Item 1. Business
In this report, we rely on and refer to information and statistics regarding the cable television industry and our market share in the sectors in which we compete. We obtained this information and statistics from various third-party sources, discussions with our customers and our own internal estimates. We believe that these sources and estimates are reliable, but we have not independently verified them and cannot guarantee their accuracy or completeness.
Overview
Insight Ohio owns and operates a cable television system in the Columbus, Ohio metropolitan area (the "System"). As of December 31, 2002, the System passed approximately 198,700 homes and served approximately 88,100 basic customers in the eastern portion of the City of Columbus and the surrounding suburban communities. All of the System's customers are served from a single headend allowing for efficient capital deployment for new services. A headend processes signals received for distribution to customers over our network. Insight Communications Company, Inc. ("Insight"), through its wholly-owned subsidiary Insight Communications Company, L.P., serves as the manager of the System.
The System
The System serves the eastern portion of the City of Columbus and 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 median household income of the System's service area is approximately $40,300 per year, while the median family income is approximately $50,600 per year. As of December 31, 2002, the System passed approximately 198,700 homes and served approximately 88,100 basic customers from a single headend.
The System enjoys a high level of population growth in the suburban communities east of Columbus. Since December 31, 1996, approximately 37,600 homes passed have been added to the System through new plant extensions, primarily in new housing developments. This represents a 3.5% compound annual growth rate of homes passed for the System for the six years ended December 31, 2002.
Portions of the System operate in a competitive environment. Customers in those areas have access to two wired cable television providers -- Insight Ohio and WideOpenWest which acquired the assets of Ameritech in December 2001. The System also competes with direct broadcast satellite television systems ("DBS") and multipoint multichannel distribution systems ("MMDS"). The areas of the System served by both Insight Ohio and WideOpenWest pass approximately 129,100 homes, representing 65% of the System's total homes passed. In this competitive environment, the System's basic customers decreased from approximately 86,000 at the end of 1995, prior to Ameritech's entry into the marketplace, to approximately 84,200 as of December 31, 1999 but has steadily increased to approximately 88,100 as of December 31, 2002.
As of December 31, 2002, the System had 2,600 miles of plant, including 1,900 miles of 870 MegaHertz (MHz) capacity, or "bandwidth," plant and 700 miles of 450 MHz. Approximately 91% of Insight Ohio's customers are served by its upgraded network which enables delivery of an advanced suite of entertainment, information and communications services, including interactive digital video, high-speed data access and telephone services. Insight Ohio's upgrade efforts are continuing.
The Manager
Insight is the ninth largest cable television system operator in the United States based on customers served. Through its wholly-owned and managed systems, Insight currently serves approximately 1.4 million customers, all of which are concentrated in the four contiguous states of Indiana, Kentucky, Illinois and Ohio. In addition to its geographic concentration, our manager's communications network is tightly-grouped, or "clustered," with approximately 95% of our manager's customers served from fourteen headends after giving effect to the remaining network upgrades of its Illinois systems, expected to be substantially completed by mid-2003. As a result, the amount of capital necessary to deploy new and enhanced products and services is significantly reduced on a per home basis because of the large number of customers served by a single headend. Clustering enables our manager to efficiently deploy a bundled suite of entertainment, information and communications services. This combination of geographic concentration and clustering has enabled Insight to offer, under the Insight Digital brand, a complete bundle of interactive digital video, high-speed data access and telephone services.
We have entered into long-term agreements with Comcast Cable Holdings, LLC (formerly known as AT&T Broadband, LLC) to facilitate the delivery of local telephone services. Telephone services recently have been deployed in areas within Columbus, and are available to approximately 73,500 households. Under the terms of these agreements, we lease for a fee certain capacity on our network to Comcast Cable. We also provide certain services and support for which we receive additional payments. The capital required to deploy telephone over our networks is shared, with Comcast Cable responsible for switching and transport facilities.
Insight Business Strategy
Our manager's strategy is to become a competitive, full-service provider of entertainment, information and communications services. This strategy is centered on the deployment of new and enhanced products and services for the communities served by our networks and consists of the following elements:
o Focus on operating large, tightly-grouped clusters of cable systems with attractive technical and demographic profiles;
o Expeditiously upgrade our network;
o Introduce new and enhanced products and services, including interactive Insight Digital service, high-speed data service and telephone service;
o Leverage strong local presence to enhance customer and community relations; and
o Pursue value-enhancing transactions in nearby or adjacent geographies.
Our manager's marketing strategy is to offer our customers an array of entertainment, information and communications services on a bundled basis. By bundling our products and services, we provide our customers with an increased choice of services in value-added packages, which we believe results in higher customer satisfaction, increased use of our services and greater customer retention. Our manager began deploying new and enhanced products and services, such as interactive digital video and high-speed data access, during 1999, and we have launched a telephone service alternative to SBC (Ameritech) through our arrangement with Comcast Cable.
The System is an integral part of Insight's long-term business strategy. The System has a strong market presence in a state capital and academic center with a diverse, growing economy. All of the System's customers are served from a single headend allowing for efficient capital deployment for new services. Moreover, Insight Ohio estimates that it serves approximately 91% of the subscribers in the System with upgraded network. Insight Ohio began launching the interactive Insight Digital service on a node-by-node basis in November 1999, including a video-on-demand and interactive informational service and launched its high-speed Internet service during the second quarter of 2000. Nodes are the point of interface between our headend and our network.
System Operating Strategy
The System fits the profile of cable television systems that Insight seeks to own and operate. The System is large enough to have a significant market presence and all customers are serviced from one headend. In addition, Columbus is geographically proximate to other Insight cable systems with a customer universe having the type of demographic profile that Insight believes will widely accept new telecommunications offerings. Insight Ohio intends to aggressively implement Insight's upgrade strategy in Columbus.
Insight has substantially completed rebuilding the System to 870 MHz, and began servicing customers from the rebuilt network in November 1999. Insight Ohio has launched its signature interactive Insight Digital service with exclusive interactive programming including Local Source, an Internet-styled information service, and a video-on-demand service by SeaChange International. As of December 31, 2002, the System passed 81,700 homes with its digital service and served approximately 29,400 customers with such service, representing a penetration level of almost 36%. Management expects to increase revenues as the System upgrade is completed by increasing the deployment of its digital cable, high-speed modem and telephone services. Insight Ohio has an agreement with Road Runner to deploy the Road Runner service over cable modems. As of December 31, 2002, approximately 18,600 customers subscribed to the Road Runner service.
In addition, the System provides exclusive sports programming under the "Sport TV!" brand, featuring sporting events from Ohio State University.
Overbuild
In 1996, Ameritech obtained a citywide cable television franchise for the City of Columbus and suburban communities in Franklin County. WideOpenWest acquired the assets of Ameritech in December 2001, and has built its citywide franchise, both in our service area and in the Time Warner service area on the west side of Columbus. Insight Ohio and Time Warner service virtually distinct areas and therefore do not compete with one another. As of December 31, 2002, the areas of the System served by both Insight
Ohio and WideOpenWest passed approximately 129,100 homes, representing 65% of the System's total homes passed.
When the System was acquired by Insight Ohio in August 1999, it implemented a strategy to end deep discounting as a defense against Ameritech. Management believed that a relatively small customer loss, caused by discontinuing discounts, would be preferable in exchange for achieving an increase in the average monthly revenue per customer. As a result of this strategy, from June 30, 1998 to December 31, 2002, the average monthly revenue per customer increased from $43.30 to $62.44 while the number of customers decreased from 91,100 to 88,100.
Technological Developments
Management believes that in order to achieve consistently high levels of customer service, reduce operating costs, maintain a strong competitive position and deploy important new technologies, we will need to install and maintain a state-of-the-art technical platform. As of December 31, 2002, the System was comprised of 2,600 miles of plant passing approximately 198,700 homes resulting in a density of 76.4 homes per mile. Approximately 91% of the customers are served by a network upgraded to 870 MHz, which enables delivery of an advanced suite of entertainment, information and communications services, including our interactive digital video, high-speed data access and telephone services.
Insight Ohio's upgrade efforts are continuing. The deployment of fiber optic cable, which has a capacity for a very large number of channels, an increase in the bandwidth to 870 MHz, activation of a two-way communications network and the installation of digital equipment will allow us to deliver new and enhanced products and services.
All of the System's basic customers currently have access to addressable technology and approximately 80% have addressable converters in their homes as of December 31, 2002. Addressable technology enables the System to electronically control the cable television services being delivered to the customer's home. As a result, the System can electronically upgrade or downgrade services to a customer immediately, from its customer service center, without the delay or expense associated with dispatching a technician to the customer's home. Addressable technology also reduces premium service theft, is an effective enforcement tool in the collection of delinquent payments and enables the System to offer pay-per-view services, including movies and special events.
Management believes that active use of fiber optic technology as a supplement to coaxial cable plays a major role in expanding channel capacity and improving the performance of the System. Fiber optic strands are capable of carrying hundreds of video, data and voice channels over extended distances without the extensive signal amplification typically required for coaxial cable. The System will continue to deploy fiber optic cable to further reduce amplifier cascades while improving picture quality and system reliability.
High-speed cable modems and set-top boxes using digital compression technology have become commercially viable. These developments allow for the introduction of high-speed data services and Internet access and will increase the programming services available to customers. Digital compression technology provides for a significant expansion of channel capacity with up to 12 digital channels to be carried in the bandwidth of one analog channel. The upgrade of the System has given the System the ability to package a "Digital Gateway" brand. For $7.95 customers receive the following services:
o A digital set-top box; o An interactive navigational program guide for all analog and digital channels; o A local, interactive Internet-style information and entertainment service; o A multi-channel premium service for customers who separately subscribe to premium channels, such as HBO and Showtime; o Video-on-demand; o Mag Rack, a video magazine service with full video-on-demand functionality; and o A digital 40-channel audio music service.
Insight Ohio began launching the Insight Digital service in the System on a node-by-node basis in November 1999, including its video-on-demand service and the Local Source interactive information service, and as of December 31, 2002 served approximately 29,400 subscribers with its digital service. Insight Ohio launched the Road Runner high-speed Internet service during the second quarter of 2000 and served approximately 18,600 customers with this service as of December 31, 2002.
Marketing, Programming and Rates
Marketing
The System's marketing programs and campaigns are based upon offering a variety of cable services creatively packaged and tailored to appeal to its different markets and to segments within its markets. The System surveys its customer base to ensure that it is meeting the demands of its customers and stays abreast of its competition in order to effectively counter competitors' promotional campaigns. The System uses a coordinated array of marketing tactics to attract and retain customers and to increase premium service penetration, including door-to-door and direct mail solicitation, telemarketing, media advertising, local promotional events typically sponsored by programming services and cross-channel promotion of new services. The rebuild of the plant allows Insight Ohio to deploy its suite of services including interactive digital, high-speed data and telephone services. In November 1999, Insight Ohio began to launch its interactive digital, video-on-demand and Local Source informational product on a node-by-node basis. Insight Ohio has also deployed its Road Runner high-speed Internet service. Using a skilled team of marketing professionals, the System has competed by supporting an innovative variety of marketing activities.
Programming
Insight has various contracts to obtain basic and premium programming for the System from program suppliers whose compensation is typically based on a fixed fee per customer. Because of our manager's relationship with Comcast Cable (formerly known as AT&T Broadband), we have the right to purchase certain programming services for our systems through Comcast Cable's programming supplier Satellite Services, Inc. We believe that Satellite Services has attractive programming costs. In addition, some program suppliers provide volume discount pricing structures or offer marketing and launch support to the System. The System's successful marketing of multiple premium service packages emphasizing customer value enables the System to take advantage of such cost incentives. The System's overall programming costs are expected to increase in the future due to additional programming being provided to its customers, inflationary increases and other factors affecting the cable television industry. The System also has various retransmission consent arrangements with commercial broadcast stations which generally have been renewed through 2003. None of these consents require payment of fees for carriage.
The System offers a "basic service tier," consisting primarily of local television channels (network and independent stations) available over-the-air, and local public, governmental and educational access channels. The System also offers, for a monthly fee, an expanded basic tier of various satellite-delivered, non-broadcast channels (such as CNN, ESPN, MTV, TNT, and USA). In addition to these services, the
System provides premium services such as HBO, Cinemax, Showtime, The Movie Channel and Starz!, which have unique appeal to various segments of the viewing audience. These services are satellite-delivered channels consisting principally of feature films, original programming, live sports events, concerts and other special entertainment features, usually presented without commercial interruption. Such premium programming services are offered by the System both on a per-channel basis and as part of premium service packages designed to enhance customer value and to enable the System to take advantage of programming agreements offering cost incentives based on premium service unit growth. Customers may subscribe to one or more premium service units. A "premium service unit" is a single premium service for which a customer must pay an additional monthly fee in order to receive the service.
Management is upgrading the System to digital using fiber optic technology, which has allowed the System to expand the number of multiplexed premium screens (additional channels such as Showtime Women and HBO Family) providing greater value for the customer. Moreover, the upgrade has given the System the ability to offer its Insight Digital service including interactive television and multiple packaging options through the addition of niche programming services. Management believes that these additional features and options will increase basic and premium penetration as well as revenue per basic customer. The System also provides video-on-demand, a digital service consisting principally of feature films, adult movies, concerts and other special events, presented without commercial interruption. Such services are offered by the System on a "per viewing" basis, with customers only paying for programs which they select for viewing. Mag Rock is an added-value digital service offering a library of video magazines - from cooking to classic cars to yoga - offered on a "per view" basis at no additional charge.
Rates
Monthly customer rates for services vary from market to market, primarily according to the amount of programming provided. As of December 31, 2002, the System's stated monthly basic service rate for residential customers was $11.95, the System's monthly expanded basic service rates for residential customers was $20.45, and per-channel premium service rates (not including special promotions) ranged from $6.95 to $13.95 per service.
A one-time installation fee, which the System may wholly or partially waive during a promotional period, is charged to new customers. The System charges monthly fees for converters and remote control devices. The System also charges administrative fees for delinquent payments for service. Customers are free to discontinue service at any time without additional charge and may be charged a reconnection fee to resume service. Commercial customers, such as hotels, motels and hospitals, are charged negotiated monthly fees and a non-recurring fee for the installation of service. These multiple dwelling unit ("MDU") accounts may be offered a bulk rate in exchange for single-point billing and basic service to all units.
On February 11, 1997, a Petition for Determination of Effective Competition filed by the prior owner of the System challenging the certification of the City of Columbus was granted by the FCC. This petition effectively revoked the City of Columbus' right to regulate the System's basic cable and equipment rates.
Employees
As of December 31, 2002, the System employed 216 full-time equivalent employees, none of whom is represented by a union or covered by a collective bargaining obligation. Management believes that its relations with its employees are good. Approximately 51% of the full-time employees have tenure of five years or longer. Management believes that it will continue to be successful in attracting and retaining highly qualified employees and maintaining good working relationships with its current employees.
Customer Service and Community Relations
The System is dedicated to quality customer service. Plans to make significant system improvements are designed in part to strengthen customer service through greater system reliability and the introduction of new services. Management seeks a high level of customer satisfaction by also employing a well-trained staff of customer service representatives and experienced field technicians.
The System is dedicated to fostering strong community relations in the communities served by the System. The System supports local charities and community causes through staged events and promotional campaigns, including Children's Hospital Miracle Network Telethon, the Penny-A-Day for Children Program and Red Cross Blood Drive donations. The System also installs and provides free cable television service and Internet access to all eligible local schools, as well as free cable television service for government buildings in its franchise areas. The System has teamed up with its neighboring cable operator Time Warner to develop a local sports and entertainment channel called "Sport TV!" which features a broad range of local programming - including high school sports, Major League Soccer, with the Columbus Crew, Ohio State University sports, Columbus Clippers baseball, and Smooth Jazz Concert series - on an exclusive basis to cable customers. Management believes that its relations with the communities in which the System operates are generally excellent.
Franchises
Cable television systems are generally constructed and operated under fixed-term non-exclusive franchises or other types of operating authorities that are granted by local governmental authorities. These franchises typically contain many conditions, such as:
o time limitations on commencement and completion of construction;
o conditions of service, including number of channels, types of programming and the provision of free service to schools and certain other public institutions;
o the maintenance of insurance and indemnity bonds; and
o the payment of fees to communities.
The provisions of local franchises are subject to federal regulation under the Communications Act of 1934, as amended (the "Communications Act").
