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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, 1998
COMMISSION FILE NUMBERS: 333-64449-02
333-64449-01
333-64449
COAXIAL LLC
COAXIAL FINANCING CORP.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO LLC
(Exact name of registrants as specified in their respective charters)
Delaware
Delaware
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
c/o Insight Communications Company, L.P.
126 East 56/th/ Street
New York, NY 10022
(212) 371-2266
(Address and telephone number of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_____ No X
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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), including,
in particular, the likelihood of the System's success given its new management
by Insight Holdings of Ohio, LLC ("IHO"). All statements other than statements
of historical fact included in this annual report regarding Coaxial LLC, Coaxial
Financing Corp. and Insight Communications of Central Ohio, LLC ("Insight Ohio")
or any of the transactions described in this report, including the timing,
financing, strategies and effects of such transactions, are forward-looking
statements. Such forward-looking statements are based upon a number of
assumptions and estimates, which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of Coaxial
LLC, Coaxial Financing Corp. and Insight Ohio, and reflect future business
decisions which are subject to change. Although Coaxial LLC, Coaxial Financing
Corp. and Insight Ohio believe that the expectations reflected in such forward-
looking statements are reasonable, they can give no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from expectations include, without limitation:
. the ability of Coaxial LLC, Coaxial Financing Corp. to make scheduled
payments with respect to the Senior Discount Notes (as defined below) will
depend on the financial and operating performance of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is
required to be dedicated to the payment of principal and interest on its
indebtedness and the required distributions with respect to its Series A
Preferred Interests and its Series B Preferred Interests, thereby reducing
the funds available to Insight Ohio for its operations and future business
opportunities;
. Coaxial LLC, Coaxial Financing Corp. have no significant assets other than
the common equity of Coaxial Communications of Central Ohio, Inc.
("Coaxial") owned by Coaxial LLC and notes issued by Coaxial DJM LLC (an
owner of 22.5% of the common equity of Coaxial) and Coaxial DSM LLC (an
owner of 10.0% of the common equity of Coaxial) to Coaxial LLC; and
. the indenture governing the terms of the Senior Discount Notes imposes
restrictions on Coaxial LLC, Coaxial Financing Corp. and Insight Ohio and
the Senior Credit Facility of Insight Ohio imposes restrictions on Insight
Ohio.
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not intend to update
these forward-looking statements.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Insight Ohio was formed to own and operate, as part of the "Financing Plan"
described below, Coaxial's cable television system in the Columbus, Ohio
metropolitan area (the "System"). As of December 31, 1998, the System passed
approximately 171,753 homes and served approximately 87,637 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. IHO, a wholly-owned
subsidiary of Insight Communications Company, L.P. ("Insight"), serves as the
manager of the System. Insight is currently the 18th largest cable television
operator in the United States, based on customers served.
Coaxial LLC, Coaxial Financing Corp., Coaxial, Phoenix and Insight Ohio
consummated the following Financing Plan on August 21, 1998:
. Coaxial contributed the System to Insight Ohio;
. Insight Ohio issued to Coaxial a 25% non-voting common membership interest
in Insight Ohio as well as voting Series A Preferred Interests and Series B
Preferred Interests in Insight Ohio (together, the "Preferred Interests");
. IHO contributed $10.0 million in cash to Insight Ohio;
. Insight Ohio issued to IHO a 75% non-voting common membership interest in
Insight Ohio;
. Coaxial LLC and Coaxial Financing Corp. effected a private offering of
$55,869,000 aggregate principal amount at maturity of their 12 7/8% Senior
Discount Notes due 2008 (the "Senior Discount Notes");
. Coaxial and Phoenix Associates, an affiliate of Coaxial ('Phoenix"),
effected a private offering of $140,000,000 aggregate principal amount of
their 10% Senior Notes due 2006 (the "Senior Notes");
. Insight Ohio conditionally guaranteed the Senior Discount Notes and the
Senior Notes;
. a portion of the existing bank indebtedness of Coaxial LLC and Coaxial
Financing Corp. and certain of their affiliates was repaid and the balance
was purchased by CIBC Oppenheimer and restructured in accordance with an
agreement among the parties; and
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. IHO became the manager of Insight Ohio, Coaxial LLC, Coaxial DJM LLC and
Coaxial DSM LLC. Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC
(together, the "Individual LLCs") are the only shareholders of Coaxial.
As a result of the Financing Plan:
. Insight Ohio is the owner and operator of the System;
. IHO, through management agreements, has effective control of the management
and affairs of Insight Ohio, Coaxial and the three Individual LLCs;
. Coaxial LLC and Coaxial Financing Corp. have only nominal assets except for
the common equity of Coaxial owned by Coaxial LLC and notes issued by
Coaxial DJM LLC (an owner of 22.5% of the common equity of Coaxial) and
Coaxial DSM LLC (an owner of 10.0% of the common equity of Coaxial) to
Coaxial LLC; and
. Coaxial LLC and Coaxial Financing Corp. do not conduct any business.
Insight Ohio entered into a $25 million senior credit facility (the "Senior
Credit Facility") on October 7, 1998 for the purpose of financing its future
working capital requirements, including the upgrade of the System's cable plant
and the introduction of new video services.
Coaxial LLC and Coaxial Financing Corp. consummated an exchange of
registered Senior Discount Notes for their privately issued Senior Discount
Notes on February 16, 1999.
THE SYSTEM
As of December 31, 1998, the System passed approximately 171,753 homes and
served approximately 87,637 basic customers from a single headend. The System is
located in the eastern portion of the City of Columbus and the surrounding
suburban communities. The City of Columbus is the 34th largest designated market
area ("DMA") in the United States, is the capital of Ohio and is the home of The
Ohio State University. Besides the state government and university, the Columbus
economy is well diversified with a significant presence of prominent companies
such as The Limited, Merck, Wendy's, Nationwide Insurance, Borden and
Worthington Industries. The area's strong economy provides for a well-paid
employment base with an unemployment rate of 2.9%. The median household income
of the System's service area is approximately $47,809 per year, while the median
family income is approximately $57,024 per year.
The System enjoys a high level of population growth in the suburban
communities east of Columbus. Over the past three years, more than 14,600 homes
passed have been added to the System through new plant extensions, primarily in
new housing developments. This represents a 3.1% compound annual growth rate of
homes passed for the System.
