SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2000
Commission file numbers 333-33540
333-33540-1
Insight Midwest, L.P.
Insight Capital, Inc.
(Exact name of registrants as specified in their charters)
Delaware 13-4079232
Delaware 13-4079679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Nos.)
c/o Insight Communications Company, Inc.
810 Seventh Avenue
New York, New York, 10019
(Address of principal executive offices)
Registrants' telephone number, including area code: (917) 286-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. yes...X.... No......
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( ) Not Applicable
State the aggregate market value of the common equity held by non-
affiliates of the registrants: Not Applicable
Indicate the number of shares outstanding of the registrants' common stock:
Not Applicable
Table of Contents
Page
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PART I
Item 1. Business.................................................................................................... 1
Item 2. Properties.................................................................................................. 34
Item 3. Legal Proceedings........................................................................................... 35
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 36
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters....................................... 37
Item 6. Selected Financial Data..................................................................................... 37
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................................... 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................................. 52
Item 8. Financial Statements and Supplementary Data................................................................. 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................................................ 52
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................................... 53
Item 11. Executive Compensation...................................................................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 56
Item 13. Certain Relationships and Related Transactions.............................................................. 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................ 59
SIGNATURES............................................................................................................. 62
FORWARD-LOOKING STATEMENTS
Some of the information in this report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
. discuss our future expectations;
. contain projections of our future results of operations or of our
financial condition; or
. state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or over which we have no control. The risk factors listed in
this report, as well as any other cautionary language in this report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of the events described in
these risk factors and elsewhere in this report could have a material adverse
effect on our business, operating results and financial condition.
PART I
Item 1. Business
In this report, we rely on and refer to information and statistics
regarding the cable television industry and our market share in the sectors in
which we compete. We obtained this information and statistics from various
third-party sources, discussions with our customers and our own internal
estimates. We believe that these sources and estimates are reliable, but we
have not independently verified them and cannot guarantee their accuracy or
completeness.
Our Manager
Insight Communications Company, Inc. is the eighth largest cable
television system operator in the United States based on customers served.
Through its wholly-owned and managed systems, Insight Communications currently
serves approximately 1.4 million customers, 99% of which are concentrated in the
four contiguous states of Indiana, Kentucky, Illinois and Ohio. In addition to
its geographic concentration, our manager's network is efficiently clustered.
After giving effect to the network upgrades expected to be substantially
completed during 2001, approximately 95% of our manager's customers will be
served from thirteen headends. Technical clustering is critical in order to
efficiently deploy a bundled suite of entertainment, information and
communications services. This combination of geographic concentration and
technical clustering has enabled our manager to lead the cable television
industry in offering, under the Insight Digital brand, a complete bundle of
interactive digital video, high-speed data access and telephony services.
To facilitate delivery of our telephony services, we have entered into a
ten-year agreement with AT&T Broadband, LLC that will allow us to deliver to our
customers local telephone service under the AT&T Digital brand. Under the terms
of the agreement, we will lease certain capacity on our network to AT&T
Broadband for which we will receive a monthly fee based upon the number of
telephone lines ordered by our customers. We will be responsible for marketing
and billing these services, as well as the installation and maintenance support
for which we will receive additional payments. The capital required to deploy
telephony over our networks will be shared, with AT&T Broadband responsible for
switching and transport facilities. Our manager believes that it will be able to
achieve higher penetration levels by marketing our telephony services under the
AT&T brand and leveraging AT&T's telephony expertise with our strong local
presence and established customer relationships. Furthermore, our manager
believes that the expected penetration levels, combined with shared capital
costs, will result in higher returns for our investors.
Consistent with our strategy of pursuing value-enhancing transactions
that fit our geographic and technical clustering strategy, on January 5, 2001,
we completed a series of transactions with our manager and certain subsidiaries
of AT&T Corp. (the "AT&T Cable Subsidiaries") that significantly increased the
number of customers we serve. We refer in this report to all of the preceding
transactions, including related bank financing, as the "Transactions." As a
result of the Transactions, additional cable television systems serving
approximately 530,000 customers were contributed to us. Specifically, we
acquired all of our manager's systems not already owned by us as well as systems
which our manager purchased from AT&T Cable Subsidiaries (comprising in total
approximately 280,000 customers). AT&T Cable Subsidiaries contributed to us
systems located in Illinois serving approximately 250,000 customers. Both our
manager and the AT&T Cable Subsidiaries contributed their respective systems to
us subject to an amount of indebtedness so that we remain equally owned by our
manager and AT&T Broadband. Our manager continues to serve as our general
partner and manages and operates our systems.
