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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, 2001
Commission file numbers: 333-63677
333-63677-01
333-63677-02
Coaxial Communications of Central Ohio, Inc.
Phoenix Associates
Insight Communications of Central Ohio, LLC
(Exact name of registrants as specified in their respective charters)
Ohio 31-0975825
Florida 59-1798351
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 each 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_____
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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 Communications of Central Ohio, Inc. ("Coaxial"),
Phoenix Associates ("Phoenix") 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, Phoenix and Insight Ohio, and reflect future business decisions which
are subject to change. Although Coaxial, Phoenix 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 and Phoenix to make scheduled payments with respect
to the Senior 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 and Phoenix have no significant assets other than Coaxial's
ownership of common membership interests, Series A Preferred Interests and
Series B Preferred Interests in Insight Ohio; and
. the indenture governing the terms of the Senior Notes imposes restrictions
on Coaxial, Phoenix and Insight Ohio and the Senior Credit Facility of
Insight Ohio imposes restrictions on Insight Ohio.
Coaxial, Phoenix and Insight Ohio do not intend to update these forward-looking
statements.
PART I
Item 1. Business
In this report, we rely on and refer to information and statistics
regarding the cable television industry and our market share in the sectors in
which we compete. We obtained this information and statistics from various
third-party sources, discussions with our customers and our own internal
estimates. We believe that these sources and estimates are reliable, but we have
not independently verified them and cannot guarantee their accuracy or
completeness.
Overview
Insight Ohio owns and operates a cable television system in the
Columbus, Ohio metropolitan area (the "System"). As of December 31, 2001, the
System passed approximately 191,000 homes and served approximately 86,100 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. A headend
processes signals received for distribution to customers over our network.
Insight Communications Company, Inc. ("Insight"), through its wholly-owned
subsidiary Insight Communications Company, L.P., serves as the manager of the
System.
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, Quest Communications and Worthington Industries. The area's strong
economy provides for a well-paid employment base with a current unemployment
rate of 3.1%. 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, 2001, the System passed approximately
191,000 homes and served approximately 86,100 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 29,900
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 five years ended December 31,
2001, 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 WideOpenWest which acquired the assets of Ameritech in December 2001.
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 WideOpenWest pass approximately
130,000 homes, representing 68.1% 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 84,200 as of December 31, 1999 but has steadily
increased to approximately 86,100 as of December 31, 2001.
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As of December 31, 2001, the System had 2,750 miles of plant, including
1,713 miles of 870 MegaHertz (MHz) capacity, or "bandwidth," plant and 1,037
miles of 450 MHz. Insight Ohio estimates that approximately 83% of its customers
are 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 telephone 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 86% of the homes in the System by the end of 2002.
The Manager
Insight is the eighth largest cable television system operator in the
United States based on customers served after giving effect to the pending
AT&T/Comcast merger transaction. 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
communications network is tightly-grouped, or "clustered," with approximately
95% of our manager's customers served from fourteen headends after giving effect
to the network upgrades, expected to be substantially completed during 2002. As
a result, the amount of capital necessary to deploy new and enhanced products
and services is significantly reduced on a per home basis because of the large
number of customers served by a single headend. Clustering enables our manager
to efficiently deploy a bundled suite of entertainment, information and
communications services. This combination of geographic concentration and
clustering has enabled Insight Communications to offer, under the Insight
Digital brand, a complete bundle of interactive digital video, high-speed data
access and telephone services.
To facilitate delivery of telephone services, we have entered into a
long-term agreement with AT&T Broadband, LLC that will allow us to deliver to
our customers local telephone service under the AT&T Digital Phone brand. Under
the terms of the agreement, we will lease for a fee certain capacity on our
network to AT&T Broadband. We will provide certain services and support for
which we will receive additional payments. The capital required to deploy
telephone over our 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 our telephone services under the
AT&T Digital Phone brand and leveraging AT&T's telephone expertise with our
strong local presence and established customer relationships.
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;
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. Introduce new and enhanced products and services, including interactive
Insight Digital service, high-speed data service and telephone 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 the first quarter of 2002 will add a telephone
service marketed under the AT&T Digital Phone 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 it serves approximately 83%
of the subscribers in the System with upgraded network. 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.
