable operators provide telecommunications service. State and local governments
must publicly disclose such required payments.
We have entered into a ten-year agreement with AT&T Broadband that will
allow AT&T Broadband to provide to customers telephony services using our
network infrastructure and AT&T Broadband's switching and long distance
transport facilities. Local telecommunications service is subject to regulation
by state utility commissions. Use of local telecommunications facilities to
originate and terminate long distance services, a service commonly referred to
as "exchange access," is subject to regulation both by the FCC and by state
utility commissions. As a provider of local exchange service, AT&T Broadband
would be subject to the requirements imposed upon local exchange carriers by the
1996 Telecom Act. These include requirements governing resale, telephone number
portability, dialing parity, access to rights-of-way and reciprocal
compensation. AT&T Broadband's ability to successfully offer local
telecommunications service will be dependent, in part, on the opening of local
telephone networks by incumbent local telephone companies as required of them by
the 1996 Telecom Act.
In January 1999, the United States Supreme Court reversed and vacated in
part an earlier decision of a federal court of appeals striking down portions of
the FCC's 1996 rules governing local telecommunications competition. The Supreme
Court held that the FCC has authority under the Communications Act to establish
rules to govern the pricing of facilities and services provided by incumbent
local exchange carriers ("ILECs") to open their local networks to competition.
However, on July 18, 2000, the United States Court of Appeals for the Eighth
Circuit vacated several FCC rules concerning interconnection and pricing of ILEC
network elements, including a rule that mandates that ILECs set prices for
unbundled network elements at the lowest cost network configuration, and another
rule that would have required the ILECs to bundle combinations of network
elements at the competing carrier's request. The U.S. Supreme Court decided to
review this decision (consolidated with four other lower court challenges to the
FCC's interconnection rules) in its next session, which commences in October
2001. In April 2000, the FCC ruled that incumbent local exchange carriers must
use their "best efforts" to acquire intellectual property rights from third
party vendors for the benefit of a competing carrier seeking unbundled access to
network elements associated with such intellectual property rights.
21
Item 2. Properties
The System's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headend and distribution systems and customer house drop equipment for
its cable television systems. The signal receiving apparatus includes a tower,
antenna, ancillary electronic equipment and earth stations for reception of
satellite signals. The headend, consisting of associated electronic equipment
necessary for the reception, amplification and modulation of signals, is located
near the receiving devices. Most basic customers of the System utilize
converters that can be addressed by sending coded signals from the headend
facility over the cable network. The System's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
The System owns parcels of real property for signal reception sites (one
antenna tower and one headend). The System also leases one small office and one
hub location. Management believes that its properties, both owned and leased,
are in suitable condition adequate for the System's operations.
The System's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The physical
components of the System require periodic upgrading to improve system
performance and capacity.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which any of the
Registrants is a party or to which any of their properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the holders of the Senior
Discount Notes during the three months ended December 31, 2000.
22
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no public trading market for the equity of Coaxial LLC, Coaxial
Financing Corp. and Insight Ohio. There are three individual holders of the
equity of Coaxial LLC and Coaxial Financing Corp., and the common equity of
Insight Ohio is held by Insight Holdings of Ohio, LLC, a wholly-owned subsidiary
of Insight Midwest, L.P.
23
Item 6. Selected Financial Data
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998. As
such, these entities were not in existence for the historical periods presented
in the following tables. The historical information of Coaxial Communications of
Central Ohio, Inc. for the years ended December 31, 1997 and 1996 is shown as
it represents the predecessor entity which has been consolidated by Coaxial LLC
as of and for the years ended December 31, 2000, 1999 and 1998. As a result of
the August 8, 2000 purchase by Insight of the remaining 25% common equity
interest in Insight Ohio and certain amendments to Insight Ohio's operating
agreement, Coaxial LLC and Coaxial Financing Corp. no longer consolidate the
accounts of Insight Ohio. The following tables present selected historical
financial data for Coaxial LLC as of and for the five years ended December 31,
2000 and selected historical financial data for Insight Ohio and Coaxial
Financing Corp. as of and for the years ended December 31, 1999 and 1998. The
financial information of the Central Ohio Cable System Operating Unit is
presented as it represents the predecessor to Insight Ohio. These tables should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the notes
thereto included elsewhere in this Report.