The System provides cable television service to residents of 42 governmental jurisdictions. Within each of these governmental jurisdictions, the System operates under authority granted by the local
community or the State of Ohio. Actual franchise agreements are maintained with 28 jurisdictions that possess the legal basis to grant such franchises consistent with federal and state law. These franchises, which are non-exclusive, provide for the payment of fees to the issuing authority. In the System, such franchise fees are passed through directly to the customers. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and the Cable Communications Policy Act of 1984 (the "1984 Cable Act" and, together with the 1992 Cable Act, the "Cable Acts") prohibit franchising authorities from imposing franchise fees in excess of 5% of gross revenue and also permit the cable television system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances.
The majority of the System's basic customers are in governmental jurisdictions that require a franchise. The table below groups all of the System's governmental jurisdictions by year of expiration of the System's franchises and presents the approximate number and percentage of basic customers for each group as of December 31, 2002.
Percentage of Number of Percentage of Total Basic Year of Franchise Expiration Franchises Total Franchises Customers - ---------------------------- ----------- ---------------- -------------
Expired* ......................... 3 10.7% 1.1%
2003 and 2004 .................... 4 14.3% 3.2%
2005 and beyond .................. 21 75.0% 93.7%
Total ...................... 28 100.0% 98.0%
- ---------------- * Such franchises are operated on a month-to-month basis and are in the process of being renewed.
The Cable Acts provide, among other things, for an orderly franchise renewal process in which franchise renewal will not be unreasonably withheld or, if renewal is denied and the franchising authority acquires ownership of the system or effects a transfer of the system to another person, the operator generally is entitled to the "fair market value" for the system covered by such franchise. In addition, the Cable Acts established comprehensive renewal procedures which require, when properly elected by an operator, 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 the System generally has good relationships with its franchising communities. The System has never had a franchise revoked or failed to have a franchise renewed. In addition, all of the franchises of the System eligible for renewal have been renewed or extended at or prior to their stated expirations, and no franchise community has refused to consent to a franchise transfer to the System.
Competition
Cable systems face increasing competition from alternative methods of receiving and distributing their core video business. Both wireline and wireless competitors have made inroads in competing against incumbent cable operators. The extent to which a cable operator is competitive depends, in part, upon its ability to provide to customers, at a reasonable price, a greater variety of programming and other
communications services than are available off-air or through alternative delivery sources and upon superior technical performance and customer service.
Congress has enacted legislation and the FCC has adopted regulatory policies providing a more favorable operating environment for new and existing technologies, in particular direct broadcast satellite television systems operators, that have the potential to provide increased competition to cable systems. Congress has also enacted legislation which permits direct broadcast satellite companies to retransmit local television signals, eliminating one of the objections of consumers about switching to satellites.
The 1996 Telecom Act makes it easier for local exchange telephone companies and others to provide a wide variety of video services competitive with services provided by cable systems. Local exchange telephone companies and other companies also provide facilities for the transmission and distribution to homes and businesses of interactive computer-based services, including the Internet, as well as data and other non-video services. The ability of local exchange telephone companies to cross-subsidize video, data and telecommunication services also poses some threat to cable operators.
Cable television systems are operated under non-exclusive franchises granted by local authorities thereby allowing more than one cable system to be built in the same area. Although the number of municipal and commercial overbuild cable systems is small, the potential profitability of a cable system is adversely affected if the local customer base is divided among multiple systems. Additionally, constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor's overbuild would need to be able to serve the homes in the overbuilt area on a more cost-effective basis than we can. Any such overbuild operation would require either significant access to capital or access to facilities already in place that are capable of delivering cable television programming. The major source of competition for the System is the wireline overbuild by WideOpenWest. WideOpenWest has overbuilt approximately 129,100 homes passed in the System's service area, or approximately 65% of the total homes in the service territory as of December 31, 2002.
Franchised cable systems compete with private cable systems for the right to service condominiums, apartment complexes and other multiple unit residential developments. The operators of these private systems, known as satellite master antenna television systems often enter into exclusive agreements with apartment building owners or homeowners' associations that preclude franchised cable television operators from serving residents of such private complexes. However, the 1984 Cable Act gives franchised cable operators the right to use existing compatible easements within their franchise areas on nondiscriminatory terms and conditions. Accordingly, where there are preexisting compatible easements, cable operators may not be unfairly denied access or discriminated against with respect to access to the premises served by those easements. Conflicting judicial decisions have been issued interpreting the scope of the access right granted by the 1984 Cable Act, particularly with respect to easements located entirely on private property.
The 1996 Telecom Act may exempt some of our competitors from regulation as cable systems. The 1996 Telecom Act amends the definition of a "cable system" such that providers of competitive video programming are only regulated and franchised as "cable systems" if they use public rights-of-way. Thus, a broader class of entities providing video programming, including operators of satellite master antenna television systems, may be exempt from regulation as cable television systems under the 1996 Telecom Act. This exemption may give these entities a competitive advantage over us. As of December 31, 2002, the System passed approximately 527 multiple dwelling unit ("MDU") complexes within its service territory and had entry agreements, either exclusive or non-exclusive, with complexes totaling
approximately 71,777 MDUs. As of December 31, 2002, the System provided programming to approximately 31,983 of these MDUs, or approximately 45% of the total MDUs passed.
Direct broadcast satellite television systems use digital video compression technology to increase the channel capacity of their systems. Direct broadcast satellite television systems' programming is currently available to individual households, condominiums and apartment and office complexes through conventional, medium and high-power satellites. High-power direct broadcast satellite television system service is currently being provided by DIRECTV, Inc., and EchoStar Communications Corporation. Direct broadcast satellite television systems have some advantages over cable systems that were not upgraded, such as greater channel capacity and digital picture quality. In addition, legislation has been enacted which permits direct broadcast satellite television systems to retransmit the signals of local television stations in their local markets. However, direct broadcast satellite television systems have a limited ability to offer locally produced programming, and do not have a significant local presence in the community. In addition, direct broadcast satellite television systems packages can be more expensive than cable, especially if the subscriber intends to view the service on more than one television in the household. Finally, direct broadcast satellite television systems do not have the same full two-way capability, which we believe will limit their ability to compete in a meaningful way in interactive television, high-speed data and voice communications. Management estimates that there were approximately 12,300 direct broadcast satellite customers in the System's service areas as of December 31, 2002.
Several telephone companies are introducing digital subscriber line technology ("DSL"), which allows Internet access over traditional phone lines at data transmission speeds greater than those available by a standard telephone modem. Although these transmission speeds are not as great as the transmission speeds of a cable modem, we believe that the transmission speeds of DSL technology are sufficiently high that such technology will compete with cable modem technology. The FCC is currently considering its authority to promulgate rules to facilitate the deployment of these services and regulate areas including high-speed data and interactive Internet services. We cannot predict the outcome of any FCC proceedings, or the impact of that outcome on the success of our Internet access services or on our operations. In addition to DSL and dialup modems for providing Internet access, other technologies are entering the marketplace. For example, there is a wireless technology popularly known as "Wi-Fi," which is faster than dial-up, but slower than cable modem technology.
As we expand our offerings to include telephone services, our telephone services will be subject to competition from existing providers, including both local exchange telephone companies and long-distance carriers. The telecommunications industry is highly competitive and many telephone service providers may have greater financial resources than we have, or have established relationships with regulatory authorities. We cannot predict the extent to which the presence of these competitors will influence customer penetration in our telephone service areas. While our manager intends to add our telephone service offering to its various markets, the service has only been launched in selected markets and has not yet achieved any material penetration levels.
Other new technologies may become competitive with services that cable communications systems can offer. Advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. Thus, we cannot predict the effect of ongoing or future developments on the cable communications industry or on our operations.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state governments and the applicable local governments. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect us. The following is a summary of federal laws and regulations materially affecting the growth and operation of the cable television industry and a description of certain state and local laws. We believe that the regulation of the cable television industry remains a matter of interest to Congress, the FCC and other regulatory authorities. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on us.
Federal Legislation
The principal federal statute governing the cable television industry is the Communications Act. As it affects the cable television industry, the Communications Act has been significantly amended on three occasions, by the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom Act altered the regulatory structure governing the nation's telecommunications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduced the scope of cable rate regulation.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction over cable television, has adopted regulations covering such areas as cross-ownership between cable television systems and other communications businesses, carriage of television broadcast programming, cable rates, consumer protection and customer service, leased access, indecent programming, programmer access to cable television systems, programming agreements, technical standards, consumer electronics equipment compatibility, ownership of home wiring, program exclusivity, equal employment opportunity, consumer education and lockbox enforcement, origination cablecasting and sponsorship identification, children's programming, signal leakage and frequency use, maintenance of various records, and antenna structure notification, marking and lighting. The FCC has the authority to enforce these regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. A brief summary of certain of these federal regulations as adopted to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation for premium channels and optional non-basic program tiers. The 1984 Cable Act also deregulated basic cable rates for cable television systems determined by the FCC to be subject to effective competition. The 1992 Cable Act substantially changed the previous statutory and FCC rate regulation standards. The 1992 Cable Act replaced the FCC's old standard for determining effective competition, under which most cable television systems were not subject to rate regulation, with a statutory provision that resulted in nearly all cable television systems becoming subject to rate regulation of basic service. The 1996 Telecom Act expanded the definition of effective competition to cover situations where a local telephone company or its affiliate, or any multichannel video provider using telephone company facilities, offers comparable video service by any means except direct broadcast satellite television systems. Satisfaction of this test deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable Act required the FCC to adopt a formula for franchising authorities to assure that basic cable rates are reasonable; allowed the FCC to review rates for cable programming service tiers, other than per-channel or per-program services, in response to complaints filed by franchising authorities and/or cable customers; prohibited cable television systems from requiring basic customers to purchase service tiers above basic service in order to purchase premium services if the system is technically capable of compliance; required the FCC to adopt regulations to establish, on the basis of actual costs, the price for installation of cable service, remote controls, converter boxes and additional outlets; and allowed the FCC to impose restrictions on the retiering and rearrangement of cable services under certain limited circumstances. The 1996 Telecom Act limited the class of complainants regarding cable programming service tier rates to franchising authorities only, and ended FCC regulation of cable programming service tier rates on March 31, 1999. The 1996 Telecom Act also relaxes existing uniform rate requirements by specifying that such requirements do not apply where the operator faces effective competition, and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation of basic service rates. Local franchising authorities are empowered to order a reduction of existing rates which exceed the maximum permitted level for basic services and associated equipment, and refunds can be required. The FCC adopted a benchmark price cap system for measuring the reasonableness of existing basic service rates. Alternatively, cable operators have the opportunity to make cost-of-service showings which, in some cases, may justify rates above the applicable benchmarks. The rules also require that charges for cable-related equipment, converter boxes and remote control devices, for example, and installation services be unbundled from the provision of cable service and based upon actual costs plus a reasonable profit. The regulations also provide that future rate increases may not exceed an inflation-indexed amount, plus increases in certain costs beyond the cable operator's control, such as taxes, franchise fees and increased programming costs. Cost-based adjustments to these capped rates can also be made in the event a cable television operator adds or deletes channels. There is also a streamlined cost-of-service methodology available to justify a rate increase on the basic tier for "significant" system upgrades.
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.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow commercial television broadcast stations that are "local" to a cable television system, that is to say that the system is located in the station's designated market area, 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 most recent election between must-carry and retransmission consent was October 1, 2002. A cable television system is generally required to devote up to one-third of its activated channel capacity for the carriage of local commercial television stations whether pursuant to mandatory carriage requirements or the retransmission consent requirements of the 1992 Cable Act. Local non-commercial television stations are also given mandatory carriage rights, subject to certain exceptions, within the larger of: (i) a 50 mile radius from the station's city of license; or (ii) the station's Grade B contour, a measure of signal strength. Unlike commercial stations, noncommercial stations are not given the option to negotiate retransmission consent for the carriage of their signal. In
addition, cable television systems have to obtain retransmission consent for the carriage of all "distant" commercial broadcast stations, except for certain "superstations," which are commercial satellite-delivered independent stations such as WGN. To date, compliance with the "retransmission consent" and "must carry" provisions of the 1992 Cable Act has not had a material effect on us, although this result may change in the future depending on such factors as market conditions, channel capacity and similar matters when such arrangements are renegotiated. The FCC has issued a decision in a rulemaking proceeding dealing with the carriage of television signals in a digital format, both high definition and standard digital. The rules require carriage of local television broadcast stations that transmits in both analog and digital format during the current several-year transition period is entitled to carriage for only its analog signal. The FCC has been asked to reconsider this decision. The FCC is also considering whether the mandatory carriage obligation should extend beyond the primary video signal to multiple services transmitted by a station over its digital channel. The outcome of these proceedings could have a material effect on the number of services that a cable operator will be required to carry.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the appropriate request of a local television station, delete the simultaneous or nonsimultaneous network programming of a distant station when such programming has also been contracted for by the local station on an exclusive basis. FCC regulations also enable television stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable television system to delete or "black out" such programming from other television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984 Cable Act, such payments cannot exceed 5% of a cable television system's annual gross revenues from the provision of cable services. 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. The FCC has ruled that franchise fees may not be imposed on revenue from cable modem services. Franchising authorities are also empowered, in awarding new franchises or renewing existing franchises, to require cable television operators to provide cable-related facilities and equipment and to enforce compliance with voluntary commitments. In the case of franchises in effect prior to the effective date of the 1984 Cable Act, franchising authorities may enforce requirements contained in the franchise relating to facilities, equipment and services, whether or not cable-related. The 1984 Cable Act, under certain limited circumstances, permits a cable operator to obtain modifications of franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal and to provide specific grounds for franchising authorities to consider in making renewal decisions, including a franchisee's performance under the franchise and community needs. Even after the formal renewal procedures are invoked, franchising authorities and cable television operators remain free to negotiate a renewal outside the formal process. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account
the cost of meeting such requirements. Similarly, if a franchising authority's consent is required for the purchase or sale of a cable television system or franchises, such authority may attempt to impose burdensome or onerous franchise requirements in connection with a request for such consent. Historically, franchises have been renewed for cable television operators that have provided satisfactory services and have complied with the terms of their franchises. At this time, we are not aware of any current or past material failure on our part to comply with our franchise agreements. We believe that we have generally complied with the terms of our franchises and have provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a cable television operator seeks to enforce its renewal rights which could make it easier in some cases for a franchising authority to deny renewal. Franchising authorities may consider the "level" of programming service provided by a cable television operator in deciding whether to renew. For alleged franchise violations occurring after December 29, 1984, franchising authorities are no longer precluded from denying renewal based on failure to substantially comply with the material terms of the franchise where the franchising authority has "effectively acquiesced" to such past violations. Rather, the franchising authority is estopped if, after giving the cable television operator notice and opportunity to cure, it fails to respond to a written notice from the cable television operator of its failure or inability to cure. Courts may not reverse a denial of renewal based on procedural violations found to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable television operators to set aside certain television channels for public, educational and governmental access programming. The 1984 Cable Act further requires cable television systems with thirty-six or more activated channels to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties to provide programming that may compete with services offered by the cable television operator. The 1992 Cable Act requires leased access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local exchange carriers providing video programming directly to customers within their local exchange telephone service areas. Consequently, the 1996 Telecom Act permits telephone companies to compete directly with operations of cable television systems. Under the 1996 Telecom Act and FCC rules adopted to implement the 1996 Telecom Act, local exchange carriers may provide video service as broadcasters, common carriers, or cable operators. In addition, local exchange carriers and others may also provide video service through "open video systems," a regulatory regime that may give them more flexibility than traditional cable television systems. Open video system operators (including local exchange carriers) can, however, be required to obtain a local cable franchise, and they can be required to make payments to local governmental bodies in lieu of cable franchise fees. In general, open video system operators must make their systems available to programming providers on rates, terms and conditions that are reasonable and nondiscriminatory. Where carriage demand by programming providers exceeds the channel capacity of an open video system, two-thirds of the channels must be made available to programmers unaffiliated with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers from purchasing a greater than 10% ownership interest in a cable television system located within the local exchange carrier's telephone service area, prohibits cable operators from purchasing local exchange carriers whose service areas are located within the cable operator's franchise area, and prohibits joint ventures between operators of cable
television systems and local exchange carriers operating in overlapping markets. There are some statutory exceptions, including a rural exemption that permits buyouts in which the purchased cable television system or local exchange carrier serves a non-urban area with fewer than 35,000 inhabitants, and exemptions for the purchase of small cable television systems located in non-urban areas. Also, the FCC may grant waivers of the buyout provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership restrictions and regulations of cable television systems. The 1996 Telecom Act repealed the 1992 Cable Act's three-year holding requirement pertaining to sales of cable television systems. The statutory broadcast/cable cross-ownership restrictions imposed under the 1984 Cable Act were eliminated in 1996, although the parallel FCC regulations prohibiting broadcast/cable common-ownership remained in effect. The U.S. Court of Appeals for the District of Columbia circuit struck down these rules. The FCC's rules also generally prohibit cable operators from offering satellite master antenna service separate from their franchised systems in the same franchise area, unless the cable operator is subject to "effective competition" there.