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Insight Midwest
We are owned equally by our manager, through its wholly-owned subsidiary
Insight Communications Company, L.P. ("Insight LP"), and AT&T Broadband, through
its indirect subsidiary TCI of Indiana Holdings, LLC. Through our subsidiaries
Insight Communications Midwest, LLC, Insight Communications of Kentucky, L.P.
and Insight Communications of Central Ohio, LLC, we own and operate cable
television systems in Indiana, Kentucky, Illinois, Ohio and Georgia which passed
approximately 2.1 million homes and served approximately 1.3 million customers
as of December 31, 2000 on a pro forma basis after giving effect to the
Transactions. On a pro forma basis, we had revenues of $647.8 million and EBITDA
of $288.0 million for the year ended December 31, 2000. As a result of our
upgrade efforts, as of the end of 2000, we estimate that 94% of our customers
(other than those served by the new Illinois systems) were passed by our
upgraded network, which enables delivery of an advanced suite of entertainment,
information and communications services, including our interactive digital
video, high-speed data access and telephony services. Upon completion of our
planned network upgrades during 2001, over 99% of our customers (other than
customers served by the recently acquired Illinois systems) will be served by
the upgraded network. We expect that the upgrade of the new Illinois systems
will be completed during 2002.
We are the largest operator of cable television systems in the State of
Indiana. As of December 31, 2000, the Indiana systems passed approximately
515,800 homes and served approximately 320,000 customers. The Indiana systems
are located primarily in the university cities of Bloomington, Evansville and
Lafayette and demographically desirable areas of suburban Indianapolis. Upon
completion of our consolidation of headends, approximately 95% of the Indiana
systems' customers will be served by three headends. The network upgrades and
consolidation of headends are expected to be substantially completed during
2001.
We are also the largest operator of cable television systems in the State
of Kentucky. As of December 31, 2000, the Kentucky systems passed approximately
748,000 homes and served approximately 442,000 customers. Our Kentucky systems
are located in four of the five largest cities in the state: Louisville,
Lexington, Covington and Bowling Green. Upon completion of our consolidation of
headends, approximately 99% of Insight Kentucky's customers will be served by
four headends. The network upgrades and consolidation of headends are
substantially completed.
On a pro forma basis after giving effect to the Transactions, as of
December 31, 2000, our Illinois systems passed approximately 664,900 homes and
served approximately 418,000 customers, making us the second largest operator of
cable television systems in the State of Illinois. The Illinois systems are
located primarily in second-tier markets, including Springfield, Rockford,
Peoria and Champaign/Urbana. Upon completion of our consolidation of headends,
approximately 95% of the Illinois systems' customers will be served by five
headends. The network upgrades and consolidation of headends are expected to be
completed during 2002.
As of December 31, 2000, our Ohio system passed approximately 184,400
homes and served approximately 85,400 customers in the eastern portion of the
City of Columbus and the surrounding suburban communities. All of the Ohio
system's customers are served from a single headend. Approximately 70% of the
Ohio system's customers are served by a network upgraded to 870 MHz, and our
upgrade efforts are continuing.
We also own a cable television system in Griffin, Georgia which passed
approximately 20,100 homes and served approximately 13,100 customers as of
December 31, 2000. The Griffin system operates from a single
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headend.
Recognizing the opportunities presented by newly available products and
services, the strength of our market characteristics and favorable changes in
the regulatory environment, we deployed a strategy to become a competitive, full
service provider of entertainment, information and communications services for
the communities served by our networks. We intend to capitalize on our highly
clustered cable television systems to economically upgrade the technological
capabilities of our broadband networks in order to deploy enhanced new services.