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Portions of the System operate in a competitive environment. Customers in
those areas have access to two wired cable television providers -- Insight Ohio
and a cable subsidiary of Ameritech Corporation, the telephone local exchange
carrier in Columbus. The System also competes with direct broadcast satellite
television systems ("DBS") and multipoint multichannel distribution systems
("MMDS"). The areas of the System served by both Insight Ohio and Ameritech pass
approximately 122,440 homes, representing 71% of the System's total homes
passed. Even in this competitive environment, the System's basic customers
increased from approximately 86,000 at the end of 1995, prior to Ameritech's
entry into the marketplace, to approximately 87,637 as of December 31, 1998.
As of December 31, 1998, the System had approximately 973 miles of 490 MHz
plant and approximately 1,675 miles of 468 MHz plant. There also were
approximately 165 miles of fiber optic cable deployed in the System. Insight
Ohio is upgrading the technical capability initially in the majority of the
System by increasing its bandwidth to 870 MHz and activating its reverse plant.
The increase in bandwidth will allow the System to deliver new services such as
digital cable, high-speed Internet connections, two-way data and other
telecommunications services. Insight Ohio expects to complete its initial phase
of the rebuild encompassing 1,200 miles by the end of the first quarter of 2000.
The System has developed an award winning local-origination and production
team which has created a firm foundation for its position in the community as a
"good citizen." An impressive list of awards has further enhanced the System's
strong local presence, including:
. 1997 OCTA Excellence in Community Service
. 1997 OCTA Image Award: System Marketing
. 1997 OCTA Image Award: Advertising
. 1997 OCTA Image Award: Sports Programming
. 1996 Pinnacle Award: Women In Cable & Telecommunications
. 1996 OCTA Image Award: Best Overall Commitment to the Community
. 1996 OCTA Image Award: Excellence in Local Programming
. 1996 OCTA Image Award: Excellence Community Service
. 1996 OCTA Image Award: Sports Programming
THE MANAGER
IHO, the manager of Insight Ohio, is a wholly-owned subsidiary of Insight.
Insight is currently the 18th largest cable television operator in the United
States based on customers served. Insight owns, operates and manages cable
television systems serving over 500,000 customers in six states, with over 93%
of its customers clustered in Ohio, Illinois, Indiana. Such customers, as of
December 31, 1998, included approximately 321,000 customers served by a joint
venture between Insight and TCI, approximately 87,637 customers served by
Insight Ohio and approximately 96,000 customers served directly by Insight.
Insight was co-founded in 1985 by Sidney R. Knafel, Chairman of Insight,
and Michael S. Willner, President and Chief Executive Officer of Insight, both
of whom have been active in
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the cable business since the early 1970's. Kim D. Kelly joined Insight in 1990
as Executive Vice President and Chief Financial Officer and recently was named
Chief Operating Officer. In addition to many years of conventional cable
television experience, Insight's management team has been intimately involved in
the development and deployment of full service telecommunications networks. In
1989, through an affiliated entity, Insight Communications Company U.K., L.P.,
Insight entered the U.K. cable television market, where today modern hybrid
fiber-coaxial networks are deployed widely. Messrs. Knafel and Willner remain on
the board of NTL, Inc., the publicly traded successor to the Insight U.K.
affiliate and one of the three major cable television operators in the
competitive U.K. market with franchises covering over five million homes,
including pending acquisitions.
A series of swaps, acquisitions and a joint venture have recently been
executed resulting in the current composition of Insight. The largest of these
transactions was the equal partnership between Insight and TCI, the largest MSO
in the United States, in which, among other things, on October 31, 1998, the two
companies contributed most of their Indiana cable systems into a joint venture
serving approximately 321,000 customers in the State of Indiana, making the
joint venture the largest operator in the state. As of December 31, 1998,
Insight owned and managed cable systems serving over 500,000 customers located
in six states including those in its joint venture, with TCI serving
approximately 321,000 customers in Indiana and approximately 87,637 customers
served in Columbus, as well as another approximately 96,000 customers served by
systems 100% owned by Insight.
On January 8, 1999, Insight and AT&T announced their intent to enter into a
joint venture whereby the joint venture will provide telecommunication services
to residents and small businesses served by Insight's cable systems, including
the System, under the AT&T brand. Insight expects to enter into a definitive
agreement with AT&T by the third quarter of 1999, with delivery of service by
early 2000. Insight will invest up to 49% in the joint venture under a plan
which will include, among other things, a cash payment to the cable partner for
telephone capable plant, reimbursements for maintenance, monthly fees to the
cash partner for the cable license and revenue sharing above certain levels.
INSIGHT BUSINESS STRATEGY
Two years ago, Insight initiated a strategic plan designed to augment its
core business of delivering multi-channel video. The strategy calls for:
. the upgrade of plant to a minimum of 750 MHz hybrid fiber-coaxial platforms
from which to deploy new value-added services such as high-speed data
access, digital video and telephony services;
. the reconfiguration of existing systems in a series of swaps to achieve
customer clusters with a strong market presence; and
. an acquisition plan focused on markets with attractive demographics and a
high ratio of customers to headends.
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The contribution of the System to Insight Ohio 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.
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. IHO intends to aggressively
implement Insight's upgrade strategy in Columbus.
Insight is in the process of rebuilding the majority of the System to 870
MHz. This rebuild is expected to be completed by the first quarter of 2000.
Management expects to increase revenues as the System upgrade is completed by
adding new services such as digital cable, high-speed modems and other newly
developing telecommunications services. Insight already has a national
affiliation agreement with @Home to provide high-speed Internet connections over
its cable television system infrastructure. Management either will extend that
agreement to the System or will affiliate the System with Time Warner's Road
Runner Internet service which is presently available in Time Warner's Columbus
cable system.
With respect to programming, Management believes it can effectively
repackage the channel offerings to more advantageously compete without reducing
revenue per customer. Management's strategy is to compete in the marketplace
with its exclusive local programming, higher quality local service and increased
new technology offerings as opposed to promotional discounts.
Due to its relationship with MediaOne (formerly Continental Cablevision),
Insight will provide programming discounts to the System through November 1999.
After such date, Insight believes that through its strategic alliances with
other major multiple system operators ("MSOs"), utilizing programming
cooperatives or through its own purchasing power, it will be able to continue to
obtain programming for the System at a cost lower than that previously available
to Coaxial.
OVERBUILD
In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus. Ameritech has built its citywide franchise, both in our
service area and in the Time Warner service area on the west side of Columbus.
Insight Ohio and Time Warner service virtually distinct areas and therefore do
not compete with one another. The areas of the System served by both Insight
Ohio and Ameritech pass approximately 122,440 homes, representing 71% of the
System's total homes passed. Presently, Ameritech is pursuing an additional
franchise with approximately 13,000 homes through an ordinance.