Coaxial LLC
(dollars in thousands, except subscriber data)
Year ended December 31,
-----------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Statement of Operations Data:
Revenues $ 28,096 $ 46,747 $ 47,956 $ 48,229 $ 50,418
Operating expenses:
Service and administrative 16,569 26,184 27,832 27,391 25,236
Severance and transaction structure costs - - 4,822 - -
Management fee 862 1,435 493 - -
Home office - - 1,370 1,498 1,697
Depreciation and amortization 6,208 7,403 5,311 5,256 5,350
--------- --------- --------- --------- ---------
Total operating expenses 23,639 35,022 39,828 34,145 32,283
Operating income 4,457 11,725 8,128 14,084 18,135
Interest expense, net 7,447 6,412 2,677 1,230 426
Gain on sale of common equity interest(1) 171,460 - - - -
Dividend on preferred interests 7,882 - - - -
Other income (expense) 31 92 (421) (271) (248)
--------- --------- --------- --------- ---------
Net income before
Extraordinary item 176,383 5,405 5,030 12,583 17,461
Extraordinary item - loss on debt retirement - - (847) - -
--------- --------- --------- --------- ---------
Net income $ 176,383 $ 5,405 $ 4,183 $ 12,583 $ 17,461
========= ========= ========= ========= =========
Financial Ratios and Other Data:
System Cash Flow (2) $ 20,171 $ 20,563 $ 20,124 $ 20,838 $ 25,182
System Cash Flow margin 40.5% 43.9% 42.0% 43.2% 49.9%
Operating Cash Flow (3) 18,678 19,128 18,261 19,340 23,485
Capital expenditures 35,982 26,656 7,369 5,570 5,998
Net cash provided by operating activities 7,224 19,043 13,052 18,622 24,369
Net cash used in investing activities 20,950 26,754 3,470 15,242 19,551
Net cash provided by (used in) financing activities 12,844 (116) (1,449) (3,712) (4,582)
Operating Data: (at end of period, except average and
annualized data)
Homes passed (4) 184,427 178,310 171,753 166,306 161,018
Basic subscribers (5) 85,415 84,236 87,637 91,873 88,056
Basic penetration (6) 46.3% 47.2% 51.0% 55.2% 54.7%
Premium service units (7) 84,648 98,202 90,032 80,013 68,720
Premium penetration (8) 99.1% 116.6% 102.7% 87.1% 78.0%
Average monthly revenue per basic subscriber (9) $ 48.87 $ 45.33 $ 44.52 $ 44.67 $ 48.27
System Cash Flow per basic subscriber (10) $ 237.83 $ 239.28 $ 224.21 $ 231.62 $ 289.28
Balance Sheet Data: (at the end of the period)
Total assets $ 219,446 $ 70,861 $ 56,532 $ 109,655 $ 102,099
Total debt 74,716 81,108 67,204 47,236 50,442
Total liabilities 76,007 96,949 77,233 55,328 59,767
Total member's equity (deficit) 143,439 (26,088) (20,701) 54,327 42,332
24
Coaxial Financing Corp.
(dollars in thousands)
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Balance Sheet Data:
Total assets............................... $ 1 $ 1 $ 1
Total debt (to be paid by Coaxial LLC)..... - - -
Total liabilities.......................... - - -
------------ ------------ ------------
Total shareholders' equity................. $ 1 $ 1 $ 1
25
Insight Communications of Central Ohio, LLC
(dollars in thousands, except subscriber data)
Insight Communications of Central Ohio Cable
Central Ohio, LLC System Operating Unit
----------------- ---------------------
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $ 49,749 $ 46,747 $ 47,956 $ 48,229 $ 50,418
Operating expenses:
Programming and other operating costs 19,027 16,446 17,682 17,530 16,151
Selling, general and administrative 10,551 9,738 10,149 9,861 9,085
Severance and transaction structure costs - - 4,822 - -
Management fee 1,493 1,435 493 - -
Home office - - 1,371 1,498 1,697
Depreciation and amortization 10,882 7,148 5,311 5,238 5,334
--------- --------- --------- --------- ---------
Total operating expenses 41,953 34,767 39,828 34,127 32,267
--------- --------- --------- --------- ---------
Operating income 7,796 11,980 8,128 14,102 18,151
Interest expense (income), net 1,792 297 (59) (70) (29)
Other expense (income) 274 (92) 422 271 248
--------- --------- --------- --------- ---------
Net income $ 5,730 $ 11,775 $ 7,765 $ 13,901 $ 17,932
========= ========= ========= ========= =========
Financial Ratios and Other Data:
System Cash Flow (2) $ 20,171 $ 20,563 $ 20,125 $ 20,838 $ 25,182
System Cash Flow margin 40.5% 43.9% 42.0% 43.2% 49.9%
Operating Cash Flow (3) 18,678 19,128 18,261 19,340 23,485
Capital expenditures 35,982 26,656 7,369 5,529 5,992
Net cash provided by operating activities 15,995 22,425 14,399 19,454 21,975
Net cash used in investing activities 36,073 26,754 6,679 5,554 5,711
Net cash provided by (used in) financing activities 20,365 (1,498) (1,585) (14,232) (16,028)
Operating Data: (at end of period, except
average and annualized data)
Homes passed (4) 184,427 178,310 171,753 166,306 161,018
Basic subscribers (5) 85,415 84,236 87,637 91,873 88,056
Basic penetration (6) 46.3% 47.2% 51.0% 55.2% 54.7%
Premium service units (7) 84,648 98,202 90,032 80,013 68,720
Premium penetration (8) 99.1% 116.6% 102.7% 87.1% 78.0%
Average monthly revenue per basic $ 48.87 $ 45.33 $ 44.52 $ 44.67 $ 48.27
subscriber (9) $ 237.83 $ 239.28 $ 224.22 $ 231.62 $ 289.28
System Cash Flow per basic subscriber (10)
Balance Sheet Data: (at end of the period)
Total assets $ 83,359 $ 56,964 $ 41,967 $ 33,553 $ 34,062
Total debt 25,000 11,117 228 407 615
Total other liabilities 20,164 19,899 15,248 7,982 8,425
Total preferred interests 180,281 175,556 171,438 - -
Total liabilities and preferred interests 225,445 206,455 186,686 - -
Total member's deficit (142,086) (149,491) (144,719) - -
Net assets to be contributed - - - 25,571 25,637
26
Notes To Selected Financial and Operating Data
(1) Represents gain on sale of remaining equity interests in Insight Ohio to
Insight Inc.