Nodes are the point of interface between our headend and our network.
System Operating Strategy
The System fits the profile of cable television systems that Insight
seeks to own and operate. The 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 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. As
of December 31, 2001, the System passed 67,200 homes with its digital service
and served approximately 22,600 customers with such service, representing a
penetration level of almost 34%. 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 to deploy the Road Runner service over cable modems.
On October 12, 2001 Insight Ohio terminated its relationship with High Speed
Access Corp. who had been doing turnkey support for the Road Runner service. As
of December 31, 2001, approximately 11,500 customers subscribed to the Road
Runner service.
In addition, the System provides exclusive sports programming under the
"Central Ohio Sport!" brand, featuring sporting events from Ohio State
University.
3
Overbuild
In 1996, Ameritech obtained a citywide cable television franchise for
the City of Columbus. Ameritech 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. In December 2001,WideOpenWest completed its
acquisition of the assets of Ameritech including the franchises to service the
Columbus, Ohio market. As of December 31, 2001, the areas of the System served
by both Insight Ohio and WideOpenWest passed approximately 130,000 homes,
representing 68% 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, 2001, the average monthly revenue
per customer increased from $43.30 to $53.89 while the number of customers
decreased from 91,100 to 86,100. Since acquisition of the Ameritech system in
December 2001, WideOpenWest has instituted a new marketing program including the
"Hot Box" savings of 50% on premiums and pay-per-view programming.
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 2,750 miles of plant passing approximately
191,000 homes resulting in a density of 69.4 homes per mile. Approximately 83%
of the customers are 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
telephone services.
Insight Ohio plans to enhance the technical platform of the System by
continuing to upgrade the plant passing 86% of the homes in the System by the
end of 2002. The capability for high-speed data transmission, video-on-demand,
interactive digital cable, additional analog channels and telephone services is
intended to be provided by further deployment of cable, known as fiber optic
cable, which has a capacity for a very large number of channels, an increase in
the bandwidth to 870 MHz, activation of the reverse plant to allow two-way
communications between the headend and the customer 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, 2001. 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
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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 $7.95 customers receive the following services:
. A digital set-top box;
. An interactive navigational program guide for all analog and digital
channels;
. A local, interactive Internet-style information and entertainment
service;
. A multi-channel premium service for customers who separately subscribe
to premium channels, such as HBO and Showtime;
. 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, 2001 served approximately 22,600 subscribers with its digital service.
Insight Ohio launched the Road Runner high-speed Internet service during the
second quarter of 2000 and served approximately 11,500 customers with this
service as of December 31, 2001.
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 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 during the first quarter of 2002, telephone
services. 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 deployed its Road Runner high-speed
Internet service. Using a skilled team of marketing professionals, the System
has competed by supporting an innovative variety of marketing activities.
5
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 manager's 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.
Rates
Monthly customer rates for services vary from market to market,
primarily according to the amount of programming provided. As of December 31,
2001, 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 was $18.65, and per-channel premium service rates (not including
special promotions) ranged from $6.95 to $13.95 per service.
6
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, 2001, the System employed 208 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 52% 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 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
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. 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, 2001.
Percentage of
Number of Percentage of Total Basic
Year of Franchise Expiration Franchises Total Franchises Customers
- ---------------------------- ---------- ---------------- ---------
Expired* .......................................... 2 7.1% 0.6%
2002 and 2003 ..................................... 4 14.3% 2.6%
2004 and beyond ................................... 22 78.6% 96.8%
---- ------ ------
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.
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.
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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. Congress has also enacted legislation which 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.
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. The major source of competition for the System is the wireline
overbuild by WideOpenWest. WideOpenWest has overbuilt approximately 130,000
homes passed in the System's service area, or approximately 68% of the total
homes in the service territory as of December 31, 2001.
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
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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.
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, 2001, the System
passed approximately 448 multiple dwelling unit ("MDU") complexes within its
service territory and had entry agreements, either exclusive or non-exclusive,
with complexes totaling approximately 65,300 MDUs. As of December 31, 2001, the
System provided programming to approximately 32,500of these MDUs, or 50% 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 has been 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 13,400 direct
broadcast satellite customers in the System's service areas as of December 31,
2001.