We believe that an integrated package of existing multi-channel video,
new and enhanced products and services, such as interactive digital video,
including video-on-demand or near video-on-demand, high-speed Internet access
and telephone services, coupled with our commitment to locally focused customer
service, will enhance our ability to acquire and retain customers in a
competitive environment while increasing revenues per customer. To augment this
growth, we will continue to seek strategic acquisitions that fit our clustering
and operating strategy.
Our principal offices are located at c/o Insight Communications Company,
Inc., 810 Seventh Avenue, New York, New York 10019, and our telephone number is
(917) 286-2300.
Strategy
Our strategy is to be 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:
Focus on operating large, tightly-grouped clusters of cable systems with
attractive technical and demographic profiles
We operate large, tightly-grouped clusters of cable systems, most of
which have attractive technical and demographic profiles. Our systems are
characterized by high housing densities and high ratios of customers to
headends. 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. We believe
that the highly clustered nature of our systems enables us to more efficiently
deploy our marketing dollars and maximize our ability to enhance customer
awareness, increase use of our products and services and build brand support.
Furthermore, our technical concentration, across 95% of our customers, providing
for headends serving an average of 100,000 customers upon completion of our
planned network upgrades, allows us to be capital efficient as we invest in
necessary technology. Our demographic profile is characterized by good housing
growth and low unemployment in growing communities, many of which are centered
around large universities and/or major commercial enterprises. We believe that
households with our demographic profile are more likely to subscribe to these
new and enhanced products and services than the national average demographic
profile.
Expeditiously upgrade our network
We are upgrading our network expeditiously in order to provide new and
enhanced products and services, increase the programming and communications
choices for our customers, improve our competitive position and increase overall
customer satisfaction. We are in the process of upgrading almost all of our
network to provide at least 750 MHz bandwidth and two-way active capability with
700 homes per fiber node, which can be further subdivided four times. The result
will be a significant increase in network
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capacity, quality and reliability which facilitates the delivery of new and
enhanced products and services and reduced operating costs. Our aggressive
investment in our broadband cable network upgrade allows us to expeditiously
offer these services to substantially all of our customers.
Introduce new and enhanced products and services, including interactive
Insight Digital service, high-speed data service and telephony service
Our 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. We have conducted research and held numerous focus group sessions in
our local markets, which lead us to believe that these services have high
customer appeal. We expect that our ability to provide bundled services will
provide us with a strong competitive advantage over alternative video providers,
such as direct broadcast satellite television systems, and incumbent telephone
companies. To accelerate the deployment of these services, we have entered into
arrangements with several industry leaders, including: (1) AT&T Broadband to
provide telephony services; (2) Excite@Home and RoadRunner to provide high-speed
data services; (3) DIVA Systems Corporation to provide video-on-demand; (4)
Liberate Technologies to utilize its software platform for the deployment of
interactive television services; (5) SourceSuite, LLC to provide an interactive
program guide as well as local information and community guides; and (6)
Commerce.TV Corporation to provide e-commerce over our networks.
Leverage strong local presence to enhance customer and community relations
Excellent customer service is a key element of our strategy. We are
dedicated to quality customer service and seek a high level of customer
satisfaction by employing localized customer care, extensively using market
research and providing customers with an attractively priced product offering. A
significant number of our customers visit their local office on a monthly basis
providing us the opportunity to demonstrate and sell our new and enhanced
products and services. Our localized customer care initiatives create
substantial marketing and promotion opportunities, which we believe are
effective in the deployment of interactive, digital and high-speed data
products. We believe that we achieve customer satisfaction levels that are
substantially above industry averages. Annually, we commission Peter D. Hart
Research Associates to survey our customers with respect to service and product
knowledge. Based upon our most recent survey conducted in November 2000, our
customers continue to be highly satisfied with our service.
In addition, we are dedicated to fostering strong relations in the
communities we serve. We sponsor local charities and community causes through
staged events and promotional campaigns, including the industry's Cable in the
Classroom program. Our emphasis on customer service and strong community
involvement has led to higher customer satisfaction, reduced customer churn and
excellent franchise relationships. To further strengthen community relations and
differentiate us from direct broadcast satellite television systems and other
multichannel video providers, we provide locally produced and oriented
programming that offers, among other things, community information, local
government proceedings and local specialty interest shows. In some of our
markets, we are the only broadcaster of local college and high school sporting
events, which allows us to provide important programming that builds customer
loyalty.