The 1996 Telecom Act amended the definition of a "cable system" under the Communications Act so that competitive providers of video services will be regulated and franchised as "cable systems" only if they use public rights-of-way. Thus, a broader class of entities providing video programming may be exempt from regulation as cable television systems under the Communications Act.
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 and requires such programmers to sell their programming to other multichannel video distributors. This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable companies. The prohibition on certain types of exclusive programming arrangements was set to expire on October 5, 2002, but the FCC has determined that a five-year extension of the prohibition is necessary to preserve and protect competition in video programming distribution.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in which cable television operators can collect and disclose data about individual system customers. The statute also requires that the system operator periodically provide all customers with written information about its policies regarding the collection and handling of data about customers, their privacy rights under federal law and their enforcement rights. In the event that a cable television operator was found to have violated the customer privacy provisions of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and other costs. Under the 1992 Cable Act, the privacy requirements were strengthened to require that cable television operators take such actions as are necessary to prevent unauthorized access to personally
identifiable information. Certain of these requirements were modified by the Electronic Communications Privacy Act of 2001.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise transfer request submitted after December 4, 1992 within 120 days after receipt of all information required by FCC regulations and by the franchising authority. Approval is deemed to be granted if the franchising authority fails to act within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of channels which carry downstream National Television System Committee video programming. The FCC also has adopted additional standards applicable to cable television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz bands in order to prevent harmful interference with aeronautical navigation and safety radio services and has also established limits on cable television system signal leakage. Periodic testing by cable television operators for compliance with the technical standards and signal leakage limits is required and an annual filing of the results of these measurements is required. The 1992 Cable Act requires the FCC to periodically update its technical standards to take into account changes in technology. Under the 1996 Telecom Act, local franchising authorities may not prohibit, condition or restrict a cable television system's use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992 Cable Act designed to improve the compatibility of cable television systems and consumer electronics equipment. These regulations, among other things, generally prohibit cable television operators from scrambling their basic service tier. The 1996 Telecom Act directs the FCC to set only minimal standards to assure compatibility between television sets, VCRs and cable television systems, and otherwise to rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure the competitive availability to consumers of customer premises equipment, such as converters, used to access the services offered by cable television systems and other multichannel video programming distributors. Pursuant to those rules, consumers are given the right to attach compatible equipment to the facilities of their multichannel video programming distributors so long as the equipment does not harm the network, does not interfere with the services purchased by other customers and is not used to receive unauthorized services. As of July 1, 2000, multichannel video programming distributors, other than operators of direct broadcast satellite television systems, were required to separate security from non-security functions in the customer premises equipment which they sell or lease to their customers and offer their customers the option of using component security modules obtained from the multichannel video programming distributors with set-top units purchased or leased from retail outlets. As of January 1, 2005, multichannel video programming distributors will be prohibited from distributing new set-top equipment integrating both security and non-security functions to their customers.
Inside Wiring; Customer Access
FCC rules require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building
owner a higher fee, where such a fee is permissible. The FCC has also issued an order preempting state, local and private restrictions on over- the-air reception antennas placed on rental properties in areas where a tenant has exclusive use of the property, such as balconies or patios. However, tenants may not install such antennas on the common areas of multiple dwelling units, such as on roofs. This order limits the extent to which multiple dwelling unit owners may enforce certain aspects of multiple dwelling unit agreements which otherwise would prohibit, for example, placement of direct broadcast satellite television systems television receiving antennae in multiple dwelling unit areas, such as apartment balconies or patios, under the exclusive occupancy of a renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain public utilities for use of their poles unless state public service commissions are able to demonstrate that they adequately regulate the rates, terms and conditions of cable television pole attachments. A number of states and the District of Columbia have certified to the FCC that they adequately regulate the rates, terms and conditions for pole attachments. Illinois, Ohio and Kentucky, states in which we operate, have made such a certification. In the absence of state regulation, the FCC administers such pole attachment and conduit use rates through use of a formula which it has devised. Pursuant to the 1996 Telecom Act, the FCC has adopted a new rate formula for any attaching party, including cable television systems, which offers telecommunications services. This new formula will result in higher attachment rates than at present, but they will apply only to cable television systems which elect to offer telecommunications services. Any increases pursuant to this new formula began in 2001, and will be phased in by equal increments over the five ensuing years. The FCC ruled that the provision of Internet services will not, in and of itself, trigger use of the new formula. The United States Supreme Court affirmed this decision and also held that the FCC's authority to regulate rates for attachments to utility poles extended to attachments by cable operators and telecommunications carriers that are used to provide Internet service or for wireless telecommunications service. This development benefits our business and will place a constraint on the prices that utilities can charge with regard to the cable facilities over which we also provide Internet access service. However, the FCC has also initiated a proceeding to determine whether it should adjust certain elements of the current rate formula. If adopted, these adjustments could increase rates for pole attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters regarding a cable television system's carriage of local sports programming; restrictions on origination and cablecasting by cable television operators; rules governing political broadcasts; equal employment opportunity; deletion of syndicated programming; registration procedure and reporting requirements; customer service; closed captioning; obscenity and indecency; program access and exclusivity arrangements; and limitations on advertising contained in nonbroadcast children's programming.
The FCC has recently issued a Notice of Inquiry covering a wide range of issues relating to Interactive Television ("ITV"). Examples of ITV services are interactive electronic program guides and access to a graphic interface that provides supplementary information related to the video display. In the near term, cable systems are likely to be the platform of choice for the distribution of ITV services. The FCC has posed a series of questions including the definition of ITV, the potential for discrimination by cable systems in favor of affiliated ITV providers, enforcement mechanisms, and the proper regulatory classification of ITV service.
Copyright
Cable television systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable television operators obtain a statutory license to retransmit broadcast signals. The amount of this royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried, and the location of the cable television system with respect to over-the-air television stations. Any future adjustment to the copyright royalty rates will be done through an arbitration process to be supervised by the U.S. Copyright Office. Cable television operators are liable for interest on underpaid and unpaid royalty fees, but are not entitled to collect interest on refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several years that would eliminate or modify the cable television compulsory license. Without the compulsory license, cable television operators would have to negotiate rights from the copyright owners for all of the programming on the broadcast stations carried by cable television systems. Such negotiated agreements would likely increase the cost to cable television operators of carrying broadcast signals. The 1992 Cable Act's retransmission consent provisions expressly provide that retransmission consent agreements between television broadcast stations and cable television operators do not obviate the need for cable operators to obtain a copyright license for the programming carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television systems by pay cable networks, such as HBO, and basic cable networks, such as USA Network, is licensed by the networks through private agreements with the American Society of Composers and Publishers, generally known as ASCAP, and BMI, Inc., the two major performing rights organizations in the United States. Both the American Society of Composers and Publishers and BMI offer "through to the viewer" licenses to the cable networks which cover the retransmission of the cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems themselves, including on local origination channels, in advertisements inserted locally on cable television networks, and in cross-promotional announcements, must be obtained by the cable television operator from the American Society of Composers and Publishers, BMI and/or SESAC, Inc.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction, and even from city to city within the same state, historically ranging from reasonable to highly restrictive or burdensome. Franchises generally contain provisions governing fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and number and types of cable television services provided. The terms and conditions of each franchise and the laws and regulations under which it was granted directly affect the profitability of the cable television system. The 1984 Cable Act places certain limitations on a franchising authority's ability to control the operation of a cable television system. The 1992 Cable Act prohibits exclusive franchises, and allows franchising authorities to exercise greater control over the operation of franchised cable television systems, especially in the area of customer service and rate regulation. The
1992 Cable Act also allows franchising authorities to operate their own multichannel video distribution system without having to obtain a franchise and permits states or local franchising authorities to adopt certain restrictions on the ownership of cable television systems. Moreover, franchising authorities are immunized from monetary damage awards arising from regulation of cable television systems or decisions made on franchise grants, renewals, transfers and amendments. The 1996 Telecom Act prohibits a franchising authority from either requiring or limiting a cable television operator's provision of telecommunications services.
Various proposals have been introduced at the state and local levels with regard to the regulation of cable television systems, and a number of states have adopted legislation subjecting cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. To date, none of the states in which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal, state and local regulations and legislation relating to the cable television industry. Other existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements, currently are the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry or us can be predicted at this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at high speeds via high capacity broadband transmission facilities and cable modems. We compete with many other providers of Internet access services which are known as Internet service providers ("ISPs"). ISPs include such companies as America Online and Mindspring Enterprises as well as major telecommunications providers, including AT&T and local exchange telephone companies. A number of local franchising authorities have attempted to require cable companies offering Internet access service over their broadband facilities to allow access to those facilities on an unbundled basis to other ISPs. To date, all such efforts have been overturned in the courts. However, many ISPs and local franchising authorities have continued to ask the U.S. Congress and the FCC to mandate such access, or at least to allow local authorities to impose such a requirement. Although the FCC has thus far declined to impose such an access requirement on cable companies, the issue remains under consideration. The FCC has recently decided that cable Internet service should be classified for regulatory purposes as an "information service" rather than either a "cable service" or a "telecommunications service." Concurrently, the FCC has initiated a wide-ranging rulemaking proceeding in which it seeks comment on the regulatory ramifications of this classification. Among the issues to be decided are whether the FCC should permit local authorities to impose an access requirement, whether local authorities should be prohibited from imposing fees on cable Internet service revenues, and what regulatory role local authorities should be permitted to play. The outcome of this proceeding could have a material impact on our provision of cable Internet service.
There are currently few laws or regulations which specifically regulate communications or commerce over the Internet. Section 230 of the Communications Act, added to that act by the 1996 Telecom Act, declares it to be the policy of the United States to promote the continued development of the Internet and other interactive computer services and interactive media, and to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by federal or state regulation. One area in which Congress did attempt to regulate content over
the Internet involved the dissemination of obscene or indecent materials. The provisions of the 1996 Telecom Act, generally referred to as the Communications Decency Act, were found to be unconstitutional, in part, by the United States Supreme Court in 1997. In response, Congress passed the Child Online Protection Act. The constitutionality of this act is currently being challenged in the courts. In May 2002, the Supreme Court reversed the finding by the Third Circuit Court of Appeals that the use of "contemporary community standards" to identify material "harmful to minors" was overly broad and therefore violative of the First Amendment. The Supreme Court, however, remanded the matter to the Third Circuit to determine the validity of other challenges to the constitutionality of the Child Online Protection Act and kept the stay prohibiting government enforcement in place until further action by the lower courts. Finally, disclosure of customer communications or records is governed by the Electronic Communications Privacy Act of 2001 and the Cable Act , both of which were amended by the USA Patriot Act.
Local Telecommunications Services
The 1996 Telecom Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality and consumer protection. State and local governments also retain their authority to manage the public rights-of-way and may require fair and reasonable, competitively neutral and non-discriminatory compensation for management of the public rights-of-way when cable operators provide telecommunications service. State and local governments must publicly disclose required compensation from telecommunications providers for use of public rights-of-way.
We have long-term agreements with Comcast Cable (formerly known as AT&T Broadband) that allow Comcast Cable to provide to customers telephone services using our network infrastructure and Comcast Cable's switching and long distance transport facilities. Local telecommunications service is subject to regulation by state utility commissions. Use of local telecommunications facilities to originate and terminate long distance services, a service commonly referred to as "exchange access," is subject to regulation both by the FCC and by state utility commissions. As a provider of local exchange service, Comcast Cable would be subject to the requirements imposed upon local exchange carriers by the 1996 Telecom Act and state law. These include requirements governing just and reasonable rates and practices, service quality, resale, telephone number portability, dialing parity, access to rights-of-way, reciprocal compensation, access for people with disabilities and truth-in-billing. Although we do not provide telecommunications services, and are not currently regulated with regard to Comcast Cable's provision of telecommunications services over our facilities, there is a possibility that we could be subject to increased regulation in the future. Although we cannot predict whether and the extent to which the state may seek to regulate us, increased regulation would likely increase our cost of doing business.
Item 2.
Item 2. Properties
The System's principal physical assets consist of cable television operating plant and equipment, including signal receiving, encoding and decoding devices, headend and distribution systems and customer house drop equipment for its cable television systems. The signal receiving apparatus includes a tower, antenna, ancillary electronic equipment and earth stations for reception of satellite signals. The headend, consisting of associated electronic equipment necessary for the reception, amplification and modulation of signals, is located near the receiving devices. Most basic customers of the System utilize converters that
can be addressed by sending coded signals from the headend facility over the cable network. The System's distribution system consists primarily of coaxial and fiber optic cables and related electronic equipment.
The System owns parcels of real property for signal reception sites (one antenna tower and one headend). The System also leases one small office and one hub location. Management believes that its properties, both owned and leased, are in suitable condition adequate for the System's operations.
The System's cables generally are attached to utility poles under pole rental agreements with local public utilities, although in some areas the distribution cable is buried in underground ducts or trenches. The physical components of the System require periodic upgrading to improve system performance and capacity.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no public trading market for the equity of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio. There are three individual holders of the equity of Coaxial LLC and Coaxial Financing Corp., and the common equity of Insight Ohio is held by Insight Holdings of Ohio, LLC, a wholly-owned subsidiary of Insight Midwest, L.P.
Item 6.
Item 6. Selected Financial Data
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998. As a result of the August 8, 2000 purchase by Insight Ohio of Coaxial's 25% common equity interest in Insight Ohio and certain amendments to Insight Ohio's operating agreement, the operating results of Coaxial LLC include the operating results of Insight Ohio only through August 8, 2000.
The following tables present selected historical financial data for Coaxial LLC and Insight Ohio as of and for the five years ended December 31, 2002 and selected historical financial data for Coaxial Financing Corp. as of and for the four years ended December 31, 2002 and the period from July 24, 1998 (inception) through 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.
Under Insight Ohio's franchise agreements, it is obligated to pay to local franchising authorities a percentage of it's revenue derived from providing cable and other services the majority of which are passed through to customers. Insight Ohio has historically recorded revenue net of franchise fees charged to its customers. Staff Announcement D-103, issued by the FASB in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This Staff Announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this Staff Announcement, comparative financial statements for prior periods are required to be reclassified to comply with the guidance in this Staff Announcement. Consequently, Insight Ohio has reclassified the prior period amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis with reimbursements as revenue and payments as expense. The effect on the prior period statements of operations was to increase both revenue and selling, general and administrative costs by $1.5 million, $1.4 million, $1.3 million and $1.3 million for each of the years ended December 31, 2001, 2000, 1999 and 1998.
Additionally, the consolidated financial statements of Coaxial LLC have been adjusted to reflect such prior period reclassifications. The effect on the prior period statements of operations was to increase both revenue and selling, general and administrative costs by $824,000 for the period from January 1, 2000 through August 8, 2000 and $1.3 million for the years ended 1999 and 1998.
Coaxial LLC (dollars in thousands)
Coaxial Financing Corp. (in thousands)
Insight Communications of Central Ohio, LLC (dollars in thousands)
Notes To Selected Financial and Operating Data
(1) Represents gain on redemption of common equity interests in Insight Ohio.
(2) Operating Cash Flow ("OCF") represents operating income before depreciation and amortization and severance and transaction structure costs. Insight Ohio believes that OCF 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, OCF is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as an indicator of operating performance or cash flows as a measure of liquidity, as determined in accordance with accounting principles generally accepted in the United States. Refer to Insight Ohio's financial statements; including it's statements of cash flows, which appear elsewhere in this report.
(3) Represents OCF as a percentage of revenue.
(4) Homes passed are the number of single residence homes, apartments and condominium units passed by the cable distribution network in a cable system's service area.
(5) Basic customers are customers of a cable television system who receive a package of over-the-air broadcast stations, local access channels and certain satellite-delivered cable television services, other than premium services, and who are usually charged a flat monthly rate for a number of channels.
(6) Basic penetration represents basic customers as a percentage of total number of homes passed.
(7) Premium service units represents the number of subscriptions to premium services, which are paid for on an individual unit basis.
(8) Premium penetration represents premium service units as a percentage of the total number of basic customers. A customer may purchase more than one premium service, each of which is counted as a separate premium service unit. This ratio may be greater than 100% if the average customer subscribes to more than one premium service unit.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and related notes that are included elsewhere in this report.