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Insight Ohio is currently rebuilding the System to 870 MHz. Management
expects to begin servicing customers from the rebuilt network by June 1999.
Insight Ohio will begin launching digital service, on a node by node basis,
including a video-on-demand service and an interactive information service, by
the end of the second quarter of 1999. Management expects to launch a high-speed
data service during the third quarter of 1999.
When the System was contributed to Insight Ohio, it implemented a strategy
to end deep discounting in order to achieve rate stability in the market.
Management believed that a relatively small customer loss, caused by
discontinuing discounts, would be preferable in exchange for achieving rate
integrity and increasing the average monthly revenue per customer. As a result
of this strategy, from June 30, 1998 to December 31, 1998, the average monthly
revenue per customer increased from $43.30 to $46.85, while the number of
customers decreased from 91,088 to 87,637. Management believes rates are
stabilizing; most recently, Ameritech announced a $1.75 increase in the price of
their standard cable service and a $0.26 increase in the price of pay-per-view
movies, effective March 1, 1999.
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 robust technical platform needs to be maintained. Presently the
System is comprised of approximately 2,644 miles of plant passing approximately
171,753 homes resulting in a density of 65 homes per mile. Approximately 37% of
the plant has been expanded to 490 MHz and approximately 63% is built at 468
MHz. The System is 100% addressable, with approximately 84% of the basic
customers having addressable converters.
The System's deployment of fiber optic cable began in 1989. Its use was
originally for two main purposes: to improve end-of-the-line performance and to
increase reach for service of areas as yet uncabled. In addition, the fiber
program created a redundant network allowing for automatic backup in case of
system failure. Presently, 72 nodes are active, allowing for narrow casting and
differentiation of channel lineups from the single headend.
Insight Ohio plans to further enhance the technical platform of the System
by upgrading the plant serving the majority of customers. The capability for
high-speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Insight Ohio is well along its plan to upgrade a majority of the System by the
first quarter of 2000.
All of the System's basic customers currently have access to addressable
technology and approximately 84% have addressable converters in their homes.
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
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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 is expected to play a major role in expanding
channel capacity and improving the performance of the System. Fiber optic
strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal amplification typically required
for coaxial cable. The System will continue to deploy fiber optic cable further
reducing amplifier cascades while improving picture quality and system
reliability.
Recently, 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. In
three markets, Insight plans to go commercial with its @Home high-speed Internet
service during April 1999. Insight Ohio intends to install two-way capability in
the System rebuild and a wide-spread rollout for a high-speed Internet service
is planned for late 1999.
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
techniques 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 and pay-per-view. Using a
skilled team of marketing professionals, the System has competed by supporting
an innovative variety of marketing activities, including the following:
Promotion. The System's marketing team functions as an in-house ad agency
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handling graphic design, art direction, television scripting and radio scripting
at significant savings over outside agencies. Using state-of-the-art software
packages, the marketing team is able to produce direct mail, video, print and
collateral marketing materials in-house. In addition, sophisticated in-house
capabilities allow for the quick and inexpensive production of promotional and
competitive educational spots to air on any of 20 channels for which the System
has inserted advertising spots. Management zones the System's service areas into
two regions: competitive and non-competitive. This zoning provides separate and
distinct channel line-ups to customers in the competitive and non- competitive
regions of the System. The System also has its CableData homes passed database
zoned similarly. This provides a significant advantage by delivering a
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customized "competitive" message to only those customers in the zoned
competitive area. The System has run an average of 15,000 marketing commercials
per month, fully utilizing any unsold advertising spots.
Telemarketing. The System's in-house telemarketing operation consists of an
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eight-person team including a supervisor and an order-entry person. A Telecorp
predictive dialer is used which allows the telemarketing group to achieve better
sales calls results. The telemarketing group also collects customer surveys and
provides additional phone capacity to customer service representatives during
peak periods such as heavy media campaigns.
Guide. The System produces a 200-page monthly programming guide. The guide
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features extensive custom features including the cover, pay-per-view, sports
calendars, VCR+ Codes and a 16-page advertiser supported coupon section. The
guide also gives the System a vehicle to provide customer notifications and any
technical information that is traditionally delivered via more expensive bill
inserts or direct mail. It is also customized and zoned to competitive and non-
competitive areas. The guide is profitable with a 64% penetration.
Apartment Management. Approximately 37% of the System's customers reside in
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apartment housing units or Multiple Dwelling Units ("MDUs"). Management believes
that in a competitive environment, the management of the MDU market and the
apartment owners will grow in importance. The apartment group provides support
for the entire MDU customer base. The group works with apartment managers
throughout the System to manage move-in and move-out lists in an effort to
maximize penetration within the market. It has developed strong working
relationships with key apartment owners and managers and is an active member in
The Greater Columbus Apartment Association. As of December 31, 1998, the group
had executed exclusive contracts with apartment complexes representing 15% of
the System's homes passed, providing a significant competitive advantage in the
overbuilt market.
Network Spot Sales. In addition to customer fees, the System derives a
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modest amount of revenue from the sale of local spot advertising time on locally
originated and satellite-delivered programming. The advertising sales operation
currently inserts advertising spots on the following 20 channels: A&E, BET,
Comedy Central, CNN, Discovery, ESPN, ESPN-2, Fox Family Channel, Fox Sports,
Golf, Headline News, Home & Garden, Lifetime, MTV, Nickelodeon, TBS, TNN, TNT,
TV Land and USA. The System utilizes digital insertion technology supplied by
SeaChange Digital. As a result of the latest insertion equipment and an
experienced and talented advertising team, the System generates approximately
$40.21 of total advertising revenue per customer on an annual basis, placing it
near the top of the industry in spot sales revenue.
Home Shopping. The System also derives a modest amount of revenue from
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affiliations with home shopping services (which offer merchandise for sale to
customers and compensate system operators with a percentage of their sales
receipts). Utilizing two full-time networks and one part-time network, the
System generated home shopping revenues of $3.89 per customer in 1998.
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Other Advertising Sales. The System has also developed a classified channel
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designed both to attract new advertising clients as well as to create value-
added programs which enhance customer satisfaction. Among the System's
programming are several real estate programs, a career search program, leased
access and a membership marketing program called "Cable Saver" which offers
discounts at local merchants to customers, thus helping customers partially
offset their cable bills. The System expects to generate approximately $6.13 per
customer on an annual basis from classifieds. When combined with network spot
sales, the System's strong advertising business affords it the top spot among
MSOs when ranked by gross advertising revenue per basic customer.