Pursue value-enhancing transactions in nearby or adjacent geographies
To support our strategy, we intend to pursue value-enhancing
transactions. To augment our internal customer growth, we will seek to swap or
acquire systems that strategically fit our clustering and
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operating strategy. We do not currently have any agreements, commitments or
understandings for any future acquisitions. There is no assurance that any
additional acquisitions will be completed. We believe that by acquiring or
swapping systems in close proximity we can improve revenue growth and operating
margins. This is achieved through the consolidation of headends and spread of
fixed costs over larger systems and the increase of operating efficiencies
associated with larger systems.
Technical Overview
We believe 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. The deployment of fiber optics, an increase in
the bandwidth to 750 MHz or higher, the activation of a two-way communications
network and the installation of digital equipment will allow us to deliver new
and enhanced products and services, including interactive digital video, high-
speed data services and telephony services provided by AT&T Broadband.
As of December 31, 2000, our systems, including the new Illinois systems,
were comprised of 27,312 miles of network passing approximately 2.1 million
homes resulting in a density of approximately 78.1 homes per mile. As of that
date, our systems were made up of an aggregate of 79 headends. We intend to
continue our strategy of consolidating headends by eliminating approximately 59
headends, at which point 95% of our customers will be served by thirteen
headends. At the end of 2000, we estimate that 94% of our customers (other than
those served by the new Illinois systems) were passed by our upgraded network.
After completion of our planned network upgrades, over 99% of our customers will
be served by a network that is two-way active and 750 MHz.
Our network design calls for a digital two-way active network with a
fiber optic trunk system carrying signals to nodes within our customers'
neighborhoods. The signals are transferred to coaxial network at the node for
delivery to our customers. We have designed the fiber system to be capable of
subdividing the nodes if traffic on the network requires additional capacity.
We believe 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 our systems. 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. We will continue to
deploy fiber optic cable to further reduce amplifier cascades while improving
picture quality and system reliability.
A direct result of this extensive use of fiber optics is an improvement
in picture quality and a reduction of outages because system failures will be
both significantly reduced and will impact far fewer customers when they do
occur. Our design allows our systems to have the capability to run multiple
separate channel line-ups from a single headend and to insert targeted
advertisements into specific neighborhoods based on node location.
To enable us to deliver telephony services, AT&T Broadband is required to
install and maintain the necessary switching and transport facilities. We are
required to deploy the necessary equipment at the headends and at our customers'
homes, and are responsible for expanding and upgrading our network to provide
the required capacity. We intend to increase the reliability of the services by
implementing centralized powering and status monitoring on our networks as
telephony services are deployed in our systems. Centralized power provides the
reliability, including lifeline reliability, required in delivering telephony
services. The existing commercial power structure employed by cable networks is
subject to the general power disruptions experienced by the local power utility.
Centralized power will provide immediate battery
5
back-up for a limited duration followed by unlimited gas-powered generator back-
up. This reliability will not only benefit the delivery of telephony service,
but also the reliability of the other products and services delivered over the
network. Status monitoring will enable us to examine key components of our
network so that we can diagnose problems before they become critical and
interfere with the stability of our network.
Products and Services
Traditional Cable Television Services
We offer our customers a full array of traditional cable television
services and programming offerings. We tailor both our basic line-up and our
additional channel offerings to each regional system in response to
demographics, programming preferences, competition and local regulation. We
offer a basic level of service which includes up to 25 channels of television
programming. Excluding our new Illinois systems, as of December 31, 2000,
approximately 91.8% of our customers chose to pay an additional amount to
receive additional channels under our "Classic" or "expanded" service. Premium
channels, which are offered individually or in packages of several channels, are
optional add-ons to the basic service or the classic service. As of December 31,
2000, premium units as a percentage of basic subscribers was approximately
72.6%, including our new Illinois Systems.
Our analog cable television service offering includes the following:
. Basic Service. All of our customers receive the basic level of service,
which generally consists of local broadcast television and local
community programming, including government and public access, and may
include a limited number of satellite programs.