Offering of Senior Discount Notes and Senior Notes and Acquisition of System by Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a private offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate principal amount at maturity of their 12 7/8% Senior Discount Notes due in 2008 (the "Senior Discount Notes") in connection with a Financing Plan (the "Financing Plan") which included the contribution of Coaxial's cable television system (the "System") to Insight Ohio. On February 16, 1999, Coaxial LLC and Coaxial Financing Corp. consummated an
exchange of registered Senior Discount Notes for their privately issued Senior Discount Notes. Coaxial LLC and Coaxial Financing Corp. have only nominal assets except for Coaxial LLC's ownership of 67.5% of the common stock of Coaxial and notes of Coaxial DJM LLC and Coaxial DSM LLC (the other two owners of Coaxial), which notes are secured by the remaining 32.5% of the common stock of Coaxial. The Senior Discount Notes are guaranteed on a conditional basis by Insight Ohio. The limited liability companies that own Coaxial are referred to herein as the "Individual LLCs".
As part of the Financing Plan, Coaxial and Phoenix Associates, an affiliated general partnership, completed a private offering (the "Senior Notes Offering") of $140,000,000 aggregate principal amount of their 10% Senior Notes due in 2006 (the "Senior Notes"). On February 16, 1999, Coaxial and Phoenix consummated an exchange of registered Senior Notes for their privately issued Senior Notes. The Senior Notes are also guaranteed on a conditional basis by Insight Ohio. The conditional guarantee of the Senior Discount Notes is subordinated to the conditional guarantee of the Senior Notes. Coaxial and Phoenix have only nominal assets. Coaxial holds the Series A Preferred Interest and the Series B Preferred Interest of Insight Ohio (together the "Preferred Interests").
The Preferred Interests have distribution priorities that provide for distributions to Coaxial. The distributions from the Series B Preferred Interest will be used to pay dividends to the Individual LLCs, which dividends will be used to pay interest and principal on the Senior Discount Notes and the distributions from the Series A Preferred Interest are used to pay interest and principal on the Senior Notes. Distributions by Insight Ohio are subject to certain financial covenants and other conditions set forth in its Senior Credit Facility.
Coaxial LLC and Coaxial Financing Corp. do not conduct any business and are dependent upon the cash flow of Insight Ohio to meet their obligations under the Senior Discount Notes. Insight LP serves as the manager of the System.
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity interest in Insight Ohio, resulting in Insight LP owning 100% of the common equity of Insight Ohio. The purchase price was 800,000 shares of common stock of Insight and cash paid by Insight to the principals of the Individual LLCs in the amount of $2.6 million. In connection with the purchase, Insight Ohio's operating agreement was amended to, among other things, remove certain participating rights of the principals of the Individual LLCs, and vest in the common equity interests of Insight Ohio 70% of its total voting power and in the preferred equity interests 30% of its total voting power. As a result of this purchase Coaxial LLC no longer consolidates the results of Insight Ohio subsequent to August 8, 2000.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50 partnership between Insight LP and an indirect subsidiary of AT&T Broadband (now known as "Comcast Cable"), entered into definitive agreements with Insight LP and certain subsidiaries of AT&T Corp. ("AT&T Cable Subsidiaries") for the acquisition of additional cable television systems, including Insight Ohio. Through a series of transactions, Insight Midwest acquired all of Insight LP's wholly owned systems serving approximately 280,000 customers, including the approximately 85,400 customers then served by Insight Ohio and including systems which Insight LP purchased from AT&T Cable Subsidiaries. At the same time, Insight Midwest acquired from AT&T Cable Subsidiaries systems serving approximately 250,000 customers. Insight Ohio is an unrestricted subsidiary under the indentures governing Insight's and Insight Midwest's senior notes and is prohibited by the terms of its indebtedness from making distributions to Insight Midwest. Insight Midwest remains equally owned by Insight LP and AT&T Broadband, and
Insight LP continues to serve as the general partner and manages and operates the Insight Midwest systems, including Insight Ohio.
Insight Ohio's conditional guarantee of the Senior Notes and the Senior Discount Notes remains in place. If at any time the Senior Notes or the Senior Discount Notes are repaid or significantly modified, or in any case after August 15, 2008, the principals of the Individual LLCs may require Insight LP to purchase the Preferred Interests for a purchase price equal to the difference, if any, of $32.6 million less the then market value of the 800,000 shares of Insight Inc. common stock issued on August 8, 2000.
The following discussion relates to the operations of Insight Ohio for years ended December 31, 2002, 2001 and 2000. The financial statements of Insight Ohio are included in the consolidated financial statements of Coaxial through August 8, 2000 and Coaxial was deemed to be a subsidiary of Coaxial LLC and, as such, the financial statements of Coaxial are included in the consolidated financial statements of Coaxial LLC. The historical operating results of Coaxial LLC reflect the actual results of the System through August 8, 2000 in addition to certain financing activities unrelated to the operation of the System. These financing activities relate primarily to the offering of the Senior Discount Notes and Senior Notes discussed above as well as certain borrowings and repayments of debt with affiliated companies. These activities resulted in related financing and interest costs. The historical results of Coaxial LLC appear elsewhere in this report under the heading "Coaxial LLC."
Introduction
Insight Ohio relies on Insight LP, for all of its strategic, managerial, financial and operational oversight and advice. Insight LP also centrally purchases programming and equipment and provides the associated discount to Insight Ohio. In exchange for all such services provided to Insight Ohio and subject to certain restrictions contained in the covenants with respect to Insight Ohio's Senior Credit Facility and the Senior Notes, Insight LP receives management fees of 3.0% of gross revenues of Insight Ohio. Such management fees are payable only after distributions have been made with respect to the Preferred Interests and only to the extent that such payments would be permitted by an exception to the restricted payments covenants of the Senior Notes as well as Insight Ohio's Senior Credit Facility.
Results of Operations
Revenues are earned from customer fees for cable television programming services including premium, digital and pay-per-view services and ancillary services, such as rental of converters and remote control devices, installations and from selling advertising. In addition, Insight Ohio earns revenues from providing high-speed data services and from facilitating the delivery of telephone services as well as from commissions for products sold through home shopping networks.
Under Insight Ohio's franchise agreements, it is obligated to pay to local franchising authorities a percentage of it's revenue derived from providing cable and other services the majority of which are passed through to customers. Insight Ohio has historically recorded revenue net of franchise fees charged to it's customers. Staff Announcement D-103, issued by the FASB in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This Staff Announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this Staff Announcement, comparative financial statements for prior periods are
required to be reclassified to comply with the guidance in this Staff Announcement. Consequently, Insight Ohio has reclassified the prior period amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis with reimbursements as revenue and payments as expense. The effect on the prior period statements of operations was to increase both revenue and selling, general and administrative costs by $1.5 million and $1.4 million for each of the years ended December 31, 2001 and 2000, respectively.
The following table is derived for the periods presented from Insight Ohio's financial statements that are included in this report and sets forth certain statement of operations data for the System:
Operating Cash Flow ("OCF") represents operating income before depreciation and amortization. Insight Ohio believes that OCF 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, OCF is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as an indicator of operating performance or cash flows as a measure of liquidity, as determined in accordance with accounting principles generally accepted in the United States. Refer to Insight Ohio's financial statements, including its statements of cash flows, which appear elsewhere in this report.
The following calculations of OCF are not necessarily comparable to similarly titled amounts of other companies:
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenue for the year ended December 31, 2002 increased $6.1 million or 11% to $63.1 million from $57.0 million for the year ended December 31, 2001. For the year ended December 31, 2002, customers served averaged approximately 87,400 compared to approximately 85,800 during the year ended December 31, 2001. The increase in revenue was primarily attributable to increases in our basic, digital and high-speed data services.
Revenue by service offering was as follows for the year ended December 31, (in thousands):
RGUs (Revenue Generating Units) were approximately 137,600 as of December 31, 2002 compared to approximately 120,000 as of December 31, 2001. This represents an annual growth rate of 15%. RGUs represent the sum of basic, digital, high-speed data and telephone customers.
Average monthly revenue per basic customer for the year ended December 31, 2002 was $60.18 compared to $55.37 for the year ended December 30, 2001. Average monthly revenue per basic customer for digital and high-speed data services was $12.90 for the year ended December 31, 2002 compared to $7.97 for the year ended December 31, 2001. As of December 31, 2002, there were approximately 29,400 digital customers compared to approximately 22,600 digital customers as of December 31, 2001,
representing penetrations of 36% and 34%, respectively. As of December 31, 2002, there were approximately 18,600 high-speed data customers compared to approximately 11,400 high-speed data customers as of December 31, 2001, representing penetrations of 10% and 7%, respectively.
Programming and other operating costs remained relatively flat from 2001 increasing $139,000 or .6% to $22.3 million for the year ended December 31, 2002 from $22.1 million for the year ended December 31, 2001. The increase was primarily attributable to increased digital programming and increased programming rates associated with classic services offset by decreased engineering salaries, video-on-demand and high-speed data charges.
Selling, general and administrative expenses remained relatively flat from 2001 increasing $97,000 or .8% to $12.4 million for the year ended December 31, 2002 from $12.3 million for the year ended December 31, 2001. The increase was primarily attributable to increases in employee related costs such as salaries and benefits offset by decreases in marketing and other general corporate expenses.
Management fees are directly related to revenue as these fees are calculated as approximately 3% of revenues.
Depreciation and amortization expense for the year ended December 31, 2002 increased $4.6 million or 34% to $18.0 million from $13.4 million for the year ended December 31, 2001. This increase was primarily attributable to increased capital expenditures associated with the launch of new services, the near completion of the rebuild of plant and an $871,000 write-down of the carrying value of current video-on-demand equipment, which was replaced as of December 31, 2002 in connection with our transition to a new video-on-demand service provider.
OCF increased $5.7 million or 27% to $26.6 million for the year ended December 31, 2002 from $21.0 million for the year ended December 31, 2001. This increase was primarily due to increased digital and high-speed data revenue, partially offset by slight increases in programming and other operating costs and selling, general and administrative costs.
Interest expense for the year ended December 31, 2002 decreased $783,000 or 45% to $949,000 from $1.7 million for the year ended December 31, 2001. This decrease was primarily attributable to lower interest rates.
For the year ended December 31, 2002, the net income was $7.8 million primarily for the reasons set forth above.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue for the year ended December 31, 2001 increased $5.9 million or 12% to $57.0 million from $51.1 million for the year ended December 31, 2000. For the year ended December 31, 2001, customers served averaged approximately 85,800 compared to approximately 84,800 during the year ended December 31, 2000. The increase in revenue was primarily attributable to new product launches, specifically digital services and high-speed data services.
Revenue by service offering was as follows for the year ended December 31, (in thousands):
RGUs (Revenue Generating Units) were approximately 120,000 as of December 31, 2001 compared to approximately 103,700 as of December 31, 2000. This represents an annual growth rate of 16%. RGUs represent the sum of basic, digital, high-speed data and telephone customers.
Average monthly revenue per basic customer for the year ended December 31, 2001 was $55.37 compared to $50.21 for the year ended December 30, 2000. Average monthly revenue per basic customer for digital and high-speed data services was $7.97 for the year ended December 31, 2001 compared to $2.45 for the year ended December 31, 2000. As of December 31, 2001, there were approximately 22,600 digital customers compared to approximately 13,400 digital customers as of December 31, 2000, representing a penetration of 34% and 28%, respectively. As of December 31, 2001, there were approximately 11,400 high-speed data customers compared to approximately 4,900 high-speed data customers as of December 31, 2000, representing a penetration of 7% and 5%, respectively. High-speed data services were launched during the year ended December 31, 2000.
Programming and other operating costs increased $2.6 million or 13% to $22.1 million for the year ended December 31, 2001 from $19.5 million for the year ended December 31, 2000. The increase was primarily attributable to increased digital programming and increased programming rates associated with classic services in addition to increased high-speed data costs.
Selling, general and administrative expenses increased $834,000 or 7% to $12.3 million for the year ended December 31, 2001 from $11.4 million for the year ended December 31, 2000. The increase was primarily attributable to increased marketing activity and corporate expenses associated with advertising sales.
Management fees are directly related to revenue as these fees are calculated as approximately 3% of revenues.
Depreciation and amortization expense for the year ended December 31, 2001 increased $2.5 million or 23% to $13.4 million from $10.9 million for the year ended December 31, 2000. This increase
was primarily attributable to increased capital expenditures associated with the rebuild of plant and launch of new services.
OCF increased $2.3 million or 12% to $21.0 million for the year ended December 31, 2001 from $18.7 million for the year ended December 31, 2000. This increase was primarily due to increased digital and high-speed data revenue, partially offset by increases in programming and other operating costs and selling, general and administrative costs.
Interest expense for the year ended December 31, 2001 decreased $151,000 or 8% to $1.7 million from $1.9 million for the year ended December 31, 2000. This decrease was primarily attributable to lower interest rates partially offset by higher average outstanding borrowings.
For the year ended December 31, 2001, the net income was $5.6 million primarily for the reasons set forth above.
Liquidity and Capital Resources
The cable television business is a capital-intensive business that generally requires financing for the upgrade, expansion and maintenance of the technical infrastructure. Capital expenditures totaled $33.7 million for the year ended December 31, 2002. These expenditures were primarily for the upgrade of the System and plant expansions and to launch new services. Capital expenditures were financed by cash flows from operations and capital contributions. Capital expenditures are expected to approximate $16.7 million during the year ending December 31, 2003 to support new customer additions, capital replacement and the continued implementation of telephone services.
Cash provided by operations for the year ended December 31, 2002 and 2001 was $24.2 million and $23.0 million, respectively. The increase was primarily attributable to the timing of cash receipts and payments related to working capital accounts.
Cash used in investing activities for the year ended December 31, 2002 and 2001 was $33.9 million and $28.5 million, respectively, reflecting capital expenditures to upgrade the System and build plant expansions.
Cash provided by financing activities for the year ended December 31, 2002 was $8.5 million. This was comprised of capital contributions from Insight Midwest of $22.5 million partially offset by distributions on preferred interests of $14.0 million. Cash provided by financing activities for the year ended December 31, 2001 was $6.5 million. This was comprised of capital contributions from Insight Midwest of $20.5 million partially offset by distributions on preferred interests of $14.0 million. The $25.0 million Senior Credit Facility was fully borrowed as of December 31, 2002 and 2001.
The Senior Credit Facility contains covenants restricting, among other things, our ability to make capital expenditures, acquire or dispose of assets, make investments and engage in transactions with related parties. The facility also requires compliance with certain financial ratios and contains customary events of default. As of December 31, 2002, Insight Ohio was in compliance with its debt covenant requirements relating to the credit facility. Given current operating conditions and projected results of operations, we anticipate full compliance with this credit facility agreement for the foreseeable future.
The following table summarizes Insight Ohio's contractual obligations and commitments, excluding interest, preferred dividends and commitments for programming, as of December 31, 2002, including periods in which the related payments are due (in thousands):
Due to the increased capital expenditures, management determined that cash flows from operations will not be sufficient to finance the operating and capital requirements of the System, debt service requirements and distributions on the Preferred Interests over the next year. As such, Insight Midwest has committed to provide capital contributions to fund cash requirements through the year ending December 31, 2003. Insight Midwest contributed $22.5 million to Insight Ohio during the year ended December 31, 2002.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Disposal Obligations", which became effective for Insight Ohio beginning January 1, 2003. SFAS No. 146 supersedes EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 addresses the accounting for and disclosure of costs to terminate an existing contractual obligation (including but not limited to operating leases), incremental direct and other costs associated with the related disposal activity and termination benefits (severance pay) provided to employees pursuant to a one-time benefit arrangement that does not constitute a preexisting or newly-created ongoing benefit plan. The adoption of SFAS No. 146 had no impact on Insight Ohio's financial position or results of operations.
Critical Accounting Policies
The methods, estimates and judgments Insight Ohio uses in applying its most critical accounting policies have a significant impact on the results it reports in its financial statements. Insight Ohio evaluates its estimates and judgments on an on-going basis. It bases its estimates on historical experience and on assumptions that it believes to be reasonable under the circumstances. Insight Ohio's experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what it anticipates and different assumptions or estimates about the future could change its reported results. Insight Ohio believes the following accounting policies are the most critical to it, in that they are important to the portrayal of its financial statements and they require Insight Ohio's most difficult, subjective or complex judgments in the preparation of its financial statements.
Fixed Assets
As of December 31, 2002, the carrying value of Insight Ohio's property and equipment totaled $107.4 million, which represents approximately 96% of total assets. Fixed assets include costs capitalized for labor and overhead incurred in connection with the installation of cable systems and is stated at cost. Depreciation for buildings, cable system equipment, furniture, fixtures and office equipment is calculated using the straight-line method over estimated useful lives ranging from 2 to 30 years. Building improvements are amortized using the straight-line method over the shorter of the remaining terms of the leases or the estimated lives of the improvements.