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
31 Gigahertz (GHz) band for a new service that can be used to provide video
services similar to multipoint multichannel distribution systems, which transmit
television channels from a fixed station to multiple receiving facilities
located at fixed points. 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
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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 telephone service areas. While our manager
intends to add our telephone service offering to its various markets, the
service has only recently been launched in selected markets and has not yet
achieved any material penetration levels.
Other new technologies may become competitive with services that cable
communications 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.
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.
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.
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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 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 always results in rates that exceed those produced by the
cost-of-service rules applicable to larger
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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 October 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 of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant
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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."
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Channel Set-Asides
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 were eliminated in 1996, although
the parallel FCC regulations prohibiting broadcast/cable common-ownership
remained in effect. The U.S. Court of Appeals for the District of Columbia
circuit has recently struck down these rules. 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.
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Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
subscribers which 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 was denied by the
Supreme Court. However, the U.S. Court of Appeals for District of Columbia
Circuit reversed and remanded the horizontal and vertical ownership rules for
further proceedings on non-constitutional grounds.
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 soon.
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. Certain of these
requirements were modified by the Electronic Communications Privacy Act of 2001.
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
16
regulations and by the franchising authority. Approval is deemed to be granted
if the franchising authority fails to act within such period.
Technical Requirements
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, were 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
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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
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 began 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
recently reversed 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.
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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 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
19
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 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 ("ISPs"). ISPs include such companies as America
Online and Mindspring Enterprises as well as major telecommunications providers,
including AT&T and local exchange telephone companies. A number of local
franchising authorities have attempted to require cable companies offering
Internet access service over their broadband facilities to allow access to those
facilities on an unbundled basis to other ISPs. To date, all such efforts have
been overturned in the courts. However, many ISPs and local franchising
authorities have continued to ask the U.S. Congress and the FCC to mandate such
access, or at least to allow local authorities to impose such a requirement.
Although the FCC has thus far declined to impose such an access requirement on
cable companies, the issue remains under consideration. The FCC has recently
decided that cable Internet service should be classified for regulatory purposes
as an "information service" rather than either a "cable service" or a
"telecommunications service." Concurrently the FCC has initiated a wide-ranging
rulemaking proceeding in which it seeks comment on the regulatory ramifications
of this classification. Among the issues to be decided are whether the FCC
should permit local authorities to impose an access requirement, whether local
authorities should be prohibited from imposing fees on cable Internet service
revenues, and what regulatory role local authorities should be permitted to
play. The outcome of this proceeding could have a material impact on our
provision of cable Internet service.
20
There are currently few laws or regulations which specifically regulate
communications or 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.
Finally, disclosure of customer communications or records is governed by the
Electronic Communications Privacy Act of 2001.
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 telephone 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 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 ("UNEs") 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 is presently reviewing
this decision (consolidated with four other lower court challenges to the FCC's
interconnection rules). In addition, a later FCC order dealing with certain
other UNE issues remanded by the U.S. Supreme Court in its 1999 decision has
been appealed to the Eighth Circuit. In the meantime, in December 2001 the FCC
instituted a new rulemaking
21
proceeding to reevaluate the list of available UNEs. The FCC has also initiated
rulemaking proceedings to establish uniform ordering and provisioning
performance standards for resale and UNEs, and for special access services. The
outcome of these court proceedings and FCC rulemakings will have an effect on
AT&T Broadband's ability to compete in the telecommunications marketplace.
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
Notes during the three months ended December 31, 2001.
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, Phoenix and
Insight Ohio. There are three, holders each of the equity of Coaxial and Phoenix
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
The following tables present selected historical financial data for
Coaxial, Phoenix and Insight Ohio as of and for the five years ended December
31, 2001. As a result of the August 8, 2000 purchase by Insight LP of the
remaining 25% common equity interest in Insight Ohio and certain amendments to
Insight Ohio's operating agreement, the operating results of Coaxial include the
operating results of Insight Ohio only through August 8, 2000. The 1997
financial information includes 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 Communications of Central Ohio, Inc.