. Classic Service or Expanded Service. This expanded level of service
includes a group of satellite-delivered or non-broadcast channels such as
ESPN, CNN, Discovery Channel and Lifetime.
. Premium Channels. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming such as
HBO, Cinemax, Starz! and Showtime. We offer subscriptions to these
channels either individually or in premium channel packages.
. Pay-Per-View. These analog channels allow customers with addressable set
top boxes to pay to view a single showing of a recently released movie or
a one-time special sporting event or music concert on an unedited,
commercial-free basis.
New and Enhanced Products and Services
As network upgrades have been activated, we deploy new and enhanced
products and services in most of our markets, including interactive digital
video and high-speed data services. In addition, we are offering telephony
services marketed under the AT&T Digital brand.
Interactive Digital Video
The implementation of interactive digital technology significantly
enhances and expands the video and service offerings we provide to our
customers. Most digital launches by other cable operators have been limited to
simply offering more channels as a defensive move against competition from
direct broadcast satellite television systems. Because of the significantly
increased bandwidth and two-way transmission
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capability of our state-of-the-art technical platform, which continues to be
built in conjunction with our digital launches, we have designed a more
extensive digital product that is rich in program offerings and highly
interactive with our customers. Our interactive digital service is designed to
exploit the advantages of a broadband network in the existing generation of set-
top devices. The digital service encompasses three interactive applications: (1)
an interactive program guide; (2) interactive local information and community
guides; and (3) a video-on-demand service. Our experience with our initial
interactive digital launches is very encouraging.
We have conducted numerous focus groups and commissioned research
studies, the findings of which have helped to develop our interactive digital
strategy. We believe that our digital penetration will continue to increase as a
result of our differentiated services such as a graphically rich local
information network and video-on-demand pay-per-view with full VCR
functionality.
We are packaging a "Digital Gateway" brand. For $6.95 per month, our
customers receive the following services:
. A digital converter box;
. An interactive navigational program guide for all analog and digital
channels;
. A local, interactive Internet-style service;
. A significant multiplexing of premium channels for customers who
separately subscribe to premium channels, such as HBO and Showtime;
. Pay-per-view video-on-demand; and
. A digital 40-channel audio music service.
We have entered into an agreement with Liberate Technologies that enables
us to utilize the Liberate software platform for the deployment of interactive
television services on the Motorola DCT-2000 and DCT-5000 digital set-top boxes.
The Liberate software provides the middleware component of our interactive
digital product. As of December 31, 2000, we deployed 100,000 DCT-2000 set-top
boxes with Liberate's C-Lite system. Our plan includes the aggressive roll-out
of these systems, and when the DCT-5000 becomes available in commercial
quantities, we intend to sell premium digital services using the DCT-5000 and
Liberate's middleware.
We have also entered into an agreement with DIVA Systems Corporation,
which allowed us to become the first cable operator to offer DIVA's video-on-
demand services as part of a digital tier package. DIVA provides a true video-
on-demand service over the cable television infrastructure. Customers receive
the movies electronically over the network and have full VCR functionality,
including pause, play, fast forward and rewind. The movies are delivered with a
high quality digital picture and digital sound. DIVA is designed to provide
movies at prices comparable to those charged for videotape rentals, pay-per-view
and near video-on-demand movies, but with far greater convenience and
functionality.
We have also entered into an agreement with Commerce.TV to provide e-
commerce over our networks. Commerce.TV owns a proprietary software and database
network which would provide our customers with the ability to purchase products
from third party merchants and track the status of their orders
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using a set-top box remote control. We will be launching Commerce.TV in our
Lexington, Kentucky system early in the second quarter of 2001.
Upon the completion of the network upgrades of the Indiana, Kentucky and
Illinois systems, we will continue to migrate the previous owners' digital
products to our interactive Insight Digital product. While the previous owners'
digital products were targeted to fill programming voids, our interactive
Insight Digital service is designed to provide our customers with an Internet-
style experience as well as enhanced programming choices, which have resulted in
higher penetration and customer satisfaction and reduced churn. Our interactive
Insight Digital service has experienced average penetration in the Rockford,
Illinois, Columbus, Ohio and Evansville, Indiana systems of between 20% and 30%
in less than two years from launch.