Allowance for Doubtful Accounts
Insight Ohio maintains allowances for doubtful accounts for estimated losses from its customers' inability to make payments. In order to estimate the appropriate level of this allowance, it analyzes historical bad debts, current customer credit-worthiness, current economic trends and changes in customer payment patterns. If the financial condition of customers were to deteriorate and to impair their ability to make payments, additional allowances might be required in future periods.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Companies do not engage in trading market risk sensitive instruments and do not purchase hedging instruments or "other than trading" instruments that are likely to expose any of them to market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. The Companies have not entered into forward or future contracts, purchased options or entered into swaps.
Insight Ohio's Senior Credit Facility bears interest at floating rates. Accordingly, Insight Ohio is exposed to potential losses related to changes in interest rates. A hypothetical 100 basis point increase in interest rates along the entire interest rate yield curve would increase projected annual interest expense by approximately $250,000. The Senior Notes issued by Coaxial and Phoenix bear interest at fixed rates.
The fair value of borrowings under Insight Ohio's senior credit facility approximates carrying value as it bears interest at floating rates. The fair value and carrying value of the Senior Notes and Senior Discount Notes as of December 31, 2002 was $122.8 million and $140.0 million and $36.7 million and $51.8 million, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to our consolidated financial statements beginning on page of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the executive officers of the Individual LLCs, Coaxial, Insight Ohio, and Insight LP. Insight LP is wholly-owned by Insight. Insight LP owns 50% of and is the general partner of Insight Midwest, which is the parent of Insight Ohio. Insight LP also serves as manager of the Individual LLCs and Insight Ohio and Insight thereby effectively controls the management and affairs of the Individual LLCs, Coaxial and Insight Ohio. The executive officers of Insight are compensated by Insight. Insight Ohio pays management fees to Insight LP. Sidney Knafel, Michael Willner and Kim Kelly serve as the directors of Coaxial. None of the executive officers of Coaxial, Coaxial LLC and Coaxial Financing Corp. are compensated for their services as such. Coaxial Financing Corp. only has nominal assets and does not conduct any business.
Sidney R. Knafel, a director of Insight, has been Chairman of the Board of Insight since 1985. He was the founder, Chairman and an equity holder of Vision Cable Communications, Inc. from 1971 until its sale in 1981. Mr. Knafel is presently the managing partner of SRK Management Company, a private investment company, and also serves as Chairman of BioReliance Corporation, a biological testing company. He is a director of General American Investors Company, Inc. and IGENE Biotechnology, Inc., as well as several private companies. Mr. Knafel is a graduate of Harvard College and Harvard Business School.
Michael S. Willner, a director of Insight, co-founded and has served as Chief Executive Officer since 1985. Mr. Willner has also served as Vice Chairman since August 2002, and previously served as President from 1985. Mr. Willner served as Executive Vice President and Chief Operating Officer of Vision Cable from 1979 through 1985, Vice President of Marketing for Vision Cable from 1977 to 1979 and General Manager of Vision Cable's Bergen County, New Jersey cable television system from 1975 to 1977. He is serving his second term as Chairman of the National Cable & Telecommunications Association's Board of Directors and Executive Committee. He also serves on the boards of C-SPAN,
CableLabs and the Walter Kaitz Foundation. Mr. Willner is a graduate of Boston University's College of Communication and serves on the school's Executive Committee.
Kim D. Kelly, a director of Insight, has served as President since August 2002 and as Chief Operating Officer since January 1998. She joined Insight in 1990 as Executive Vice President, and served from then until January 2002 as Chief Financial Officer. Since August 2002, she has also served as Chief Executive Officer of Insight Midwest, the Individual LLCs, Coaxial and Insight Ohio. She served from 1982 to 1990 with Marine Midland Bank, becoming its Senior Vice President in 1988, with primary responsibility for media lending activities. Ms. Kelly is Chairperson of the Cable Advertising Bureau's Board of Directors. She also serves as a member of the National Cable & Telecommunications Association Subcommittees for Telecommunications Policy, Diversity Initiatives and Accounting. Ms. Kelly also serves as a director of Bank of New York Hamilton Funds, and serves on the boards of Cable in the Classroom and the Cable Center. Ms. Kelly is a graduate of George Washington University.
Dinesh C. Jain has served as Senior Vice President and Chief Financial Officer since January 2002. Previously, Mr. Jain was employed for more than the past five years as a Managing Director of NTL, one of Europe's leading cable and telecommunications companies. His background in the cable industry includes a nine-year period with OCOM Corporation and International CableTel, working in various key general management positions. His roles have included Deputy Managing Director, NTL Consumer Group, as well as Managing Director of Cable and Wireless' Consumer Division.
Elliot Brecher has served as Senior Vice President and General Counsel since January 2000. Previously, he was associated with the law firm Cooperman Levitt Winikoff Lester & Newman, P.C., which served as our legal counsel until July 2000 when it merged with Sonnenschein Nath & Rosenthal, which continues to serve as our legal counsel. He joined that firm in February 1994 and served as a partner from January 1996 until joining Insight. Prior to that, he was an associate of the law firm Rosenman & Colin from October 1988. Mr. Brecher received his law degree from Fordham University.
All executive officers serve at the discretion of the Board of Directors.
Item 11.
Item 11. Executive Compensation
Coaxial LLC and Coaxial Financing Corp. do not make any payments in respect of compensation to any of their executive management personnel. Rather, executive management personnel of Coaxial LLC and Coaxial Financing Corp. receive compensation from Insight. Accordingly, Insight utilizes its management fees from Insight Ohio to pay for all of its operating expenses for managing the day-to-day affairs of the System.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The outstanding shares of common stock of Coaxial are owned by the Individual LLCs as described in the table below. All of the outstanding shares of common stock of Coaxial Financing Corp. and all of the outstanding membership interests of the Individual LLCs are wholly-owned by the individuals indicated in the footnotes to the table in the same ownership percentages as the respective Individual LLCs' ownership in Coaxial. Insight LP is the manager of each of the Individual LLCs and
thereby effectively controls the business of each of such Individual LLCs and Coaxial. Accordingly, Insight LP and members of its executive
management may be deemed to beneficially own (as defined by Rule 13d-3 under the Securities Exchange Act of 1934) all of the outstanding shares of common stock of Coaxial.
Name and Address of Beneficial Owner Percentage Ownership ------------------------------------ --------------------
Coaxial LLC (1) c/o Coaxial Communications 5111 Ocean Boulevard, Suite C Sarasota, FL 34242 ............................. 67.5%
Coaxial DJM LLC (2) c/o Coaxial Communications 5111 Ocean Boulevard, Suite C Sarasota, FL 34242 ............................. 22.5%
Coaxial DSM LLC (3) c/o Coaxial Communications 5111 Ocean Boulevard, Suite C Sarasota, FL 34242 ............................. 10.0%
- -------- (1) Wholly-owned by Barry Silverstein. (2) Wholly-owned by Dennis J. McGillicuddy. (3) Wholly-owned by D. Stevens McVoy.
Item 13.
Item 13. Certain Relationships and Related Transactions
Management Fees
In accordance with the Operating Agreement of Insight Ohio, Insight LP is entitled to be paid management fees for managing the day-to-day operations of Insight Ohio. Pursuant to the Operating Agreement, subject to certain covenants in the Indentures, Insight LP is entitled to receive management fees of 3.0% of gross revenues of Insight Ohio. Fees under this management agreement were approximately $1.9 million and $1.7 million for the years ended December 31, 2002 and 2001. Insight LP is also entitled to reimbursement from Insight Ohio for all direct, out-of-pocket expenses incurred by or on behalf of Insight LP that directly relate to its management of the business and operations of Insight Ohio, including any such expenses incurred in connection with the management of Coaxial LLC and Coaxial Financing Corp. However, Insight LP is not entitled to reimbursement from Insight Ohio for corporate overhead (including employee bonuses and health, welfare, retirement, and other employee benefits and overhead expenses of its corporate office management, development, internal accounting, and finance management personnel).
Coaxial and Phoenix
All of the outstanding shares of Coaxial's capital stock and all of the outstanding partnership interests in Phoenix are held indirectly by the same three individuals, Barry Silverstein, Dennis J. McGillicuddy
and D. Stevens McVoy. Coaxial and Phoenix were co-obligors (along with certain other affiliates) with respect to the Chase Credit Facility. Coaxial and Phoenix continue to be co-obligors with respect to the Senior Notes.
Coaxial
Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC
Upon the closing of the Senior Discount Notes offering, Coaxial LLC (which owns 67.5% of the common equity of Coaxial) loaned 22.5% of the gross proceeds of the Senior Discount Notes offering (approximately $6.75 million) to Coaxial DJM LLC (which owns 22.5% of the common equity of Coaxial) and 10% of such proceeds (approximately $3.0 million) to Coaxial DSM LLC (which owns 10% of the common equity of Coaxial) in order to allow for distributions to their respective holders (Barry Silverstein, Dennis J. McGillicuddy and D. Stevens McVoy, respectively) for purposes of repaying the amounts outstanding under the Chase Credit Facility. Such loans are evidenced by the LLC Mirror Notes. Each of the LLC Mirror Notes incorporates the terms of the Senior Discount Notes with respect to payments and otherwise. Accordingly, Coaxial LLC will rely on the provisions of the LLC Mirror Notes in requiring payments from Coaxial DJM LLC and Coaxial DSM LLC in order to make corresponding payments on the Senior Discount Notes. The LLC Mirror Note issued by Coaxial DJM LLC is in the amount of $12,570,525 (i.e., 22.5% of the principal amount at maturity of the Senior Discount Notes) and is secured by 22.5% of the outstanding common equity of Coaxial. The LLC Mirror Note issued by Coaxial DSM LLC is in the amount of $5,586,900 (i.e., 10% of the principal amount at maturity of the Senior Discount Notes) and is secured by 10% of the outstanding common equity of Coaxial.
Item 14.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, under the supervision and with the participation of Coaxial LLC's management, including its Chief Executive Officer and its Chief Financial Officer, Coaxial LLC's management has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Coaxial LLC's Chief Executive Officer and its Chief Financial Officer have concluded that Coaxial LLC's disclosure controls and procedures are effective in timely alerting them to material information relating to Coaxial LLC (including its consolidated subsidiaries) required to be included in Coaxial LLC's periodic SEC filings. There have been no significant changes in Coaxial LLC's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
Within the 90 days prior to the date of this report, under the supervision and with the participation of Coaxial Financing Corp.'s management, including its Chief Executive Officer and its Chief Financial Officer, Coaxial Financing Corp.'s management has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Coaxial Financing Corp.'s Chief Executive Officer and its Chief Financial Officer have concluded that Coaxial Financing Corp.'s disclosure controls and procedures are effective in timely alerting them to material information
relating to Coaxial Financing Corp. (including its consolidated subsidiaries) required to be included in Coaxial Financing Corp.'s periodic SEC filings. There have been no significant changes in Coaxial Financing Corp.'s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
Within the 90 days prior to the date of this report, under the supervision and with the participation of Insight Ohio's management, including its Chief Executive Officer and its Chief Financial Officer, Insight Ohio's management has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Insight Ohio's Chief Executive Officer and its Chief Financial Officer have concluded that Insight Ohio's disclosure controls and procedures are effective in timely alerting them to material information relating to Insight Ohio (including its consolidated subsidiaries) required to be included in Insight Ohio's periodic SEC filings. There have been no significant changes in Insight Ohio's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
(b) Reports on Form 8-K:
None.
(c) Exhibits
2.1 Purchase and Option Agreement, dated as of August 8, 2000, among Coaxial Communications of Central Ohio, Inc., Insight Communications of Central Ohio, LLC, Insight Holdings of Ohio, LLC, Insight Communications Company, L.P., Insight Communications Company, Inc., Coaxial LLC, Coaxial DJM LLC, Coaxial DSM LLC, Barry Silverstein, Dennis J. McGillicuddy, and D. Stevens McVoy (1)
2.2 Asset Contribution Agreement, dated August 15, 2000, by and among, Command Cable of Eastern Illinois Limited Partnership, MediaOne of Illinois, Inc., Northwest Illinois TV Cable Company, S/D Cable Partners, Ltd., TCI American Cable Holdings, L.P., TCO of Bloomington/Normal, Inc., TCI of Cablevision of Texas, Inc., UACC Midwest, Inc., United Cable Television of Illinois Valley, Inc., United Cable Television of Southern Illinois Valley, Inc., United Cable Television of Southern Illinois, Inc., TCI of Indiana Holdings, LLC, Insight Communications Company, L.P, and Insight Midwest, L.P. ("Asset Contribution Agreement") (2)
2.3 Amendment to the Asset Contribution Agreement, dated January 5, 2001 (3)
2.4 Asset Exchange Agreement, dated August 15, 2000, by and between MediaOne of Illinois, Inc., and Insight Communications Company, L.P. ("Asset Exchange Agreement") (2)
2.5 Amendment to the Asset Exchange Agreement, dated January 5, 2001 (3)
2.6 Assets Purchase and Sale Agreement, dated August 15, 2000, by and between TCI of Illinois, Inc., TCI of Racine, Inc., UACC Midwest, Inc. and Insight Communications Company, L.P. ("Asset Purchase and Sale Agreement") (2)
2.7 Amendment to the Asset Purchase and Sale Agreement, dated January 5, 2001 (3)
3.1 Certificate of Incorporation of Coaxial Financing Corp., filed July 24, 1998(4)
3.2 By-Laws of Coaxial Financing Corp.(4)
3.3 Certificate of Formation of Insight Communications of Central Ohio, LLC filed July 23, 1998 (4)
3.4 Amended and Restated Operating Agreement of Insight Ohio, dated as of August 8, 2000 (1)
3.5 Certificate of Formation of Coaxial LLC filed July 24, 1998 (4)
3.6 Operating Agreement of Coaxial LLC dated August 21, 1998 (4)
10.1 Indenture among Coaxial LLC, Coaxial Financing Corp., Insight Communications of Central Ohio, LLC and Bank of Montreal Trust Company dated August 21, 1998 (4)
10.2 Securities Pledge Agreement between Coaxial Communications of Central Ohio, Inc. and Bank of Montreal Trust Company dated August 21, 1998 (4)
10.3 Securities Pledge Agreement between Coaxial LLC and Bank of Montreal Trust Company dated August 21, 1998 (4)
10.4 Securities Pledge Agreement between Coaxial DSM LLC and Coaxial LLC dated August 21, 1998 (4)
10.5 Securities Pledge Agreement between Coaxial DJM LLC and Coaxial LLC dated August 21, 1998 (4)
10.6 Mirror Note of Coaxial DJM LLC payable to the order of Coaxial LLC dated August 21, 1998 (4)
10.7 Mirror Note of Coaxial DSM LLC payable to the order of Coaxial LLC dated August 21, 1998 (4)
10.8 Revolving Credit Agreement dated as of October 7, 1998 among Insight Communications of Central Ohio, LLC, several banks and financial institutions or entities, and Canadian Imperial Bank of Commerce, as administrative agent ("Credit Agreement") (4)
10.8(a) First Amendment to Credit Agreement dated as of June 30, 2000 (5)
10.8(b) Second Amendment to Credit Agreement dated as of June 30, 2000 (5)
10.8(c) Third Amendment to Credit Agreement dated as of March 4, 2002 (5)
10.9 Indenture among Coaxial Communications of Central Ohio, Inc., Phoenix Associates, Insight Communications of Central Ohio, LLC, CIBC Oppenheimer Corp. and Bank of Montreal Trust Company dated August 21, 1998 (6)
10.10 Cable Facilities Lease Agreement, dated July 17, 2000, among AT&T Broadband, LLC and Insight Communications Company, Inc. and certain of its affiliates, including Insight Ohio (1)
21.1 Subsidiaries of Registrants (7)
- -----------
(1) Filed as an Exhibit to Insight Communications Company, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 0-26677) and incorporated herein by reference.
(2) Filed as an Exhibit to Insight Communications Company, Inc.'s Current Report on Form 8-K, dated August 15, 2000 (File No. 0-26677) and incorporated herein by reference.
(3) Filed as an Exhibit to Insight Communications Company, Inc.'s Current Report on Form 8-K, dated January 5, 2001 (File No. 0-26677) and incorporated herein by reference.
(4) Filed as an Exhibit to Registrants' Registration Statement on Form S-4 (File No. 333-64449) and incorporated herein by reference.
(5) Filed as an Exhibit to Registrants' Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 and incorporated herein by reference.