(dollars in thousands, except customer data)
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Statement of Operations Data:
Revenues .................................................. $ -- $ 28,096 $ 46,747 $ 47,956 $ 48,229
Operating costs and expenses:
Programming and other operating costs ................. -- 10,955 16,863 18,130 17,974
Selling general and administrative .................... -- 6,476 10,756 11,565 10,915
Severance and transaction structure costs ............. -- -- -- 4,822 --
Depreciation and amortization ......................... 628 6,474 7,769 5,471 5,256
--------- --------- --------- --------- ---------
Total operating costs and expenses ................. 628 23,905 35,388 39,988 34,145
Operating income (loss) ................................... (628) 4,191 11,359 7,968 14,084
Interest expense, net ................................. (14,000) (14,861) (14,297) (5,434) (1,230)
Gain on sale of common equity interest(1) ............. -- 171,460 -- -- --
Dividend on preferred interest ........................ 19,432 7,882 -- -- --
Other income (expense) ................................ -- 31 92 (421) (271)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ............... 4,804 168,703 (2,846) 2,113 12,583
Extraordinary loss on extinguishments of debt ......... -- -- -- (847) --
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ 4,804 $ 168,703 $ (2,846) $ 1,266 $ 12,583
========= ========= ========= ========= =========
Financial Ratios and Other Data:
Capital expenditures ...................................... -- 19,943 26,656 7,369 5,570
Net cash provided by (used in) operating activities ....... (3,444) 7,224 19,043 12,597 18,622
Net cash used in investing activities ..................... -- 20,950 26,754 3,470 15,242
Net cash provided by (used in) financing activities ....... 3,444 12,844 (116) (993) (3,712)
Operating Data: (at end of period, except average and
annualized data)
Homes passed (2) .......................................... 190,959 184,427 178,310 171,753 166,306
Basic customers (3) ....................................... 86,042 85,415 84,236 87,637 91,873
Basic penetration (4) ..................................... 45.1% 46.3% 47.2% 51.0% 55.2%
Premium service units (5) ................................. 66,684 84,648 98,202 90,032 80,013
Premium penetration (6) ................................... 77.5% 99.1% 116.6% 102.7% 87.1%
Average monthly revenue per basic customer (7) ............ -- $ 48.87 $ 45.33 $ 44.52 $ 44.67
System Cash Flow per basic customer (8) ................... -- $ 237.83 $ 239.28 $ 224.21 $ 231.62
Balance Sheet Data: (at the end of the period)
Total assets .............................................. $ 213,206 $ 207,874 $ 61,135 $ 48,849 $ 109,655
Total debt ................................................ 140,000 140,000 151,000 141,248 47,236
Total liabilities ......................................... 145,250 145,250 170,914 155,237 55,328
Total shareholders' equity (deficit) ...................... 67,956 62,624 (109,779) (106,388) 54,327
24
Phoenix Associates
(dollars in thousands)
Year ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Operating loss:
Interest and amortization expense, net ...... $ (14,470) (14,470) $(14,470) $ (13,709) $ (12,094)
Other expense ............................... - - - (4) (89)
--------- -------- -------- --------- ---------
Net loss before extraordinary gain ............... (14,470) (14,470) (14,470) (13,713) (12,183)
Extraordinary gain ............................... - - - 100 3,315
--------- -------- -------- --------- ---------
Net loss ......................................... $ (14,470) $(14,470) $(14,470) $ (13,613) $ (8,868)
========= ======== ======== ========= =========
Balance Sheet Data: (at the end of the period)
Total assets ..................................... $ 4,402 $ 4,872 $ 5,342 $ 5,747 $ 7,954
Total debt ....................................... 140,000 140,000 140,000 140,000 178,365
Total liabilities ................................ 145,250 145,250 145,250 145,250 178,366
Total partners' deficit .......................... (140,848) (140,378) (139,908) (139,503) (170,412)
25
Insight Communications of Central Ohio, LLC
(dollars in thousands, except customer data)
Central Ohio
Cable
System
Insight Communications of Operating
Central Ohio, LLC Unit
----------------- ----
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data: $ 55,494 $ 49,749 $ 46,747 $ 47,956 $ 48,229
Revenue
Operating costs and expenses:
Programming and other operating costs 22,129 19,509 16,863 18,130 17,974
Selling, general and administrative 10,745 10,069 9,321 9,701 9,417
Severance and transaction structure costs - - - 4,822 -