High-Speed Data
We offer high-speed data service for personal computers through
Excite@Home over our network in all of our upgraded systems except for our
Columbus, Ohio system, which utilizes the RoadRunner service. As of December 31,
2000, the high-speed data service was made available in 1.5 million of our homes
and served approximately 51,800 of our customers, including our new Illinois
systems. The Illinois systems we acquired from the AT&T Cable Subsidiaries
pursuant to the Transactions which offer Excite@Home have achieved an average
Excite@Home penetration of 7.6% as of December 31, 2000.
The broad bandwidth of our cable network enables data to be transmitted
up to 100 times faster than traditional telephone-based modem technologies, and
the cable connection does not interfere with normal telephone activity or usage.
For example, cable's on-line customers can download large files from the
Internet in a fraction of the time it takes when using any widely available
telephone modem technology. Moreover, surfing the Internet on a high-speed
network removes the long delays for Web pages to fully appear on the computer
screen, allowing the experience to more closely approximate the responsiveness
of changing channels on a television set. In addition, the cable modem is always
on and does not require the customer to dial into an Internet service provider
and await authorization. We believe that these factors of speed and easy
accessibility will increase the use and impact of the Internet. Although other
high-speed alternatives are being developed to compete with cable, we believe
that the cable platform currently is best able to deliver these services.
In addition to being an Internet service provider, Excite@Home offers its
own content for our customers. Excite@Home aggregates high quality web sites for
customers to explore and also offers various chat rooms, newsgroups, on-line
stores, gaming channels, on demand Fox News, NBA and MTV video clips, and easy
to use search engines and tip wizards. We expect to offer our customers content
of local interest, including community information, local news, sports,
entertainment, and weather, through our local home page.
Our Insight@Home service offers unlimited access to the Internet. The
service includes three e-mail addresses and 15 megabytes of space with which to
create a personal web site. We are offering the Insight@Home service to cable
customers at a price of $29.95 per month plus $10 to $15 to lease the cable
modem. Customers may also purchase the cable modem. Non-cable customers are
charged an additional $10 per month for the service. Both cable and non-cable
customers are charged a $150 installation fee, which we may, at our discretion,
discount to promote usage of cable modems. Insight@Home also provides several
additional services, such as the ability to dial-up away from the customer's
home, multiple computer access and Internet fax services, which provides
additional revenue potential. In addition to customer fees, we expect
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to generate advertising and e-commerce revenue by selling advertisers and
retailers space on our local home pages in exchange for a fee or a share of the
revenues.
Telephony Services
On July 17, 2000, we entered into a ten-year agreement with AT&T
Broadband that will allow us to deliver to our customers local telephone service
under the AT&T Digital brand using our network infrastructure and AT&T
Broadband's switching and transport facilities. We will lease certain capacity
on our network to AT&T Broadband for a monthly fee for each of the first four
lines ordered by a customer. Additionally, AT&T Broadband is required to pay us
a fee for each customer installation. We are compensated on a per transaction
basis for sales of AT&T Broadband services as AT&T Broadband's agent. For our
provision of billing and collection services and for the provision of customer
care for customers that buy bundled Insight Communications/AT&T Broadband
services, AT&T Broadband is required to pay us a monthly fee per customer. We
also receive an additional fee if revenue exceeds the projected target revenue
for local service lines and features, such as enhanced caller ID or voice mail.
AT&T Broadband is the regulated telephone carrier for the telephony
services provided to our customers. The AT&T Broadband digital telephony
services are marketed and carried under the AT&T Digital brand as part of our
bundle of Insight Digital services. We market the services, as AT&T Broadband's
agent, both on a stand-alone basis and bundled with our other products and
services, such as interactive digital video and high-speed data access. We also
bill our customers for AT&T Broadband's services, as well as provide
installation, maintenance and marketing support for AT&T Broadband's services.
Pursuant to the agreement, the services are to be provided in the territories in
which we currently provide cable television service, other than the newly
acquired Illinois systems. If both parties agree, the agreements can be expanded
to include the new Illinois systems.
The capital required to deploy telephony over our networks is a shared
obligation. We are responsible for upgrading and maintaining our network to meet
specified measures of quality, including increasing the capacity on our network
to a maximum capacity of two lines per residential household passed, assuming a
specified service penetration rate. We also acquire and install equipment to be
located at the customer premises that is required to provide telephone services.