(6) Filed as an Exhibit to Registration Statement in Form S-4 (File No. 333-63677) and incorporated herein by reference.
(7) Filed as an Exhibit to Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference.
Report of Independent Auditors
The Member of Coaxial LLC
We have audited the accompanying consolidated balance sheets of Coaxial LLC (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in members' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2, the Company has no operations. The Company's ability to satisfy its debt and related interest obligations is dependent upon funding from a related entity in which it owns preferred equity interests which provide for distributions in amounts equal to the payments required on its debt.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York February 25, 2003
COAXIAL LLC CONSOLIDATED BALANCE SHEETS (in thousands)
See accompanying notes
COAXIAL LLC CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
See accompanying notes
COAXIAL LLC CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT) (in thousands)
See accompanying notes
COAXIAL LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes
COAXIAL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and Basis of Presentation
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on July 24, 1998 in order to own and hold 67 1/2% of the common stock of Coaxial Communications of Central Ohio, Inc. ("Coaxial Inc."). The Company has one individual as its sole member.
Coaxial Inc., an Ohio corporation, through its ownership of preferred interests, has a 30% voting interest in Insight Communications of Central Ohio, LLC ("Insight Ohio"). Insight Ohio operates a cable television system that provides basic and expanded cable television services to homes in the eastern parts of Columbus, Ohio and surrounding areas.
In connection with the contribution of Coaxial Inc.'s cable system (the "System") described below and with the issuance of the Senior Notes and Senior Discount Notes by Coaxial Inc. and the Company during 1998, the three individuals who previously owned the outstanding stock of Coaxial Inc. contributed their stock to three separate limited liability companies. Accordingly, Coaxial Inc. is a subsidiary of the Company, which owns 67 1/2% of Coaxial Inc.'s outstanding stock.
Other related entities affiliated with the Company in addition to Coaxial Inc., include Coaxial DJM LLC, Coaxial DSM LLC, (collectively, the "Coaxial Entities"), Phoenix Associates ("Phoenix"), Coaxial Financing Corp., Coaxial Associates of Columbus I and Coaxial Associates of Columbus II.
The Company and Coaxial Financing Corp. are co-issuers of the Senior Discount Notes. Coaxial Inc. and Phoenix are co-issuers of the Senior Notes. The ability of Coaxial Financing Corp., the Company, Coaxial Inc. and Phoenix to make scheduled payments with respect to the Senior Discount Notes and Senior Notes is dependent on the financial and operating performance of Insight Ohio. The required distributions on the Series A preferred equity interest and Series B preferred equity interest to Coaxial Inc. are designed to provide the cash flow necessary to service the debt requirements on the Senior Notes and Senior Discount Notes, respectively.
On August 21, 1998, Coaxial Inc. and Insight Communications Company, L.P. ("Insight LP") entered into a contribution agreement (the "Contribution Agreement") pursuant to which Coaxial Inc. contributed substantially all of the assets and liabilities comprising the System to a newly formed subsidiary, Insight Ohio. In connection therewith, Insight Holdings of Ohio, LLC ("Insight Holdings"), a wholly owned subsidiary of Insight LP, contributed $10.0 million in cash to Insight Ohio. As a result of the Contribution Agreement, Coaxial Inc. owned 25% of the non-voting common equity and Insight Holdings owned 75% of the non-voting common equity of Insight Ohio. Coaxial Inc. also owns a $140.0 million Series A preferred equity interest and a $30.0 million Series B preferred equity interest in Insight Ohio.
On August 8, 2000, Insight Ohio purchased Coaxial Inc.'s 25% non-voting common equity interest in Insight Ohio. The purchase price was 800,000 shares of common stock of Insight LP's general partner, Insight Communications Company, Inc. ("Insight Inc.") with a value of $10.4 million and cash in the amount of $2.6 million. In connection with the purchase, Insight Ohio's operating agreement was amended to, among other things, remove certain participating rights of the principals of Coaxial Inc. and the Coaxial Entities. Additionally, the agreement was amended to incorporate 70% of Insight Ohio's
COAXIAL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and Basis of Presentation (continued)
total voting power into the common equity interests of Insight Ohio and 30% of Insight Ohio's total voting power into the preferred equity interests of Insight Ohio.
2. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial Inc.'s ownership of all of the voting equity of Insight Ohio through August 8, 2000, the accompanying financial statements include the accounts of Insight Ohio through such date. All inter-company balances have been eliminated in consolidation. Since Insight Ohio had a members' deficiency, the accompanying financial statements do not include a minority interest liability for Insight Holdings of Ohio LLCs' 75% common equity interest in Insight Ohio for any period prior to August 8, 2000.
As a result of the sale of Coaxial Inc.'s common equity interest and change in voting interest, the Company no longer consolidates the accounts of Insight Ohio subsequent to August 8, 2000 and consequently has no operations.
Investments
Investments consist of 800,000 shares of common stock of Insight Inc. These securities are classified as available-for-sale under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of members' equity.
Investment in Affiliate
In connection with the Contribution Agreement described in Note 1, Insight Ohio issued to Coaxial Inc. a $140.0 million Series A preferred equity interest ("Series A Preferred Interest") and a $30.0 million Series B preferred equity interest ("Series B Preferred Interest") (the "Preferred Interests"). These voting Preferred Interests provide for distributions to Coaxial Inc. and indirectly to Phoenix and the Company in amounts equal to the payments required on the Senior Notes and the Senior Discount Notes issued by the Company due in August 2008 with a maturity value of $55.9 million. The accreted value of the Senior Discount Notes was $51.8 million as of December 31, 2002. Additionally, the Preferred Interests have liquidation preferences equal to the investment in affiliate balance.
Fair Value of Financial Instruments
The carrying amounts of current assets (excluding investments which are carried at fair value) and liabilities approximate their fair market value because of the immediate or short-term maturity of these
COAXIAL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
financial instruments. The fair value of the Senior Discount Notes and the Senior Notes was $36.7 million and $122.8 million and $42.6 million and $143.5 million as of December 31, 2002 and 2001, respectively.
Revenue Recognition
Prior to 2001, revenue included service, connection and launch fees. Service fees were recorded in the month cable television and pay television services were provided to subscribers. Connection fees were charged for the hook-up of new customers and were recognized as current revenues. Launch fees were deferred and amortized over the period of the underlying contract.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and professional fees, associated with the Senior Notes and Senior Discount Notes, which are amortized over the life of the Senior Notes and Senior Discount Notes, respectively.
Marketing and Promotional Costs
Prior to 2001, marketing and promotional costs were expensed as incurred. Marketing and promotional expense, primarily for campaign and telemarketing-related efforts, was $758,000 for the year ended December 31, 2000.
In-Substance Allocation of Note Proceeds
Since both Phoenix and Coaxial Inc. are severally and jointly liable, the Senior Notes, deferred financing costs and associated interest expense are reflected in the Company's financial statements as well as a charge to the equity section representing an in-substance allocation of the proceeds from Phoenix's allocated portion of the Senior Notes. Coaxial Inc. accrues interest on the total Senior Note balance. When Phoenix makes interest payments, Coaxial Inc. reduces accrued interest payable and records an in-substance contribution to equity.
Comprehensive Income (Loss)
The Company owns common stock that is classified as available-for-sale and reported at market value, with unrealized gains and losses recorded as accumulated other comprehensive income or loss in the accompanying balance sheets.
COAXIAL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company is a limited liability company. Therefore, its members report the income or loss on their income tax returns. As a result, the Company does not provide for federal or state income taxes in its accounts. In the event that the limited liability company election is terminated, deferred taxes related to book and tax temporary differences would be required to be reflected in the financial statements. As a limited liability company, the liability of the Company's members is limited to their investment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Under the Company's franchise agreements, it was obligated to pay to local franchising authorities a percentage of its revenue derived from providing cable and other services the majority of which are passed through to customers. The Company had historically recorded revenue net of franchise fees charged to its customers. Staff Announcement D-103, issued by the FASB in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This Staff Announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this Staff Announcement, comparative financial statements for prior periods are required to be reclassified to comply with the guidance in this Staff Announcement. Consequently, the Company has reclassified the prior period amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis with reimbursements as revenue and payments as expense. The effect on the prior period statements of operations was to increase both revenue and selling, general and administrative costs by $824,000 for the period from January 1, 2000 through August 8, 2000.
Certain prior year amounts have been reclassified to conform to the current year's presentation.
3. 401(k) Plan
Insight Ohio sponsors various 401(k) Plans (the "Plans") for the benefit of its' employees. All employees who have completed six months of employment and have attained the age of 18 are eligible to participate in the Plans. Insight Ohio's contributions to the Plans, which were equal to a portion of the employees' contributions up to 5% of the employees' wages, were $75,000 for the year ended December 31, 2000.
COAXIAL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of Insight Ohio under an operating agreement dated August 21, 1998 that provided for a management fee equal to 3% of Insight Ohio's revenues. In connection with the purchase of Coaxial Inc.'s 25% common equity interest in Insight Ohio, Insight Ohio's operating agreement was amended to provide for Insight LP to serve as manager of Insight Ohio. Fees under this operating agreement were $870,000 for the year ended December 31, 2000. Other related party transactions are described in Note 5.
5. Notes Payable
Senior Notes
On August 21, 1998, Coaxial Inc. and Phoenix Associates completed an offering of $140.0 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million was allocated to Phoenix and $34.4 million was allocated to Coaxial Inc. Interest is payable in cash semi-annually on each February 15 and August 15 through 2006. Interest payments commenced on February 15, 1999. The Senior Notes are secured by the outstanding Series A Preferred Interest in Insight Ohio and contain certain financial and other debt covenants.
The Series A Preferred Interest pays distributions in an amount equal to the interest payments on the Senior Notes. The Series A Preferred Interest is owned by Coaxial Inc. and is pledged to Bank of New York, as trustee, for the benefit of the holders of the Senior Notes. Coaxial Inc. utilizes cash distributions made by Insight Ohio on the Series A Preferred Interest to make debt service payments on the Senior Notes. The ability of Coaxial Inc. and Phoenix to make scheduled debt service payments with respect to the Senior Notes depends on the financial and operating performance of Insight Ohio. Coaxial Inc., as joint and several issuer with Phoenix of the Senior Notes, provides the funding which allows Phoenix to repay its share of the Senior Notes, as Phoenix has no operations.
In connection with the issuance of the Senior Notes, Coaxial Inc. incurred financing fees of $5.0 million that are being amortized over the life of the Senior Notes. Amortization expense for these deferred financing costs was $628,000 for each of the years ended December 31, 2002, 2001 and 2000.
On August 21, 1998, the Company and Coaxial Financing issued Senior Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes have a maturity value of $55.9 million and $30.0 million of gross proceeds were received upon issuance. Of the gross proceeds $19.5 million was contributed by the members of the Company to certain related entities to repay indebtedness. Of the remaining proceeds, $9.8 million was loaned to two related entities (Coaxial DJM LLC and Coaxial DSM LLC) by the Company. The Company received notes payable from these related entities with identical interest and maturity terms to the Senior Discount Notes. The debt discount of $25.9 million is being amortized using the effective interest method over five years through August 15, 2003. Thereafter, interest on the Senior Discount Notes accrues at 127/8% per annum and is payable semi-
COAXIAL LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Notes Payable (continued)
annually. All of the proceeds from the Senior Discount Notes were allocated to the Company.
In connection with the issuance of the Senior Discount Notes, the Company incurred financing fees of approximately $1.4 million that are being amortized over the life of the Senior Discount Notes. Amortization expense related to the deferred financing costs was $136,000 for each of the years ended December 31, 2002, 2001 and 2000.
The Senior Discount Notes are non-recourse and secured by all of the common stock of Coaxial Inc. and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC to the Company and conditionally guaranteed by Insight Ohio.
Among other covenants, the borrowers must comply with restrictive covenants relating to incurrence of additional debt, payment of dividends and distributions and the transfer or sale of assets. The ability of Coaxial Financing and the Company to make scheduled payments with respect to the Senior Discount Notes will depend on the financial and operating performance of Insight Ohio. The distributions on the Series A and B Preferred Interests equal the interest payments on the Senior Notes and Senior Discount Notes.
Report of Independent Auditors
The Shareholders Coaxial Financing Corp.
We have audited the accompanying balance sheets as of December 31, 2002 and 2001 and the related statements of operations, changes in shareholders' deficit and cash flows of Coaxial Financing Corp. (the "Company") for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, the Company has no operations. Its ability to satisfy debt and other obligations is dependent upon funding from related entities, which are under the common control of the owners of the Company.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001 and the results of their operations and cash flows for the each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York February 25, 2003
COAXIAL FINANCING CORP. BALANCE SHEETS (in thousands)
See accompanying notes
COAXIAL FINANCING CORP. STATEMENTS OF OPERATIONS (in thousands)
See accompanying notes
COAXIAL FINANCING CORP. STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT (in thousands)
See accompanying notes
COAXIAL FINANCING CORP. STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes
COAXIAL FINANCING CORP. NOTES TO FINANCIAL STATEMENTS
1. Organization
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on July 24, 1998, for the sole purpose of being a co-issuer with Coaxial LLC, a related entity, of the discount notes described in Note 3, which allows certain investors the ability to be holders of the debt. The Company has no operations. Three individuals own the outstanding shares of the Company.
2. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and professional fees associated with the Senior Discount Notes, which are amortized over the life of the Senior Discount Notes.
Fair Value of Financial Instruments
The fair value of the Senior Discount Notes as of December 31, 2002 and 2001 was $36.7 million and $42.6 million, respectively.
In-Substance Allocation of Note Proceeds
Since both Coaxial LLC and the Company are severally and jointly liable, the Senior Discount Notes, deferred financing costs and associated interest expense are reflected in the Company's financial statements as well as a charge to the equity section representing an in-substance allocation of the proceeds from the Senior Discount Notes received by Coaxial LLC in 1998. The Company has accreted interest on the outstanding balance and will accrue interest when it begins to become payable in 2003. When Coaxial LLC makes an interest payment or repays the debt, the Company will reduce accrued interest or the debt balance and record an in-substance contribution to equity.
Income Taxes
The Company has prepared its income tax provision using the liability method in accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and are measured using tax rates that will be in effect when the differences are expected to reverse. As of December 31, 2002 and 2001 the Company had no deferred tax assets or liabilities and no tax provision to record.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
COAXIAL FINANCING CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Notes Payable
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes have a maturity value of $55.9 million and $30.0 million of gross proceeds were received upon issuance. Of the gross proceeds, $19.5 million was contributed by the members of Coaxial LLC to certain related entities to repay indebtedness. In addition, $9.8 million was loaned to two related entities ("Coaxial DJM LLC" and "Coaxial DSM LLC") by Coaxial LLC. The debt discount of $25.9 million is being amortized, using the effective interest method, over five years through August 15, 2003. Thereafter, interest on the Senior Discount Notes accrues at 127/8% per annum and is payable semi-annually. All of the proceeds from the Senior Discount Notes were allocated to Coaxial LLC.
In connection with the issuance of the Senior Discount Notes, the Company incurred financing fees of approximately $1.4 million that are being amortized over the life of the Senior Discount Notes. Amortization expense related to the deferred financing costs was $136,000 for each of the years ended December 31, 2002, 2001 and 2000.
The Senior Discount Notes are non-recourse, secured by all of the common stock of Coaxial Communications of Central Ohio, Inc. ("Coaxial Inc.") and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally guaranteed by Insight Communications of Central Ohio, LLC ("Insight Ohio"), an affiliate of Coaxial Inc.
Among other covenants, the borrowers must comply with restrictive covenants relating to incurrence of additional debt, payment of dividends and distributions, and the transfer or sale of assets.
The ability of the Company and Coaxial LLC to make scheduled payments with respect to the Senior Discount Notes will depend on the financial and operating performance of Insight Ohio. Although the Company is a co-issuer of the Senior Discount Notes, it has no substantial assets or any operations and will not have access to additional sources of cash flow to make any payments on such debt.
Report of Independent Auditors
The Shareholders Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheets of Coaxial Communications of Central Ohio, Inc. (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of operations and changes in shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2, the Company has no operations. The Company's ability to satisfy its debt and related interest obligations is dependent upon funding from a related entity in which it owns preferred equity interests which provide for distributions in amounts equal to the payments required on its debt.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York February 25, 2003
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. BALANCE SHEETS (in thousands)
See accompanying notes
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
See accompanying notes
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (in thousands)
See accompanying notes
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization and Purpose
Coaxial Communications of Central Ohio, Inc. (the "Company"), an Ohio corporation, through its ownership of preferred interests (discussed below), has a 30% voting interest in Insight Communications of Central Ohio, LLC ("Insight Ohio"). Insight Ohio operates a cable television system that provides basic and expanded cable services to homes in the eastern parts of Columbus, Ohio and surrounding areas.