Central Ohio Sport! Television. In early 1998, the System teamed up with
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the local Time Warner cable system to develop a local sports programming package
under the brand "Sport!". This exclusive package is not available to Ameritech's
cable customers. "Sport!" features as its cornerstone 31 Ohio State University
games including women's basketball, men's ice hockey, women's volleyball, men's
baseball and the annual Spring Football Game. In addition "Sport!" will offer 40
to 50 additional professional, collegiate and high school sporting events on the
same exclusive basis.
Production. The System produces all of the local programming for Central
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Ohio Sport! Television, as well as other events as varied as harness racing and
marching band competitions. The System has a state-of-the-art commercial
production facility, including a 1996 mobile production vehicle, electronic
field production ("EFP") equipment and an on-line edit suite. The combination of
the mobile truck, EFP equipment and the edit suite allow the vast majority of
commercial production work to be done in-house at significant cost savings over
outside production facilities.
High Speed Internet Access. In May 1998, the System began offering high-
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speed Internet access via asymmetrical (telephone return) cable modems under the
brand name Coaxial Express as an interim measure until a more robust two-way
service is available following the rebuild. The service is provided in a
"turnkey" fashion under an agreement with Frontier Global Center. As of December
31, 1998, the System had approximately 240 customers subscribing to this
service.
Programming
The System 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. Due to its relationship with MediaOne (formerly
Continental Cablevision), Insight will provide programming discounts to the
System at MediaOne's rate card through November 1999. After such date, Insight
believes that through its strategic alliances with other major MSOs, utilizing
programming cooperatives or through its own purchasing power, it will be able to
continue to obtain programming for the System at a cost lower than that
presently available to Coaxial.
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Some program suppliers provide volume discount pricing structures or offer
marketing 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 programming costs are expected
to increase in the future due to additional programming being provided to its
customers, increased costs to purchase programming, inflationary increases and
other factors affecting the cable television industry. The System also has
various retransmission consent arrangements with commercial broadcast stations
which generally expire in December 1999 and beyond. None of these consents
require payment of fees for carriage; however, the System has entered into
agreements with certain stations to carry satellite-delivered cable programming
which is affiliated with the network carried by those stations.
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
offers, for a monthly fee, an expanded basic tier of various satellite-
delivered, non- broadcast channels (such as CNN, MTV, USA, ESPN and TNT). In
addition to these services, the System provides premium services such as HBO,
Cinemax, Showtime, The Movie Channel and Starz!, which are combined in different
formats to appeal to the 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 plans to upgrade the System using fiber optic
technology, which will allow 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. The upgrade will also give the System
the ability to use "tiered" packaging strategies for marketing premium services
and promoting niche programming services. Management believes that this ability
will increase basic and premium penetration as well as revenue per basic
customer. The System also provides five pay-per-view services purchased from
independent suppliers such as Viewer's Choice and Showtime Event Television.
These services are satellite-delivered channels, consisting principally of
feature films, adult movies, live sporting events, concerts and other special
events, usually presented without commercial interruption. Such pay-per-view
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, 1998, the
System's stated monthly basic service rate for residential customers was $11.47,
the System's monthly expanded basic
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service rates for residential customers ranged from $14.93 to $18.65, and per-
channel premium service rates (not including special promotions) ranged from
$5.95 to $12.95 per service.
A one-time installation fee, which the System may wholly or partially waive
during a promotional period, is charged to new customers. The System charges
monthly fees for converters and remote control devices. The System also charges
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. Multiple dwelling unit 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 Coaxial 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, 1998, the System employed approximately 191 full-time
equivalent employees, none of whom are represented by a union or covered by a
collective bargaining agreement. Management believes that its relations with its
employees are good. Approximately 50% of the full-time employees have tenure of
five years or longer. Although the Columbus area has relatively low unemployment
and competition in hiring is intense, Management believes that it will continue
to be successful in attracting and retaining highly qualified employees and
maintaining good working relationships with its current employees.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
The System is dedicated to quality customer service. Plans to make
significant system improvements are designed in part to strengthen customer
service through greater system reliability and the introduction of new services.
Management seeks a high level of customer satisfaction by also employing a well-
trained staff of customer service representatives and experienced field
technicians.
Overall, the System employs 56 customer service representatives, an average
of one for every 1,565 customers, who answer phone calls and handle walk-in
traffic. The System utilizes an automated response unit system to track and
monitor customer calls, which allows customers to perform common functions such
as checking account balances, recent payments or scheduled appointments using a
touch-tone phone, without talking to a customer service representative.
Customers can also use the automated response unit system to instantly upgrade
premium services or order pay-per-view movies and events, as well as report
service problems. All newly hired customer service representatives and
technicians are trained in-house. Programmers and vendors provide training and
product updates via representatives who visit the System office on a continual
basis. Technicians are on call 24 hours per day, 365 days per year. All on-call
13
technicians are equipped with pagers and two-way radios. During the work day,
technicians communicate with the System office via business radios. The majority
of re-connects and new connects or drop replacements are performed by in-house
personnel. All disconnects are performed in-house.
During December 1998, the System converted its billing system from the
Cable Data system to the Convergys system. Management believes the Convergys
billing system has several advantages including the ability to conduct metered
and bundled billing. In addition, Insight uses the Convergys billing system for
all of its cable television systems. With a uniform billing system, Insight can
consolidate after hours calls into one call center achieving efficiencies while
retaining strong customer service.
In addition, 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, strong United Way support 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. 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
. 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 41
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 Communication
Policy Act of 1984 (the "1984 Cable Act" and, together with the 1992 Cable Act,
the "Cable Acts") prohibit franchising
14
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, 1998.
Number of Percentage of Percentage of Total
Year of Franchise Expiration Franchises Total Franchises Basic Customers
- ---------------------------- ---------- ---------------- ---------------
1999 through 2001................ 6 15% 14%
2002 and thereafter.............. 35 85% 86%
-- --- ---
Total......................... 41 100% 100%
== === ===
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.