Management fee 1,664 1,493 1,435 493 -
Home office - - - 1,371 1,498
Depreciation and amortization 13,397 10,882 7,148 5,311 5,238
--------- --------- --------- --------- ---------
Total operating costs and expenses 47,935 41,953 34,767 39,828 34,127
--------- --------- --------- --------- ---------
Operating income 7,559 7,796 11,980 8,128 14,102
Interest expense (income), net 1,682 1,792 297 (59) (70)
Other expense (income) 279 274 (92) 422 271
--------- --------- --------- --------- ---------
Net income $ 5,598 $ 5,730 $ 11,775 $ 7,765 $ 13,901
========= ========= ========= ========= =========
Financial Ratios and Other Data:
System Cash Flow (2) $ 22,620 $ 20,171 $ 20,563 $ 20,125 $ 20,838
System Cash Flow margin 40.8% 40.5% 43.9% 42.0% 43.2%
Operating Cash Flow (3) 20,956 18,678 19,128 18,261 19,340
Capital expenditures 28,409 35,982 26,656 7,369 5,529
Net cash provided by operating activities 23,023 15,995 22,425 14,399 19,454
Net cash used in investing activities 28,534 36,073 26,754 6,679 5,554
Net cash provided by (used in) financing activities 6,500 20,365 (1,498) (1,585) (14,232)
Operating Data: (at end of period, except
average and annualized data)
Homes passed (4) 190,959 184,427 178,310 171,753 166,306
Basic customers (5) 86,042 85,415 84,236 87,637 91,873
Basic penetration (6) 45.1% 46.3% 47.2% 51.0% 55.2%
Premium service units (7) 66,684 84,648 98,202 90,032 80,013
Premium penetration (8) 77.5% 99.1% 116.6% 102.7% 87.1%
Average monthly revenue per basic customer (9) $ 53.89 $ 48.87 $ 45.33 $ 44.52 $ 44.67
System Cash Flow per basic customer (10) $ 263.64 $ 237.83 $ 239.28 $ 224.22 $ 231.62
Balance Sheet Data: (at end of the period)
Total assets $ 98,657 $ 83,359 $ 56,964 $ 41,967 $ 33,553
Total debt, including preferred interests 210,713 205,281 186,673 171,666 407
Total liabilities 48,364 45,164 19,782 15,248 -
Total member's deficit (135,420) (142,086) (149,491) (144,719) -
Net assets to be contributed - - - - 25,571
26
Notes To Selected Financial and Operating Data
(1) Represent gain on sale of remaining equity interests in Insight Ohio to
Insight Inc.
(2) Homes passed are the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(3) Basic customers are customers of a cable television system who receive
a package of over-the-air broadcast stations, local access channels and
certain satellite-delivered cable television services, other than
premium services, and who are usually charged a flat monthly rate for a
number of channels.
(4) Basic penetration means basic customers as a percentage of total number
of homes passed.
(5) Premium units mean the number of subscriptions to premium services,
which are paid for on an individual unit basis.
(6) Premium penetration means premium service units as a percentage of the
total number of basic customers. A customer may purchase more than one
premium service, each of which is counted as a separate premium service
unit. This ratio may be greater than 100% if the average customer
subscribes to more than one premium service unit.
(7) 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.
(8) 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.
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 that 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
27
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 are used to pay interest and
principal on the Senior Notes. Distributions by Insight Ohio are 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 LP serves as the manager of the System.
On August 8, 2000, Insight LP purchased Coaxial's 25% non-voting common
equity interest in Insight Ohio, resulting in Insight LP 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 the Individual
LLCs 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 the Individual LLCs, 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.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight LP and an indirect subsidiary of AT&T Broadband,
entered into definitive agreements with Insight LP and certain subsidiaries of
AT&T Corp. ("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 LP's wholly owned systems serving
approximately 280,000 customers, including the approximately 85,400 customers
served by Insight Ohio and including systems which Insight LP 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 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 LP and AT&T Broadband, and Insight LP 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,
28
or in any case after August 15, 2008, the principals of the Individual LLCs may
require Insight LP to purchase the 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 Inc. common stock issued on August 8, 2000.