In connection with the contribution of the Company's cable system ("the System") described below and with the issuance of the Senior Notes and Senior Discount Notes by the Company's majority shareholder, Coaxial LLC during 1998, the three individuals who previously owned the outstanding stock of the Company contributed their stock to three separate limited liability companies. Accordingly, the Company is a subsidiary of Coaxial LLC, which owns 67 1/2% of the Company's outstanding stock.
Other related entities affiliated with the Company in addition to Coaxial LLC, include Coaxial DJM LLC, Coaxial DSM LLC, (collectively, the "Coaxial Entities"), Phoenix Associates ("Phoenix"), Coaxial Financing Corp., Coaxial Associates of Columbus I and Coaxial Associates of Columbus II.
On August 21, 1998, the Company and Insight Communications Company, L.P. ("Insight LP") entered into a contribution agreement (the "Contribution Agreement") pursuant to which the Company contributed substantially all of the assets and liabilities comprising the System to a newly formed subsidiary, Insight Ohio. In connection therewith, Insight Holdings of Ohio, LLC ("Insight Holdings"), a wholly owned subsidiary of Insight LP, contributed $10.0 million in cash to Insight Ohio. As a result of the Contribution Agreement, the Company owned 25% of the non-voting common equity and Insight Holdings owned 75% of the non-voting common equity of Insight Ohio. The Company also owns a $140.0 million Series A preferred equity interest and a $30.0 million Series B preferred equity interest of Insight Ohio.
On August 8, 2000, Insight Ohio purchased the Company's 25% non-voting common equity interest in Insight Ohio. The purchase price was 800,000 shares of common stock of Insight LP's general partner, Insight Communications Company, Inc. ("Insight Inc.") with a value of $10.4 million and cash in the amount of $2.6 million. In connection with the purchase, Insight Ohio's operating agreement was amended to, among other things, remove certain participating rights of the principals of the Company and the Coaxial Entities. Additionally, the agreement was amended to incorporate 70% of Insight Ohio's total voting power into the common equity interests of Insight Ohio and 30% of Insight Ohio's total voting power into the preferred equity interests of Insight Ohio.
As a result of this transaction, the Company recorded a gain on the sale of its common equity interest of $171.5 million which was equal to the difference between the value of the shares of Insight Inc. common stock and cash received plus the fair value of a guaranteed security price adjustment ($20.1 million) as compared to the Company's recorded investment in Insight Ohio (net liability of $151.4 million) as of the transaction date.
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Business Organization and Purpose (continued)
Insight Ohio is prohibited by the terms of its indebtedness from making distributions to Insight Inc. or any of its subsidiaries. Insight Ohio's conditional guarantee of the Senior Notes and the Senior Discount Notes remains in place. If at any time the Senior Notes or the Senior Discount Notes are repaid or significantly modified, the principals of the Coaxial Entities may require Insight Inc. to purchase their preferred interests in the Coaxial Entities for a purchase price equal to the difference, if any, of $32.6 million less the then market value of the 800,000 shares of Insight Inc. common stock issued on August 8, 2000. The fair value of the aforementioned guaranteed security price of $32.6 million compared to the market value of the 800,000 shares of Insight Inc. common stock as of the date of acquisition was $7.1 million.
2. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of the Company's ownership of all of the voting equity of Insight Ohio through August 8, 2000, the accompanying financial statements include the accounts of Insight Ohio through such date. All inter-company balances have been eliminated in consolidation. Since Insight Ohio had a members' deficiency, the accompanying financial statements do not include a minority interest liability for Insight Holdings' 75% common equity interest in Insight Ohio for any period prior to August 8, 2000.
As a result of the sale of its common equity interest and change in voting interest, the Company no longer consolidates the accounts of Insight Ohio subsequent to August 8, 2000 and consequently has no operations.
Investments
Investments consist of 800,000 shares of common stock of Insight Inc. These securities are classified as available-for-sale under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with SFAS No. 115, available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' equity.
Investment in Affiliate
In connection with the Contribution Agreement, Insight Ohio issued to the Company a $140.0 million Series A preferred equity interest ("Series A Preferred Interest") and a $30.0 million Series B preferred equity interest ("Series B Preferred Equity Interest") (the "Preferred Interests"). These voting Preferred Interests provide for distributions to the Company and indirectly to Phoenix and Coaxial LLC in amounts equal to the payments required on the Senior Notes and the Senior Discount Notes issued by
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Coaxial LLC due in August 2008 with a maturity value of $55.9 million. The accreted value of the Senior Discount Notes was $51.8 million as of December 31, 2002. Additionally, the Preferred Interests have liquidation preferences equal to the investment in affiliate balance.
Fair Value of Financial Instruments
The carrying amounts of current assets (excluding investments which are carried at fair value) and liabilities approximate their fair market value because of the immediate or short-term maturity of these financial instruments. The fair value of the Senior Notes was $122.8 million and $143.5 million as of December 31, 2002 and 2001, respectively.
Revenue Recognition
Prior to 2001, revenue included service, connection and launch fees. Service fees were recorded in the month cable television and pay television services were provided to subscribers. Connection fees were charged for the hook-up of new customers and were recognized as current revenues. Launch fees were deferred and amortized over the period of the underlying contract.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and professional fees, associated with the Senior Notes. These costs are being amortized over the life of the Senior Notes.
Marketing and Promotional Costs
Prior to 2001, marketing and promotional costs were expensed as incurred. Marketing and promotional expense, primarily for campaign and telemarketing-related efforts, was $758,000 for the year ended December 31, 2000.
In-Substance Allocation of Note Proceeds
Since both Phoenix and the Company are severally and jointly liable, the Senior Notes, deferred financing costs and associated interest expense are reflected in the Company's financial statements as well as a charge to the equity section representing an in-substance allocation of the proceeds from Phoenix's portion of the Senior Notes. The Company accrues interest on the total Senior Note balance. When Phoenix makes interest payments, the Company reduces accrued interest payable and records an in-substance contribution to equity.
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss)
The Company owns common stock that is classified as available-for-sale and reported at market value, with unrealized gains and losses recorded as accumulated other comprehensive income or loss in the accompanying balance sheets.
Income Taxes
The Company is a Subchapter S corporation. Therefore, each shareholder reports their distributive share of income or loss on their respective income tax return. As a result, the Company does not provide for federal or state income taxes in its accounts. In the event that the Subchapter S corporation election is terminated, deferred taxes related to book and tax temporary differences would be required to be reflected in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Under the Company's franchise agreements, it was obligated to pay to local franchising authorities a percentage of its revenue derived from providing cable and other services the majority of which are passed through to customers. The Company had historically recorded revenue net of franchise fees charged to its customers. Staff Announcement D-103, issued by the FASB in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This Staff Announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this Staff Announcement, comparative financial statements for prior periods are required to be reclassified to comply with the guidance in this Staff Announcement. Consequently, the Company has reclassified the prior period amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis with reimbursements as revenue and payments as expense. The effect on the prior period statements of operations was to increase both revenue and selling, general and administrative costs by $824,000 for the period from January 1, 2000 through August 8, 2000.
Certain prior year amounts have been reclassified to conform to the current year's presentation.
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 401(k) Plan
Insight Ohio sponsors various 401(k) Plans (the "Plans") for the benefit of its' employees. All employees who have completed six months of employment and have attained the age of 18 are eligible to participate in the Plans. Insight Ohio's contributions to the Plans, which were equal to a portion of the employees' contributions up to 5% of the employees' wages, were $75,000 for the year ended December 31, 2000.
4. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of Insight Ohio under an operating agreement dated August 21, 1998 that provided for a management fee equal to 3% of Insight Ohio's revenues. In connection with the purchase of the Company's 25% common equity interest in Insight Ohio, Insight Ohio's operating agreement was amended to provide for Insight LP to serve as manager of Insight Ohio. Fees under this operating agreement were $870,000 for the year ended December 31, 2000.
5. Notes Payable
On August 21, 1998, the Company and Phoenix Associates completed an offering of $140.0 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million was allocated to Phoenix and $34.4 million was allocated to the Company. Interest is payable in cash semi-annually on each February 15 and August 15 through 2006. Interest payments commenced on February 15, 1999. The Senior Notes are secured by the outstanding Series A Preferred Interest in Insight Ohio and contain certain financial and other debt covenants.
The Series A Preferred Interest pays distributions in an amount equal to the interest payments on the Senior Notes. The Series A Preferred Interest is owned by the Company and is pledged to Bank of New York, as trustee, for the benefit of the holders of the Senior Notes. The Company utilizes cash distributions made by Insight Ohio on the Series A Preferred Interest to make debt service payments on the Senior Notes. The ability of Phoenix and the Company to make scheduled debt service payments with respect to the Senior Notes depends on the financial and operating performance of Insight Ohio. The Company, as joint and several issuer with Phoenix of the Senior Notes, provides the funding which allows Phoenix to repay it's share of the Senior Notes, as Phoenix has no operations.
In connection with the issuance of the Senior Notes, the Company incurred financing fees of $5.0 million that are being amortized over the life of the Senior Notes. Amortization expense for these deferred financing costs was $628,000 for each of the years ended December 31, 2002, 2001 and 2000.
Report of Independent Auditors
The General Partners Phoenix Associates
We have audited the accompanying balance sheets of Phoenix Associates (the "Company") as of December 31, 2002 and 2001, and the related statements of operations, changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, the Company has no operations. Its ability to satisfy debt and other obligations is dependent upon funding from related entities, which are under the common control of the owners of the Company.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York February 25, 2003
PHOENIX ASSOCIATES BALANCE SHEETS (in thousands)
See accompanying notes
PHOENIX ASSOCIATES STATEMENTS OF OPERATIONS (in thousands)
See accompanying notes
PHOENIX ASSOCIATES STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands)
See accompanying notes
PHOENIX ASSOCIATES STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes
PHOENIX ASSOCIATES NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Phoenix Associates (the "Company") is a Florida general partnership originally organized for the purpose of purchasing promissory notes, mortgages, deeds of trust, debt securities and other types of securities and purchasing and acquiring rights in any loan agreements or other documents relating to those securities. The Company has no operations. The Company's ability to satisfy debt and other obligations is dependent upon funding from related entities, which are under the common control of the Company's owners. The Company is a co-issuer and joint and several obligor of the debt described in Note 4, along with an affiliate, Coaxial Communications of Central Ohio, Inc. ("Coaxial Inc.").
The Company consists of three separate LLC's whose sole members are individual partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%, respectively.
Other related entities affiliated with the Company include Coaxial LLC, Coaxial Financing Corp., Insight Communications of Central Ohio, LLC ("Insight Ohio"), Coaxial Associates of Columbus I ("Columbus I") and Coaxial Associates of Columbus II ("Columbus II").
On August 21, 1998, Coaxial Inc. and Insight Communications Company, L.P. ("Insight LP") entered into a contribution agreement (the "Contribution Agreement") pursuant to which Coaxial Inc. contributed substantially all of the assets and liabilities comprising its cable system to a newly formed subsidiary, Insight Ohio, and Insight Holdings of Ohio, LLC ("Insight Holdings"), a wholly owned subsidiary of Insight LP, contributed $10.0 million in cash to Insight Ohio. As a result of this Contribution Agreement, Coaxial Inc. owned 25% of the non-voting common equity and Insight Holdings owned 75% of the non-voting common equity of Insight Ohio.
On August 8, 2000, Insight Ohio purchased Coaxial Inc.'s 25% non-voting common equity interest in Insight Ohio. The purchase price was 800,000 shares of common stock of Insight LP's general partner, Insight Communications Company, Inc. with a value of $10.4 million and cash in the amount of $2.6 million. In connection with the purchase, Insight Ohio's operating agreement was amended to, among other things, remove certain participating rights of the principals of Coaxial Inc. and certain of its affiliates (the "Coaxial Entities"). Additionally, the agreement was amended to incorporate 70% of Insight Ohio's total voting power into the common equity interests of Insight Ohio and 30% of Insight Ohio's total voting power into the Preferred Interests of Insight Ohio.
Coaxial Inc. also owns a $140.0 million Series A preferred equity interest in Insight Ohio (the "Series A Preferred Interest"). The Series A Preferred Interest provides for distributions to Coaxial Inc. equal in amount to the debt service payments on the Senior Notes discussed in Note 4. Coaxial Inc. will make distributions that will enable the Company to fund the required debt service payments on the Senior Notes.
PHOENIX ASSOCIATES NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and professional fees, associated with the Senior Notes. These costs are being amortized over the life of the Senior Notes.
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their fair market value because of the immediate or short-term maturity of these financial instruments. The fair value of the Senior Notes was $122.8 million and $143.5 million as of December 31, 2002 and 2001, respectively.
In-Substance Allocation of Note Proceeds
Since both Coaxial Inc. and the Company are severally and jointly liable, the Senior Notes, deferred financing costs and associated interest expense are reflected in the Company's financial statements as well as a charge to the equity section representing an in-substance allocation of the proceeds from Coaxial Inc.'s allocated portion of the Senior Notes. The Company accrues interest on the total Senior Note balance. When Coaxial Inc. makes interest payments, the Company reduces accrued interest payable and records an in-substance contribution to equity.
Income Taxes
The Company is a general partnership. Therefore, each partner reports its distributive share of income or loss on its respective income tax returns. As a result, the Company does not provide for Federal or State income taxes in its financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year's presentation.
PHOENIX ASSOCIATES NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Related Party Transactions
Due From Related Party
Due from related party of $406,000 as of December 31, 2001 represents advances to Columbus I. Interest accrued on these advances at an annual rate of 5.5%. Interest income recorded on these advances for each of the years ended December 31, 2002, 2001 and 2000 was $19,000, $22,000 and $22,000, respectively. The amount due from related party, including related accrued interest, was repaid to the Company on October 31, 2002.
Notes Receivable
The Company had the following notes receivable from related parties at December 31, 2001 (in thousands):
Columbus I $ 2,349 Columbus II 118 ------------ Total face amount of notes receivable 2,467 Less: Amounts in excess of purchase price (1,917) ------------ Notes receivable, net $ 550 ============
Columbus I - ----------
The $2,349,000 due from Columbus I represents a note, including past due interest that was added to the principal, which was purchased from CNA Financial Corporation on November 24, 1982. The Company recognized interest income, at an annual rate of 5.5%, of $108,000 for the year ended December 31, 2002 and $129,000 for each of the years ended December 31, 2001 and 2000. As discussed below, the principal and related accrued interest was repaid to the Company on October 31, 2002.
Columbus II - -----------
The $118,000 due from Columbus II represents a note, including past due interest that was added to the principal, which was purchased from CNA Financial Corporation on November 24, 1982. The Company recognized interest income, at an annual rate of 5.5%, of $5,000 for the year ended December 31, 2002 and $6,500 for each of the years ended December 31, 2001 and 2000. As discussed below, the principal and related accrued interest was repaid to the Company on October 31, 2002.
On October 31, 2002, the Company received approximately $3.5 million as payment, in full, for all related party receivables, including accrued interest. The Company recorded a gain of approximately $1.9 million in connection with this transaction representing the realized amount in excess of the net carrying value of the notes receivable. Additionally, the Company made a capital distribution to its partners on October 31, 2002 of approximately $3.5 million.
PHOENIX ASSOCIATES NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Notes Payable
On August 21, 1998, Coaxial Inc. and the Company completed an offering of $140.0 million 10% Senior Notes ("Senior Notes") due in August 2006. The proceeds of the Senior Notes were allocated $105.6 million to the Company and $34.4 million to Coaxial Inc. Interest payments commenced on February 15, 1999. Interest is payable in cash semi-annually on each February 15 and August 15. The Senior Notes contain certain financial and other debt covenants.
The Senior Notes are secured by the outstanding Series A Preferred Interest in Insight Ohio. The Series A Preferred Interest has a liquidation preference of $140.0 million and pays distributions in an amount equal to the interest payments on the Senior Notes. The Series A Preferred Interest is owned by Coaxial Inc. and is pledged to the Bank of New York, as trustee, for the benefit of the holders of the Senior Notes. Coaxial Inc. utilizes cash distributions made by Insight Ohio on the Series A Preferred Interest to make debt service payments on the Senior Notes, including distributions to the Company. The ability of Coaxial Inc. and the Company to make scheduled debt service payments with respect to the Senior Notes depends on the financial and operating performance of Insight Ohio. Although the Company is a co-issuer of the Senior Notes, it has no substantial assets or any operations and will not have access to additional sources of cash flow other than contributions from Coaxial Inc.