THE CABLE TELEVISION INDUSTRY
The cable television industry developed in the United States in the late
1940's and early 1950's in response to the needs of residents in predominantly
and mountainous areas of the country where the quality of off-air
television reception was inadequate due to factors such as topography and
remoteness from television broadcast towers. In the late 1960's, cable
television systems also developed in small and medium-sized cities and suburban
areas that had a limited availability of clear off-air television station
signals. All of these markets are regarded within the cable industry as
"classic" cable television station markets. In more recent years, cable
television systems have been constructed in large urban cities and nearby
suburban areas, where good off-air reception from multiple television stations
usually is already available, in order to provide the numerous, satellite-
delivered channels carried by cable television systems which are not otherwise
available via broadcast television reception. A cable television system receives
television, radio and data signals that are transmitted to the system's headend
site by means of
15
off-air antennas, microwave relay systems and satellite earth
stations. These signals are then modulated, amplified and distributed, primarily
through coaxial, and in some instances, fiber optic cable, to customers who pay
a fee for this service. Cable television systems may also originate their own
television programming and other information services for distribution through
the system. Cable television systems generally are constructed and operated
pursuant to non- exclusive franchises or similar licenses granted by local
governmental authorities for a specified term of years, generally for extended
periods of up to 15 years.
Cable television systems offer customers various levels (or "tiers") of
cable television services consisting of:
. off-air television signals of local network, independent and educational
stations;
. various satellite-delivered, non-broadcast channels (such as CNN, MTV, USA
Network, ESPN and TNT);
. certain programming originated locally by the cable television system (such
as public, governmental and educational access programs); and
. informational displays featuring news, weather, stock market and financial
reports and public service announcements.
For an extra monthly charge, cable television systems also offer premium
television services to their customers. These services (such as Home Box Office,
Showtime and regional sports networks) are satellite-delivered channels
consisting principally of feature films, live sports events, concerts and other
special entertainment features, usually presented without commercial
interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic and premium television services and for other services (such as
the rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenue for cable television operators. In
addition to customer revenue from these services, cable television operators
generate revenue from additional fees paid by customers for pay-per- view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. Cable television
operators frequently also offer to their customers home shopping services, which
pay the systems a share of revenue from sales of products in the systems'
service areas.
COMPETITION
The major source of competition for the System is the wireline overbuild by
Ameritech. Ameritech has overbuilt approximately 122,440 homes passed in the
System's service area, or approximately 71% of the total homes in the service
territory as of December 31, 1998.
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive online computer
services and home video products, including videotape
16
cassette recorders. The extent to which a cable television system is competitive
depends, in part, upon that system's ability to provide, at a reasonable price
to customers, a greater variety of programming and other communications services
than those which are available off-air or through other alternative delivery
sources and upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises granted
on a non-exclusive basis. The 1992 Cable Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable television systems. Well-financed
businesses from outside the cable television industry (such as the public
utilities that own the poles to which cable is attached) may become competitors
for franchises or providers of competing services. Competition from other video
service providers exists in areas served by the System. In a number of the
franchise areas served by the System, the System faces direct competition from
other franchised cable television operators. There can be no assurance, however,
that additional cable television systems will not be constructed in other
franchise areas of the System.
Cable television operators also face competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. SMATV systems offer
both improved reception of local television stations and many of the same
satellite-delivered program services offered by franchised cable television
systems. SMATV operators often enter into exclusive agreements with building
owners or homeowners associations, although some states have enacted laws that
authorize franchised cable television operators access to such private
complexes. These laws have been challenged in the courts with varying results.
In addition, some companies are developing and/or offering to these private
residential and commercial developments packages of telephony, data and video
services. Under the Telecommunications Act of 1996 (the "1996 Telecom Act"),
SMATV systems can interconnect non-commonly owned buildings without having to
comply with local, state and federal regulatory requirements that are imposed on
cable television systems providing similar services, as long as they do not use
public rights-of-way. For instance, while a franchised cable television system
typically is obligated to extend service to all areas of a community regardless
of population density or economic risk, a SMATV system may confine its operation
to small areas that are easy to serve and are more likely to be profitable. The
System passes over 430 MDU complexes within its service territory and currently
has entry agreements, either exclusive or non-exclusive, with complexes totaling
approximately 26,000 MDUs. The System currently provides programming to just
over 14,000 of these MDUs, or 55% of the total MDUs passed. The ability of the
System to compete for customers in residential and commercial developments
served by SMATV operators is uncertain.
The FCC has recently allocated a sizable amount of spectrum in the 27 to 31
GHz band for use by a new wireless service, Local Multipoint Distribution
Service ("LMDS"), which, among other uses, can deliver over 100 channels of
programming directly to consumers' homes. The FCC completed an auction of this
spectrum to the public in March 1998, in which the participation of cable
television operators and local telephone companies was restricted. The extent to
which the winning licensees in this service will use this spectrum in particular
regions
17
of the country to deliver multichannel video programming and other services to
customers, and therefore provide competition to franchised cable television
systems, is uncertain at this time.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered broadcast and non-broadcast
program services formerly available only to cable television customers. Most
satellite-distributed program signals are electronically scrambled so as to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. The 1992 Cable Act enhances the right of satellite distributors
and other competitors to purchase non-broadcast satellite- delivered
programming. The fastest growing method of satellite distribution is by high-
powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in the
same orbital position. DBS service can be received virtually anywhere in the
United States through the installation of a small rooftop or side-mounted
antenna. DBS service is presently being heavily marketed on a nationwide basis
by three service providers. The 1996 Telecom Act and FCC regulations preempt
certain local restrictions on the location and use of DBS and other satellite
receiver dishes.
DBS systems currently have certain advantages over cable television systems
with respect to programming and digital quality, as well as disadvantages that
include high upfront costs and a lack of local programming, service and
equipment distribution. One DBS provider, EchoStar, has announced plans to offer
some local signals in a limited number of markets. A review by the U.S.
Copyright Office is underway to determine if such offerings are permissible
under the copyright law. In addition, legislation has been introduced in
Congress to include carriage of local signals by DBS providers under the
copyright law. The ability of DBS to deliver local signals would eliminate a
significant advantage that cable television operators currently have over DBS
providers. The System will magnify its competitive service price points and seek
to maintain programming parity with DBS by selectively increasing channel
capacities of the System and introducing new premium channels, pay-per-view and
other services. Management estimates that there are approximately 6,800 DBS
customers in the System's service area as of December 31, 1998. Management
believes that DBS erosion will be minimal due to the marketing department's
ability to properly educate customers regarding pricing and packaging and
offering high value-added channel line-ups.
Cable television systems also compete with wireless program distribution
services such as MMDS, which uses low-power microwave frequencies to transmit
video programming over the air to customers. Wireless distribution services
generally provide many of the programming services provided by cable television
systems, and digital compression technology is likely to increase significantly
the channel capacity of their systems.