We anticipate AT&T Broadband will use portions of our network to permit AT&T
Broadband to offer an average of two telephone lines to each customer. AT&T
Broadband is responsible for switching and transport facilities. Our manager
believes that we will be able to achieve higher penetration levels by marketing
our telephony services under the AT&T brand and leveraging AT&T's telephony
expertise with our strong local presence and established customer relationships.
Furthermore, our manager believes that the expected penetration levels, combined
with shared capital costs, will result in higher returns for our investors.
Business Background of Our Manager
Insight Communications was co-founded in 1985 as a limited partnership
under the name Insight Communications Company, L.P. by Sidney R. Knafel and
Michael S. Willner after a previous association with one another at Vision Cable
Communications where Mr. Knafel was co-founder and Chairman and Mr. Willner held
various operating positions, ultimately holding the position of Executive Vice
President and Chief Operating Officer. Vision Cable was sold to The Newhouse
Group Inc. in 1981 and Mr. Willner remained there to run the cable operations
until 1985 when he and Mr. Knafel formed Insight Communications.
In addition to many years of conventional cable television experience,
Insight Communications'
9
management team has been involved in the development and deployment of full
service communications networks since 1989. Through a then related entity,
Insight Communications Company UK, L.P., Insight Communications' management and
related parties entered the cable television market in the United Kingdom, where
today modern networks are widely deployed. Messrs. Knafel and Willner remain on
the board of NTL Incorporated, the publicly traded successor to the former
Insight UK related entity. NTL is currently the largest operator of local
broadband communications systems in the United Kingdom.
As a result of our management's British experience, Insight
Communications recognized that the technology and products developed in the
United Kingdom would migrate to the United States in similar form. Insight
Communications focused on planning to upgrade our network promptly after it
became clear that the 1996 Telecom Act would encourage competition in the
communications industries. Insight Communications understood, however, that the
new products and services available with new technology were best deployed in
markets which provided for efficiencies for branding and technical investment.
Insight Communications' original acquisition strategy, which focused on customer
growth, was very successful. However, Insight Communications' management team
recognized the opportunity to evolve from our role as a cable television
operator providing only home video entertainment into a full service alternative
communications network providing not only standard video services, but also
interactive digital video, high-speed data access and communications products
and services.
Recognizing the opportunities presented by newly available products and
services and favorable changes in the regulatory environment, Insight
Communications executed a series of asset swaps, acquisitions and entered into
several joint ventures that resulted in its current composition. The largest of
these transactions were the 50/50 joint ventures formed with AT&T Broadband and
its affiliates in October 1998 with respect to the Indiana systems, in October
1999 with respect to the Kentucky systems and most recently on January 5, 2001
with respect to the new Illinois systems. As of December 31, 1997, Insight
Communications' systems had approximately 180,000 customers with the two largest
concentrations in Utah and Indiana, which together represented less than half of
its customers. Insight Communications believes that it has successfully
transformed its assets so that as of December 31, 2000, without giving effect to
the Transactions, it owned, operated and managed a cable television network
serving approximately 1.0 million customers with approximately 98% of its
customers clustered in the contiguous states of Indiana, Kentucky, Illinois and
Ohio. Insight Communications' current assets are reflective of its strategy to
own systems that have high ratios of customers to headends.
In July 1999, the holders of the partnership interests of Insight LP
exchanged their respective partnership interests for common stock of Insight
Communications. As a result, Insight LP became a wholly-owned subsidiary of
Insight Communications. Simultaneous with the exchange, Insight Communications
consummated an initial public offering of 26,450,000 shares of its Class A
common stock, raising an aggregate of approximately $650.0 million. Insight
Communications' Class A common stock is currently listed on The Nasdaq National
Market under the symbol "ICCI."
Our Systems
Our systems in Indiana, Kentucky, Illinois, Ohio and Georgia serve
approximately 1.3 million customers. We are the largest operator of cable
systems in both Indiana and Kentucky and the second largest in Illinois. Our
systems are technically clustered or are capable of being clustered to serve an
average of 100,000 customers per headend.