In connection with the issuance of the Senior Notes, Coaxial Inc. and the Company incurred financing fees of $5.0 million that are being amortized over the life of the Senior Notes.
Report of Independent Auditors
The Members Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheets of Insight Communications of Central Ohio, LLC (the "Company") as of December 31, 2002 and 2001, and the related statements of operations and changes in members' deficit and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York February 25, 2003
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC BALANCE SHEETS (in thousands)
See accompanying notes
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT (in thousands)
See accompanying notes
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC STATEMENTS OF CASH FLOWS (in thousands)
See accompanying notes
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC (the "Company") provides basic and expanded cable television services to homes in the eastern parts of Columbus, Ohio and surrounding areas. The Company was formed on July 23, 1998 in order to acquire substantially all of the assets and liabilities comprising the cable system of Coaxial Communications of Central Ohio, Inc. ("Coaxial").
On August 21, 1998, Coaxial contributed to the Company all of the assets and liabilities comprising Coaxial's cable television system (the "System") for which Coaxial received a 25% non-voting common membership interest as well as 100% of the voting preferred membership interests in the Company (the "Preferred Interests"). In conjunction therewith, Insight Holdings of Ohio, LLC ("Insight Holdings"), a wholly-owned subsidiary of Insight Communications Company, L.P. ("Insight LP") contributed $10.0 million in cash to the Company for which it received a 75% non-voting common membership interest in Insight Ohio.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued $140.0 million of 10% Senior Notes ("Senior Notes") due in August 2006. The Senior Notes are non-recourse and are secured by the issued and outstanding Series A Preferred Interest and are conditionally guaranteed by the Company. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related entities, issued 12 7/8% Senior Discount Notes due in August 2008 ("Senior Discount Notes"). The Senior Discount Notes have a face amount of $55.9 million and resulted in gross proceeds of $30.0 million received upon issuance. The Senior Discount Notes are non-recourse and are secured by the issued and outstanding Series B Preferred Interest, 100% of the common stock of Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC. The Senior Discount Notes are also conditionally guaranteed by the Company.
The Preferred Interests have distribution priorities that provide for distributions to Coaxial and indirectly to Phoenix Associates and Coaxial LLC in amounts equal to the payments required on the Senior Notes and the Senior Discount Notes. The accreted value of the Senior Discount Notes was $51.8 million as of December 31, 2002. Additionally, the Preferred Interests have liquidation preferences equal to their carrying value. Distributions by the Company are subject to certain financial covenants and other conditions set forth in its Senior Credit Facility.
On August 8, 2000, The Company purchased Coaxial's 25% non-voting common equity interest in the Company. The purchase price was 800,000 shares of common stock of Insight LP's general partner, Insight Communications Company, Inc. ("Insight Inc.") with a value of $10.4 million and cash in the amount of $2.6 million. In connection with the purchase, the Company's operating agreement was amended to, among other things, remove certain participating rights of the principals of Coaxial and certain of its affiliates (the "Coaxial Entities"). Additionally, the agreement was amended to incorporate 70% of the Company's total voting power into the common equity interests of the Company and 30% of the Company's total voting power into the Preferred Interests of the Company.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
1. Business Organization and Purpose (continued)
The Company is prohibited by the terms of its indebtedness from making distributions to Insight Inc. The Company's conditional guarantee of the Senior Notes and the Senior Discount Notes remains in place. If at any time the Senior Notes or Senior Discount Notes are repaid or significantly modified, the principals of the Coaxial Entities may require Insight Inc. to purchase their preferred interests in the Coaxial Entities for a purchase price equal to the difference, if any, of $32.6 million less the then market value of 800,000 shares of Insight Inc.'s common stock issued on August 8, 2000. The fair value of the aforementioned guaranteed security price of $32.6 million compared to the market value of the 800,000 shares of Insight Inc. common stock as of the date of acquisition was $7.1 million.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50 partnership between Insight LP and an indirect subsidiary of AT&T Broadband, LLC (now known as "Comcast Cable"), completed a series of transactions with Insight LP and certain subsidiaries of AT&T Corp. (the "AT&T Subsidiaries") for the acquisition of additional cable television systems valued at approximately $2.2 billion, including the common equity of the Company (the "AT&T Transactions"). As a result of the AT&T Transactions, Insight Midwest acquired all of Insight LP's wholly owned systems serving approximately 280,000 customers, including the approximately 85,000 customers served by the Company and including systems which Insight LP purchased from the AT&T Subsidiaries. At the same time, Insight Midwest acquired from the AT&T Subsidiaries systems serving approximately 250,000 customers.
The Company is prohibited by the terms of its indebtedness from making distributions to Insight Midwest. Insight Midwest remains equally owned by Insight LP and Comcast Cable, and Insight LP continues to serve as the general partner of Insight Midwest and manages and operates the Insight Midwest systems.
Although the financial results of the Company are consolidated into Insight Midwest as a result of the AT&T Transactions, for financing purposes, the Company is an unrestricted subsidiary under the indentures of Insight Midwest and Insight Inc. The Company's conditional guarantee of the Senior Notes and the Senior Discount Notes remains in place.
In November 2002, AT&T Broadband and Comcast Corporation merged their respective cable systems and certain other assets. The transaction did not result in any direct change in our ownership structure.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is earned from customer fees for cable television programming services including premium, digital and pay-per-view services and ancillary services, such as rental of converters and remote control devices, installations and from selling advertising. In addition, the Company earns revenue from providing high-speed data services and from facilitating the delivery of telephone services as well as from commissions for products sold through home shopping networks. Revenue is recorded in the month the related services are rendered.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customer base consists of a number of homes concentrated in the central Ohio area. The Company continually monitors the exposure for credit losses and maintains allowances for anticipated losses. The Company had no significant concentrations of credit risk as of December 31, 2002 or 2001.
Fixed Assets
Fixed assets are stated at cost and include costs capitalized for labor and overhead incurred in connection with the installation of cable system infrastructures, including those providing high-speed data and telephone services. In addition, we capitalize labor and material costs associated with installations related to new services on customer premises. Depreciation for buildings, cable system equipment, furniture, fixtures and office equipment is calculated using the straight-line method over estimated useful lives ranging from 2 to 30 years. Building improvements are amortized using the straight-line method over the shorter of the remaining terms of the leases or the estimated lives of the improvements.
The carrying value of fixed assets is reviewed if facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value of the fixed assets will not be recovered from undiscounted future cash flows generated from such assets, an impairment loss would be recognized for the amount that the asset's carrying value exceeds its fair value. We believe that no impairment of fixed assets existed as of December 31, 2002 or 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which became effective for us beginning January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
No. 30. The adoption of SFAS No. 144 had no impact on our consolidated financial position or results of operations.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal and bank facility fees, incurred in securing bank loans and other sources of financing. These costs are amortized over the life of the applicable debt.
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their fair market value because of the immediate or short-term maturity of these financial instruments.
Income Taxes
The Company is a limited liability corporation and does not provide for federal or state income taxes in its financial statements. In the event that the limited liability corporation election is terminated, deferred taxes related to book and tax temporary differences would be required to be reflected in the financial statements. As a limited liability company, the liability of the Company's members is limited to their respective investments.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. Marketing and promotional expense, primarily for campaign and telemarketing-related efforts, was $272,000, $796,000 and $1.3 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Disposal Obligations", which became effective for us beginning January 1, 2003. SFAS No. 146 supersedes EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 addresses the accounting for and disclosure of costs to terminate an existing contractual obligation (including but not limited to operating leases), incremental direct and other costs associated with the related disposal activity and termination benefits (severance pay) provided to employees pursuant to a one-time benefit arrangement that does not constitute a preexisting or newly-created ongoing benefit plan. The adoption of SFAS No. 146 had no impact on our consolidated financial position or results of operations.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Reclassifications
Under the Company's franchise agreements, it is obligated to pay to local franchising authorities a percentage of its revenue derived from providing cable and other services the majority of which are passed through to customers. The Company has historically recorded revenue net of franchise fees charged to its customers. Staff Announcement D-103, issued by the FASB in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This Staff Announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this Staff Announcement, comparative financial statements for prior periods are required to be reclassified to comply with the guidance in this Staff Announcement. Consequently, the Company has reclassified the prior period amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis with reimbursements as revenue and payments as expense. The effect on the prior period statements of operations was to increase both revenue and selling, general and administrative costs by $1.5 million for the year ended December 31, 2001 and $1.4 million for the year ended December 31, 2000.
Additionally, certain other prior year amounts have been reclassified to conform to the current year's presentation.
3. Long-Lived Assets
Fixed Assets
Fixed assets consist of:
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was $17.9 million, $13.3 million and $10.9 million, respectively.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
3. Long-Lived Assets (continued)
Intangible Assets
We recorded amortization expense of $52,000, $75,000 and $31,000 for the years ended December 31, 2002, 2001 and 2000. We estimate aggregate amortization expense to be approximately $60,000 for each of the five succeeding fiscal years, primarily relating to other intangible assets.
4. Credit Facility
The Company has a Senior Credit Facility ("Senior Credit Facility") that provides for revolving credit loans of up to $25.0 million to finance capital expenditures and for working capital and general purposes, including the upgrade of the System's cable plant and for the introduction of new video services. The Senior Credit Facility has a six-year maturity from the date of borrowings, with reductions to the amount of the commitment commencing after three years. The amount available for borrowing is reduced by any outstanding letter of credit obligations. The Company's obligations under the Senior Credit Facility are secured by substantially all the assets of the Company.
The Senior Credit Facility requires the Company to meet certain financial and other debt covenants. Loans under the Senior Credit Facility bear interest, at the Company's option, at the prime rate or at a Eurodollar rate. In addition to the index rates, the Company pays an additional margin percentage tied to its ratio of total debt to adjusted annualized operating cash flow.
Interest expense including fees paid to the lender was $949,000, $1.7 million and $1.9 million for the years ended December 31, 2002, 2001, and 2000, respectively. The weighted average interest rate in effect as of December 31, 2002 and 2001 was 3.6% and 4.3%, respectively.
5. Related Party Transactions
Management Fees
Through August 8, 2000, Insight Holdings managed the operations of the Company under an operating agreement dated August 21, 1998 that provided for a management fee equal to approximately 3% of the Company's revenues. In connection with the purchase of Coaxial's 25% common equity interest in the Company, the Company's operating agreement was amended to provide for Insight LP to serve as manager of the Company.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
5. Related Party Transactions (continued)
Programming
The Company purchases the majority of its programming through affiliates of AT&T Broadband (now known as Comcast Cable). Although the Company has the ability to purchase substantially all its programming through Comcast Cable, it purchases certain programming directly from programmers for strategic and/or cost purposes. Charges for such programming, including a 1 1/2% administrative fee, were $7.5 million and $6.2 million for the years ended December 31, 2002 and 2001. As of December 31, 2002 and 2001, $1.4 million and $1.6 million of accrued programming costs were due to affiliates of AT&T Broadband. The company believes that the programming rates charged through these affiliates are lower than those available from independent parties.
Telephone Agreements
In July 2000, to facilitate delivery of telephone services, Insight LP entered into a ten-year agreement with AT&T Broadband (now known as Comcast Cable) that allows the Company to deliver to its customers local telephone service. Under the terms of the agreement, the Company leases for a fee certain capacity on its network to AT&T Broadband. The Company provides certain services and support for which it receives additional payments. The Company began providing telephone services to a limited number of its customers in 2002. Revenue earned from leased network capacity used in the provision of telephone services was $53,000 in the year ended December 31, 2002. The capital required to deploy telephone services over the Company's network is shared, with AT&T Broadband responsible for switching and transport facilities. AT&T is also required to pay the Company for installations, marketing and billing support that amounted to $377,000 for the year ended December 31, 2002.
6. 401(k) Plan
The Company sponsors various 401(k) Plans (the "Plans") for the benefit of its' employees. All employees who have completed six months of employment and have attained the age of 18 are eligible to participate in the Plans. The Company makes matching contributions equal to a portion of the employees' contribution up to 5% of the employees' wages. Effective April 1, 2001, 50% of the Company's matching contribution to the Plan is in the form of Insight Inc. common stock. Company contributions to the Plans were $234,000, $176,000, and $129,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC NOTES TO FINANCIAL STATEMENTS CONTINUED
7. Commitments and Contingencies
Programming Contracts
The Company enters into long-term contracts with third parties who provide programming for distribution over the Company's cable television systems. These programming contracts are a significant part of our business and represent a substantial portion of our operating costs. Since future fees under such contracts are based on numerous variables, including number and type of customers, the Company has not recorded any liabilities with respect to such contracts.
Operating Lease Agreements
Future minimum rental commitments required under non-cancelable operating leases as of December 31, 2002 were (in thousands):
2003 $ 17 2004 7 2005 7 2006 7 2007 7 Thereafter 91 ------------ Total $ 136 ============
Litigation
The Company is party in or may be affected by various matters under litigation in the normal course of business. Management believes that the ultimate outcome of these matters will not have a significant adverse effect on the Company's future results of operations or financial position.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Coaxial LLC
Date: March 28, 2003 By: /s/ Kim D. Kelly --------------------------- Kim D. Kelly , President, Chief Executive Officer and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Coaxial Financing Corp.
Date: March 28, 2003 By: /s/ Kim D. Kelly --------------------------------- Kim D. Kelly, President, Chief Executive Officer and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Insight Communications of Central Ohio, LLC
Date: March 28, 2003 By: /s/ Kim D. Kelly --------------------------- Kim D. Kelly, President, Chief Executive Officer, Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
CERTIFICATIONS
I, Kim D. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial LLC (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Kim D. Kelly --------------------------- Kim D. Kelly
President, Chief Executive Officer and Chief Operating Officer Coaxial LLC March 28, 2003
I, Dinesh C. Jain, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial LLC (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) the Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report; and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Dinesh C. Jain ----------------------------------- Dinesh C. Jain Senior Vice President and Chief Financial Officer Coaxial LLC March 28, 2003
I, Kim D. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial Financing Corp. (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report; and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Kim D. Kelly ---------------------------- Kim D. Kelly President, Chief Executive Officer and Chief Operating Officer Coaxial Financing Corp. March 28, 2003
I, Dinesh C. Jain, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial Financing Corp. (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report; and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Dinesh C. Jain ----------------------------------- Dinesh C. Jain Senior Vice President and Chief Financial Officer Coaxial Financing Corp. March 28, 2003
I, Kim D. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of Insight Communications of Central Ohio, LLC (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report; and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Kim D. Kelly ------------------------ Kim D. Kelly President, Chief Executive Officer and Chief Operating Officer Insight Communications of Central Ohio, LLC March 28, 2003
I, Dinesh C. Jain, certify that:
1) I have reviewed this annual report on Form 10-K of Insight Communications of Central Ohio, LLC (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for he registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report; and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Dinesh C. Jain ----------------------------------- Dinesh C. Jain Senior Vice President and Chief Financial Officer Insight Communications of Central Ohio, LLC March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kim D. Kelly, hereby certify that the annual report on Form 10-K of Coaxial LLC (the "registrant"), for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
/s/ Kim D. Kelly --------------------------- Kim D. Kelly President, Chief Executive Officer and Chief Operating Officer Coaxial LLC March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Dinesh C. Jain, hereby certify that the annual report on Form 10-K of Coaxial LLC (the "registrant"), for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
/s/ Dinesh C. Jain ----------------------------------- Dinesh C. Jain Senior Vice President and Chief Financial Officer Coaxial LLC March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kim D. Kelly, hereby certify that the annual report on Form 10-K of Coaxial Financing Corp. (the "registrant"), for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
/s/ Kim D. Kelly -------------------------- Kim D. Kelly President, Chief Executive Officer and Chief Operating Officer Coaxial Financing Corp. March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Dinesh C. Jain, hereby certify that the annual report on Form 10-K of Coaxial Financing Corp. (the "registrant"), for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
/s/ Dinesh C. Jain ----------------------------------- Dinesh C. Jain Senior Vice President and Chief Financial Officer Coaxial Financing Corp. March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kim D. Kelly, hereby certify that the annual report on Form 10-K of Insight Communications of Central Ohio, LLC (the "registrant"), for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
/s/ Kim D. Kelly ---------------------------------- Kim D. Kelly President, Chief Executive Officer and Chief Operating Officer Insight Communications of Central Ohio, LLC March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Dinesh C. Jain, hereby certify that the annual report on Form 10-K of Insight Communications of Central Ohio, LLC (the "registrant"), for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
/s/ Dinesh C. Jain ----------------------------------- Dinesh C. Jain Senior Vice President and Chief Financial Officer Insight Communications of Central Ohio, LLC March 28, 2003