MMDS service requires unobstructed "line of sight" transmission paths. In
the majority of the System's franchise service areas, prohibitive topography and
"line of sight" access have and are likely to continue to limit competition from
MMDS systems. Moreover, in the majority of the System's franchise areas MMDS
operators face significant barriers to growth since the
18
lower population densities make these areas less attractive. Management is not
aware of any significant MMDS operation currently within its cable television
franchise service areas. American Telecasting Inc. ("ATI") is an MMDS operator
providing service in the Columbus area and covering most of the System's service
areas. The System has run numerous competitive ad campaigns educating consumers
regarding the shortfalls of the ATI product, such as the limited number of
channels, the massive antennae required and service issues. Management estimates
that ATI has built a customer base of less than 500 customers in the System's
service areas.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The 1996
Telecom Act directed the FCC to establish, and the FCC has adopted, regulations
and policies for the issuance of licenses for digital television ("DTV") to
incumbent television broadcast licensees. DTV is expected to deliver high
definition television pictures, multiple digital-quality program streams, as
well as CD-quality audio programming and advanced digital services, such as data
transfer or subscription video. The FCC also has authorized television broadcast
stations to transmit textual and graphic information useful both to consumers
and businesses. The FCC also permits commercial and noncommercial FM stations to
use their subcarrier frequencies to provide nonbroadcast services including data
transmissions. The FCC established an over-the-air Interactive Video and Data
Service that will permit two-way interaction with commercial and educational
programming along with informational and data services. LECs and other common
carriers provide facilities for the transmission and distribution to homes and
businesses of video services, including interactive computer-based services like
the Internet, data and other nonvideo services.
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 financial resources, electric utilities could be
formidable competitors to traditional cable television systems.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environments are constantly occurring. Thus,
it is not possible to predict the effect that ongoing or future developments
might have on the cable industry or on the operations of the System.
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 the System and the cable television industry. 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. Management believes that the regulation of its industry remains
a matter of interest to Congress, the FCC and other
19
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 the System.
Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a host of rulemakings to implement the 1996 Telecom Act, the
final outcome of which cannot yet be determined.
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.
Rate Regulation
---------------
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional nonbasic 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
expands 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 DBS. Satisfaction of this test deregulates all rates. Additionally, the
1992
20
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 ("CPST") (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 doing so; 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 retiering
and rearrangement of cable services under certain limited circumstances. The
1996 Telecom Act limited the class of complainants regarding CPST rates to
franchising authorities only, after first receiving two rate complaints from
local basic customers, and ended FCC regulation of CPST rates immediately for
small systems owned by small cable operators and on March 31, 1999 for all other
cable television systems. The System is not a "small cable operator" under the
1996 Telecom Act.
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
(e.g., converter boxes and remote control devices) 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 rebuilds or 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" (the "small system rules"). 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 (i.e., 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 which exceed those
produced by the cost-of-service rules applicable to larger cable television
operators. Once the initial rates are set they can be adjusted periodically for
inflation and external cost changes as described above. When an eligible "small
system" grows larger than 15,000 basic customers, it can maintain its then
current rates but it cannot increase its rates in the normal course until an
increase would be warranted under the rules applicable to systems that have more
than 15,000 customers. When a "small cable company" grows larger than 400,000
basic customers, the qualified systems it then owns will not lose their
21
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. The System was a "small
cable company" prior to the October 30, 1998 consummation by Insight of the TCI
transaction but it no longer enjoys this status.
On February 11, 1997, a Petition for Determination of Effective Competition
filed by Coaxial challenging the certification of the City of Columbus was
granted by the FCC. This petition revoked the City of Columbus' right to
regulate the System's basic cable and equipment rates, and the FCC's right to
regulate the System's CPST rates.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
Carriage of Broadcast Television Signals
----------------------------------------
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system (i.e., 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, 1999. 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 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" (i.e., 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
the System, 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 has initiated 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.
22
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, Management is not aware of any
current or past material failure on its part to comply with its franchise
agreements. Management believes that it has generally complied with the terms of
its franchises and has provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a cable
television operator seeks to enforce his 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."
23
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.
Competing Franchises
--------------------
Questions concerning the ability of municipalities to impose certain
franchise restrictions upon cable television companies have been considered in
several recent federal appellate and district court decisions. These decisions
have been somewhat inconsistent and, until the U.S. Supreme Court rules
definitively on the scope of cable television's First Amendment protections, the
legality of the franchising process and of various specific franchise
requirements is likely to be in a state of flux. It is not possible at the
present time to predict the constitutionally permissible bounds of cable
franchising and particular franchise requirements. However, the 1992 Cable Act,
among other things, prohibits franchising authorities from unreasonably refusing
to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.
Ownership
---------
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers ("LECs") 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, LECs may provide video service as broadcasters,
common carriers, or cable operators. In addition, LECs and others may also
provide video service through "open video systems" ("OVS"), a regulatory regime
that may give them more flexibility than traditional cable television systems.
OVS operators (including LECs) may operate open video systems without obtaining
a local cable franchise, although they can be required to make payments to local
governmental bodies in lieu of cable franchise fees. In general, OVS 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 OVS, two-thirds of the
channels must be made available to programmers unaffiliated with the OVS
operator.
The 1996 Telecom Act generally prohibits LECs from purchasing cable
television systems (i.e, any ownership interest exceeding 10%) located within
the LEC's telephone service area, prohibits cable operators from purchasing LECs
whose service areas are located within the cable operator's franchise area, and
prohibits joint ventures between operators of cable television
24
systems and LECs operating in overlapping markets. There are some statutory
exceptions, including a rural exemption that permits buyouts in which the
purchased cable television system or LEC 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 cases where: (i) the operator of a cable television system
or the LEC would be subject to undue economic duress if such provisions were
enforced; (ii) the system or facilities would not be economically viable in the
absence of a buyout or a joint venture; or (iii) the anticompetitive effects of
the proposed transaction are clearly outweighed by the transaction's effect in
light of community needs. The respective local franchising authority must
approve any such waiver.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable television systems which a single cable television operator can own. In
general, no cable television operator can have an attributable interest in cable
television systems which pass more than 30% of all homes 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
recently initiated a Notice of Proposed Rulemaking reviewing these cable
attribution rules, including whether various corporate, financial, partnership
or business relationships that confer influence or control over an entity
engaged in provision of cable services should be subject to regulation. The FCC
has stayed the effectiveness of these rules pending the outcome of the appeal
from the U.S. District Court decision holding the multiple ownership limit
provision of the 1992 Cable Act unconstitutional. The FCC has also recently
issued a Notice of Proposed Rulemaking seeking comment on possible further
revisions to this rule.