The following discussion relates to the operations of Insight Ohio for
years ended December 31, 2001, 2000 and 1999. The financial statements of
Insight Ohio are included in the consolidated financial statements of Coaxial
through August 8, 2000 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 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."
Overview
The System relies on Insight LP, for all of its strategic, managerial,
financial and operational oversight and advice. Insight LP 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 and the Senior Notes, Insight LP receives management fees
of 3.0% of gross operating revenues of the System. Such management fees are
payable only after distributions have been made with respect to the Preferred
Interests and only to the extent that such payments would be permitted by an
exception to the restricted payments covenants of the Senior Notes as well as
Insight Ohio's Senior Credit Facility.
Results of Operations
Substantially all of the System's revenue was earned from customer
fees for cable television programming services including premium and
pay-per-view services and ancillary services, such as rental of converters and
remote control devices, installations and from selling advertising. In addition,
the System earns revenue from commissions for products sold through home
shopping networks.
29
The following table is derived for the periods presented from the
System's financial statements that are included in this report and sets forth
certain statement of operations data for the System:
Year ended December 31,
2001 2000 1999
---------------------------
(in thousands)
Revenue $ 55,494 $ 49,749 $ 46,747
Operating costs and expenses:
Programming and other operating costs 22,129 19,509 16,863
Selling, general and administrative 10,745 10,069 9,321
Management fees 1,664 1,493 1,435
Depreciation and amortization 13,397 10,882 7,148
---------------------------
Total operating costs and expenses 47,935 41,953 34,767
---------------------------
Operating income 7,559 7,796 11,980
EBITDA 20,677 18,404 19,220
Interest expense 1,732 1,883 505
Net income 5,598 5,730 11,775
Net cash provided by operating activities 23,023 15,995 22,425
Net cash used in investing activities 28,534 36,073 26,754
Net cash provided by (used in) financing activities 6,500 20,365 (1,498)
EBITDA represents earnings before interest, taxes, depreciation and
amortization. Our management believes that EBITDA 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, EBITDA 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 accounting principles generally accepted in the
United States. EBITDA, as computed by management, is not necessarily comparable
to similarly titled amounts of other companies. Adjusted EBITDA, otherwise
referred to as operating cash flow, represents revenue less programming and
other operating costs and selling, general and administrative expenses. Refer to
our financial statements, including our statements of cash flows, which appear
elsewhere in this report.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue for the year ended December 31, 2001 increased $5.7 million or
11.5% to $55.5 million from $49.7 million for the year ended December 31, 2000.
For the year ended December 31, 2001, customers served averaged approximately
85,800 compared to approximately 84,800 during the year ended December 31, 2000.
The increase in revenue was primarily attributable to new product launches,
specifically digital services and high-speed data services.
30
Revenue by service offering was as follows for the year ended December
31, (in thousands):
2001 2000
Revenue by Revenue by
Service % of Total Service % of Total
2 Offering Revenue Offering Revenue
------------ ---------- ------------ ------------
Basic $29,046 52.3% 27,457 55.2%
Premium 6,705 12.1% 6,941 14.0%
Pay-per-view 1,194 2.2% 1,763 3.5%
Digital 3,861 7.0% 1,604 3.2%
Advertising sales 4,385 7.9% 4,781 9.6%
Data services 4,349 7.8% 887 1.8%
Other 5,954 10.7% 6,316 12.7%
------------ ---------- ------------ ------------
Total $55,494 100.0% 49,749 100.0%
============ ========== ============ ============
RGUs (Revenue Generating Units) were approximately 120,000 as of
December 31, 2001 compared to approximately 103,700 as of December 31, 2000.
This represents an annual growth rate of 15.7%. RGUs represent the sum of basic
and digital video, high-speed data and telephone customers.
Average monthly revenue per basic customer for the year ended December
31, 2001 was $53.89 compared to $48.87 for the year ended December 30, 2000.
Average monthly revenue per basic cust