(2) Represents Operating Cash Flow (as defined below in Note 3) plus home office
expense for periods prior to the acquisition of the System, and Operating Cash
Flow plus management fees for periods after or which give effect to the
acquisition of the System. Management believes that System Cash Flow is a
meaningful measure of performance because it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, System Cash
Flow is not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net income
as an indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles. System Cash Flow, as computed by management, is not necessarily
comparable to similarly titled amounts of other companies. See the financial
statements, including the Statements of Cash Flows, included elsewhere in this
Report.
(3) Represents earnings before depreciation, amortization, severance and
transaction structure costs, interest expense, other expenses, and extraordinary
item. Management believes that Operating Cash Flow is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, Operating Cash Flow is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
Operating Cash Flow, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including the Statements of Cash Flows included elsewhere in this Report.
(4) Refers to estimates by management of the approximate number of dwelling
units in a particular community that can be connected to the System.
(5) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an equivalent
basic unit basis in which the total monthly bill for the account is divided by
the basic monthly charge for a single outlet in the area.
(6) Calculated as basic subscribers as a percentage of homes passed.
(7) Includes only single channel services offered for a monthly fee per channel
and does not include tiers of channels offered as a package for a single monthly
fee. A subscriber may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(8) Calculated as premium service units as a percentage of basic subscribers.
(9) Represents revenues of the System during the respective period divided by
the months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for such respective
period.
(10) Represents Annualized System Cash Flow during the respective period divided
by the average number of basic subscribers (beginning of period plus end of
period divided by two) for such respective period.
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Offering of Senior Discount Notes and Senior Notes and Acquisition of System by
Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a
private offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their 12 7/8% Senior Discount Notes due in 2008
(the "Senior Discount Notes") in connection with a Financing Plan (the
"Financing Plan") which included the contribution of Coaxial's cable television
system (the "System") to Insight Ohio. On February 16, 1999, Coaxial LLC and
Coaxial Financing Corp. consummated an exchange of registered Senior Discount
Notes for their privately issued Senior Discount Notes. Coaxial LLC and Coaxial
Financing Corp. have only nominal assets except for Coaxial LLC's ownership of
67.5% of the common stock of Coaxial and notes of Coaxial DJM LLC and Coaxial
DSM LLC (the other two owners of Coaxial), which notes are secured by the
remaining 32.5% of the common stock of Coaxial. The Senior Discount Notes are
guaranteed on a conditional basis by Insight Ohio. The limited liability
companies that own Coaxial are referred to herein as the "Individual LLCs".
As part of the Financing Plan, Coaxial and Phoenix Associates, an
affiliated general partnership, completed a private offering (the "Senior Notes
Offering") of $140,000,000 aggregate principal amount of their 10% Senior Notes
due in 2006 (the "Senior Notes"). On February 16, 1999, Coaxial and Phoenix
consummated an exchange of registered Senior Notes for their privately issued
Senior Notes. The Senior Notes are also guaranteed on a conditional basis by
Insight Ohio. The conditional guarantee of the Senior Discount Notes is
subordinated to the conditional guarantee of the Senior Notes. Coaxial has only
nominal assets except for the Series A Preferred Interest and the Series B
Preferred Interest of Insight Ohio (together the "Preferred Interests").
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series B Preferred Interest
will be used to pay dividends to the Individual LLCs, which dividends will be
used to pay interest and principal on the Senior Discount Notes and the
distributions from the Series A Preferred Interest will be used to pay interest
and principal on the Senior Notes. Distributions by Insight Ohio will be subject
to certain financial covenants and other conditions set forth in its Senior
Credit Facility.