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 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 to cable companies.
25
Equal Employment Opportunities
------------------------------
The 1984 Cable Act includes provisions to ensure that minorities and women
are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable television system operators with more than five
full-time employees. Pursuant to the requirements of the 1992 Cable Act, the FCC
has imposed more detailed annual Equal Employment Opportunities reporting
requirements on cable operators and has expanded those requirements to all
multichannel video service distributors. Failure to comply with the Equal
Employment Opportunities requirements can result in the imposition of fines
and/or other administrative sanctions, or may, in certain circumstances, be
cited by a franchising authority as a reason for denying a franchisee's renewal
request.
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 were found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements were strengthened to require
that cable television operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
Franchise Transfers
-------------------
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after receipt
of all information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
Technical Requirements
----------------------
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee ("NTSC")
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.
26
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, inter alia, 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 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
("MVPD"). Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their MVPD 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, MVPDs (other than DBS operators) are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using component
security modules obtained from the MVPD with set-top units purchased or leased
from retail outlets. As of January 1, 2005, MVPDs 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 ("EAS"). The rules require all cable television systems
to provide an audio and video EAS 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 EAS message. The FCC rules permit cable television systems
either to provide a separate means of alerting persons with hearing disabilities
of EAS messages, such as a terminal that displays EAS messages and activates
other alerting mechanisms or lights, or to provide audio and video EAS 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 EAS 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 EAS message on all programmed
channels or installing EAS equipment capable of providing audio alert messages
on all programmed channels, a video interrupt on all channels, and an audio and
video EAS message on one programmed channel. This must be accomplished by
October 1, 2002.
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. Ohio, the state in which the
System operates, has 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.
27
Pursuant to the 1996 Telecom Act, the FCC has adopted a new rate formula for any
attaching party, including cable television systems, which offer
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 will not begin until 2001, and will be phased in by equal increments
over the five ensuing years. The FCC recently ruled that the provision of
Internet service will not, in and of itself, trigger use of the new formula. 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; nonduplication of network programming;
deletion of syndicated programming; registration procedure and reporting
requirements; customer service; closed captioning; obscenity and indecency;
program access and exclusivity arrangements; and limitations on advertising
contained in nonbroadcast children's programming.
The FCC recently adopted new procedural guidelines governing the
disposition of home run wiring (a line running to an individual customer's unit
from a common feeder or riser cable) in MDUs. MDU owners can use these new rules
to attempt to force cable television operators without contracts to either sell,
abandon or remove home run wiring and terminate service to MDU customers unless
operators retain rights under common or state law to maintain ownership
rights in the home run wiring.
The 1996 Telecom Act requires video programming distributors to employ
technology to restrict the reception of programming by persons not subscribing
to those channels. In the case of channels primarily dedicated to sexually-
oriented programming, the distributor must fully block reception of the audio
and video portion of the channels; a distributor that is unable to comply with
this requirement may only provide such programming during a "safe harbor" period
when children are not likely to be in the audience, as determined by the FCC.
With respect to other kinds of channels, the 1996 Telecom Act requires that the
audio and video portions of the channel be fully blocked, at no charge, upon
request of the person not subscribing to the channel.
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
28
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 ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now 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. Cable television industry
negotiations with ASCAP, BMI and SESAC, Inc. (a smaller performing rights
organization) are in progress.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising 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
29
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, Ohio, the state in which
the System currently operates, has not enacted state level regulation.
The foregoing does not purport to describe all 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 the
System can be predicted at this time.
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.
30
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which any of the
Registrants is a party or to which any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the holders of the Senior
Discount Notes during the three months ended December 31, 1998.
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the equity of Coaxial LLC, Coaxial
Financing Corp. and Insight Ohio. There are one, one and two holders of the
equity of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio, respectively.
32
ITEM 6. SELECTED FINANCIAL DATA
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998. As
such, these entities were not in existence for the historical periods presented
in the following tables. The historical information of Coaxial Communications of
Central Ohio, Inc. for the years ended December 31, 1997, 1996, 1995 and 1994 is
shown as it represents the predecessor entity which has been consolidated by
Coaxial LLC as of and for the year ended December 31, 1998. The following tables
present selected historical financial data for Coaxial LLC and Phoenix
Associates as of and for the five years ended December 31, 1998 and selected
historical financial data for Insight Ohio and Coaxial Financing Corp. as of and
for the period ended December 31, 1998. These tables should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto
included elsewhere in this Report.
COAXIAL LLC
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 47,956 $ 48,229 $ 50,418 $ 46,831 $ 43,546
Operating expenses:
Service and administrative......................... 27,832 27,391 25,236 21,920 20,830
Severance and transaction structure costs................... 4,822 - - - -
Management fee..................................... 493 - - - -
Home office........................................ 1,370 1,498 1,697 1,695 1,316
Depreciation and amortization...................... 5,311 5,256 5,350 4,837 4,010
-------- -------- -------- -------- --------
Total operating expenses.................. 39,828 34,145 32,283 28,452 26,156
Operating income............................................ $ 8,128 $ 14,084 $ 18,135 $ 18,379 $ 17,390
Interest expense, net.............................. 2,678 1,230 426 1,033 864
Other expense...................................... 421 271 248 251 261
-------- -------- -------- -------- --------
Net income before
extraordinary item................................. $ 5,029 $ 12,583 $ 17,461 $ 17,095 $ 16,265
Extraordinary item - loss on debt retirement....... (847) - - - (130)
-------- -------- -------- -------- --------
Net income.................................................. $ 4,182 $ 12,583 $ 17,461 $ 17,095 $ 16,135
======== ======== ======== ======== ========
FINANCIAL RATIOS AND OTHER DATA:
System Cash Flow (1)........................................ $ 20,124 $ 20,838 $ 25,182 $ 24,911 $ 22,716
System Cash Flow margin..................................... 42.0% 43.2% 49.9% 53.2% 52.2%
Operating Cash Flow (2)..................................... 18,261 19,340 23,485 23,216 21,400
Capital expenditures........................................ 7,369 5,570 5,998 5,724 5,486
Net cash provided by operating activities................... 13,050 18,622 24,369 21,895 5,266
Net cash used in investing activities....................... 3,470 15,242 19,551 19,914 5,441
Net cash used in financing activities....................... 1,446 3,712 4,582 1,623 525
OPERATING DATA: (AT END OF PERIOD, EXCEPT
AVERAGE AND ANNUALIZED DATA)
Homes passed (3)............................................ 171,753 166,306 161,018 156,613 152,562
Basic subscribers (4)....................................... 87,637 91,873 88,056 86,041 82,166
Basic penetration (5)....................................... 51.0% 55.2% 54.7% 54.9% 53.9%
Premium service units (6)................................... 90,032 80,013 68,720 74,087 74,529
Premium penetration (7)..................................... 102.7% 87.1% 78.0% 86.1% 90.7%
Average monthly revenue per basic subscriber (8)............ $ 44.52 $ 44.67 $ 48.27 $ 46.40 $ 44.70
System Cash Flow per basic subscriber....................... $ 224.21 $ 231.62 $ 289.28 $ 296.20 $ 279.78
BALANCE SHEET DATA: (AT THE END OF THE
PERIOD)
Total assets................................................ $ 56,532 $109,655 $102,099 $ 87,946 $ 71,677
Total debt.................................................. 67,204 47,236 50,442 40,375 34,123
Total liabilities........................................... 77,233 55,328 59,767 50,927 44,062
Total member's equity (deficit)............................. (20,701) 54,327 42,332 37,019 27,615
33
PHOENIX ASSOCIATES
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Home office.......................... $ - $ - $ - $ - $ 4
--------- --------- --------- --------- ---------
Total operating expenses........... - - - - 4
Operating loss........................ - - - - (4)
Interest expense, net.............. $ 12,350 $ 12,094 $ 12,490 $ 12,362 $ 7,265
Other expense...................... 61 89 106 120 167
--------- --------- --------- --------- ---------
Net loss before extraordinary item.... (12,411) (12,183) (12,596) (12,482) (7,436)
Extraordinary item-(loss) gain........ 100 3,315 - - (755)
--------- --------- --------- --------- ---------
Net loss.............................. $ (12,311) $ (8,868) $ (12,596) $ (12,482) $ (8,191)
========= ========= ========= ========= =========
BALANCE SHEET DATA: (AT END OF PERIOD)
Total assets.......................... $ 4,413 $ 7,954 $ 9,218 $ 8,592 $ 8,105
Total debt............................ 105,565 178,365 170,762 157,448 144,514
Total liabilities..................... 109,406 178,366 170,762 157,540 144,572
Total partners' deficit............... (104,993) (170,412) (161,544) (148,948) (136,466)
COAXIAL FINANCING CORP.
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
-----------------
BALANCE SHEET DATA:
Total assets........................... $1,000
Total debt (to be paid by Coaxial LLC). -
Total liabilities...................... -
Total shareholders' equity............. 1,000
34
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
FOR THE PERIOD
FROM AUGUST 21, 1998
STATEMENT OF OPERATIONS DATA: TO DECEMBER 31, 1998
--------------------
Revenues.............................................................................. $ 17,276
Operating Expense:
Service and administrative............................................................ 8,912
Management fee............................................................... 493
Depreciation and amortization......................................................... 1,899
--------
Total operating expenses.............................................................. $ 11,304
Operating income...................................................................... 5,972
Interest income, net.................................................................. 25
Other income.......................................................................... 11
--------
Net Income............................................................................ $ 6,008
Accrual of Preferred Interests........................................................ (6,649)
--------
Loss on Common Interest............................................................... $ (641)
========
FINANCIAL RATIOS AND OTHER DATA:
System Cash Flow(1)................................................................... $ 8,364
System Cash Flow margin............................................................... 48.4%
Operating Cash Flow(2)................................................................ 7,871
Capital expenditures.................................................................. 3,620
Net cash provided by operating activities............................................. 8,868
Net cash used in investing activities................................................. 3,909
Net cash used in financing activities................................................. 1,749
OPERATING DATA:
(AT END OF PERIOD, EXCEPT AVERAGE AND ANNUALIZED DATA)
Homes passed(3)....................................................................... 171,753
Basic subscribers(4).................................................................. 87,637
Basic penetration(5).................................................................. 51.0%
Premium service units(6).............................................................. 90,032
Premium penetration(7)................................................................ 102.7%
Average monthly revenue per basic subscriber(8)....................................... $ 44.81
Annualized System Cash Flow per basic subscriber(9)................................... $ 244.99
BALANCE SHEET DATA: (AT THE END OF THE PERIOD)
Total assets.......................................................................... $ 41,968
Total debt............................................................................ 1,257
Preferred Interests................................................................... 170,000
Total liabilities and preferred interests............................................. 186,686
Total members' deficit................................................................ (144,719)
The financial statements of Insight Communications of Central Ohio, LLC as
of December 31, 1998 and for the period from August 21, 1998 to December 31,
1998 are included in the consolidated financial statements of Coaxial
Communications of Central Ohio, Inc.
35
NOTES TO SELECTED FINANCIAL AND OPERATING DATA
(1) Represents Operating Cash Flow (as defined below in Note 2) plus home office
expense for periods prior to the acquisition of the System, and Operating Cash
Flow plus management fees for periods after or which give effect to the
acquisition of the System. Management believes that System Cash Flow is a
meaningful measure of performance because it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, System Cash
Flow is not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net income
as an indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles. System Cash Flow, as computed by management, is not necessarily
comparable to similarly titled amounts of other companies. See the financial
statements, including the Statements of Cash Flows, included elsewhere in this
Report.
(2) Represents earnings before depreciation, amortization, severance and
transaction structure costs, interest expense, other expenses, and extraordinary
item. Management believes that Operating Cash Flow is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, Operating Cash Flow is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
Operating Cash Flow, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including the Statements of Cash Flows included elsewhere in this Report.
(3) Refers to estimates by management of the approximate number of dwelling
units in a particular community that can be connected to the System.
(4) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an equivalent
basic unit basis in which the total monthly bill for the account is divided by
the basic monthly charge for a single outlet in the area.
(5) Calculated as basic subscribers as a percentage of homes passed.
(6) Includes only single channel services offered for a monthly fee per channel
and does not include tiers of channels offered as a package for a single monthly
fee. A subscriber may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(7) Calculated as premium service units as a percentage of basic subscribers.
36
(8) 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.
(9) 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.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
PRIVATE OFFERING OF 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 Senior Discount Notes in connection with
the Financing Plan discussed under "Liquidity and Capital Resources," which
included the contribution of the System to Insight Ohio. 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, which are secured by the remaining 32.5% of the common stock of
Coaxial. The Senior Discount Notes are guaranteed on a conditional basis by
Insight Ohio.
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 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. As a result of the Financing Plan,
Coaxial has only nominal assets except for its ownership of 25% of the non-
voting common member