Coaxial LLC and Coaxial Financing Corp. do not conduct any business and are
dependent upon the cash flow of Insight Ohio to meet their obligations under the
Senior Discount Notes. Insight serves as the manager of the System.
The following discussion relates to the operations of Insight Ohio for
years ended December 31, 2000, 1999 and 1998. The financial statements of
Insight Ohio are included in the consolidated financial statements of Coaxial
through August 8, 2000 (see "Recent Developments" below) and Coaxial was deemed
to be a subsidiary of Coaxial LLC and, as such, the financial statements of
Coaxial are included in the consolidated financial statements of Coaxial LLC.
The historical operating results of Coaxial LLC reflect the actual results of
the System through August 8, 2000 in addition to certain financing activities
unrelated to the operation of the System. These financing activities relate
primarily to the offering of the Senior Discount
28
Notes and Senior Notes discussed above as well as certain borrowings and
repayments of debt with affiliated companies. These activities resulted in
related financing and interest costs. The historical results of Coaxial LLC
appear elsewhere in this report under the heading "Coaxial LLC."
Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common
equity interest in Insight Ohio, resulting in Insight owning 100% of the common
equity of Insight Ohio. The purchase price was 800,000 shares of common stock of
Insight and cash paid by Insight to the principals of Coaxial in the amount of
$2.6 million. In connection with the purchase, Insight Ohio's operating
agreement was amended to, among other things, remove certain participating
rights of the principals of Coaxial, and vest in the common equity interests of
Insight Ohio 70% of its total voting power and in the preferred equity interests
30% of its total voting power. As a result of this purchase Coaxial LLC no
longer consolidates the results of Insight Ohio subsequent to August 8, 2000.
Contribution of Insight Ohio
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and an indirect subsidiary of AT&T Broadband,
entered into definitive agreements with Insight and certain subsidiaries of AT&T
Corp. (the "AT&T Cable Subsidiaries") for the acquisition of additional cable
television systems, including Insight Ohio. Through a series of transactions,
Insight Midwest acquired all of Insight's wholly-owned systems serving
approximately 280,000 customers, including the approximately 85,400 customers
served by Insight Ohio and including systems which Insight purchased from AT&T
Cable Subsidiaries. At the same time, Insight Midwest acquired from AT&T Cable
Subsidiaries systems serving approximately 250,000 customers. Insight Ohio is an
unrestricted subsidiary under the indentures governing Insight's and Insight
Midwest's senior notes and is prohibited by the terms of its indebtedness from
making distributions to Insight Midwest. Insight Midwest remains equally owned
by Insight and AT&T Broadband, and Insight continues to serve as the general
partner and manages and operates the Insight Midwest systems, including Insight
Ohio.
Insight Ohio's conditional guarantee of the Senior Notes and the Senior
Discount Notes remains in place. If at any time the Senior Notes or the Senior
Discount Notes are repaid or significantly modified, or in any case after August
15, 2008, the principals of the Coaxial Entities may require Insight to purchase
their preferred interests for a purchase price equal to the difference, if any,
of $32.6 million less the then market value of the 800,000 shares of Insight
common stock issued on August 8, 2000.
Overview
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, revenues are derived from installation and reconnection fees charged
to basic customers to commence or discontinue service, pay-per-view charges,
digital and high-speed data services, late payment fees, advertising revenues
and commissions related to the sale of goods by home shopping services.
29
System operating expenses consist of programming and other operating costs,
selling, general and administrative expenses, home office expenses and
depreciation and amortization. Programming and other operating costs include
direct costs, such as fees paid to programming suppliers, and costs attributable
to the operation of the System, including wages, salaries and other costs
related to plant operating activities. Programming fees have historically
increased at rates in excess of inflation due to increases in the number of
programming services offered by the System and improvements in the quality of
programming. Selling, general and administrative expenses include customer
service operations, marketing, billing, expenses related to copyright fees and
bad debt expense.
The System relies on Insight for all of its strategic, managerial,
financial and operational oversight and advice. Insight also centrally purchases
programming and equipment and provides the associated discount to the System. In
exchange for all such services provided to the System and subject to certain
restrictions contained in the covenants with respect to Insight Ohio's Senior
Credit Facility, the Senior Notes and the Senior Discount Notes, Insight is
entitled to receive management fees of 3.0% of gross operating revenues of the
System. Such management fee is payable only after distributions have been made
in respect of the Preferred Interests and only to the extent that such payment
would be permitted by an exception to the restricted payments covenants of the
Senior Notes and the Senior Discount Notes as well as Insight Ohio's Senior
Credit Facility. Such management fee is included in selling, general and
administrative expenses.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues for the year ended December 31, 2000 $49.7 million compared to
$46.7 million for the year ended December 31, 1999. For the year ended, December
31, 2