We are able to realize significant operational synergies due to the size
of the clusters in these states and the demographic proximity of all of our
systems. In all of our systems, we have nearly completed
10
upgrading our system infrastructures to enable us to deliver new technologies,
products and services to provide our customers with greater value and choices in
the face of growing competition. The highly clustered nature of our systems
enables us to (a) more efficiently invest our marketing dollars and maximize our
brand awareness, (b) more economically introduce new and enhanced services, and
(c) reduce our overall operating and maintenance costs as a result of our
ability to deploy fiber and reduce the number of headends we use throughout our
systems. As a result, we believe we will be able to achieve improved operating
performance on both a combined and system-wide basis. Our relationship with AT&T
Broadband provides us with substantial purchasing economies for both our
programming and hardware needs.
The Indiana Systems
General
As of December 31, 2000, the Indiana systems passed approximately 515,800
homes and served approximately 320,000 customers. The Indiana systems are owned
by Insight Communications Midwest (formerly known as Insight Communications of
Indiana), which is the largest cable operator in the state. Insight
Communications Midwest, which was capitalized on October 31, 1998, was a 50/50
joint venture between Insight LP and an indirect subsidiary of AT&T Broadband
until the contribution of its equity interests on October 1, 1999 into us.
Through Insight LP, Insight Communications serves as manager of the Indiana
systems. In addition, we believe that there are additional opportunities to
augment our position in Indiana through additional acquisitions and swaps.
We believe that further upgrading of the Indiana systems will yield
opportunities for cash flow growth. We have increased our capital investments in
the Indiana systems, with initial emphasis on upgrading the network, activating
two-way transmission and combining headends. Upon completion of our
consolidation of headends, we expect that approximately 95% of our customers in
Indiana will be served by three headends. Upon implementation of our state-of-
the-art technical platform, we deploy new services based on our marketing
strategy of bundling products.
Insight LP manages the day-to-day operations of Indiana and Kentucky
cable television systems owned by InterMedia Partners Southeast, an affiliate of
AT&T Broadband, which serve approximately 121,200 customers. The systems are
operated by employees of our Indiana and Kentucky systems, and the overhead for
these systems is allocated and charged against the cash flow of the managed
systems.
The Indiana systems are organized in four management districts:
The Central District
As of December 31, 2000, the Central District passed approximately
116,800 homes and served approximately 78,800 customers, principally in the
community of Bloomington. This includes approximately 28,300 homes passed and
approximately 14,800 customers served by the Greenwood, Indiana system which we
acquired on January 11, 2001. The City of Bloomington, located 45 miles south of
Indianapolis, is the home of Indiana University. Besides the University, major
employers include United Technology and General Electric. The median household
income for the area is approximately $37,000 per year, while the median family
income is approximately $47,500 per year. Household income differs from family
income by including income from all persons in all households, including persons
living alone and other non-family households.
Digital video service was launched in Bloomington by AT&T Broadband prior
to the formation of Insight Communications Midwest. Upon completion of our
network upgrade, we will migrate the
11
Bloomington digital customers to our interactive Insight Digital service. The
Bloomington system began deploying the Insight@Home service during the second
quarter of 2000. Bloomington and parts of Monroe County were upgraded to 750 MHz
during the second quarter of 2000. We expect to substantially complete the
upgrade of this district by the end of 2001.
The Southwest District
As of December 31, 2000, the Southwest District passed approximately
122,700 homes and served approximately 59,900 customers, principally in the
communities of Evansville and Jasper. The median household income for the area
is approximately $36,500 per year, while the median family income is
approximately $47,000 per year. Major employers include Alcoa, Whirlpool and
Bristol-Myers Squibb.
In February 2000, we completed the network upgrade of the Southwest
District to 750 MHz and we are currently migrating the digital customers to our
interactive Insight Digital service, including DIVA's video-on-demand service
and the LocalSource interactive information service. We have also launched the
Insight@Home service in Evansville.
A related party of Southern Indiana Gas and Electric Co. has overbuilt
the City of Evansville. Southern Indiana Gas and Electric Co. has obtained
franchises to provide cable television service in the City of Evansville and
neighboring areas and commenced service in April 1999. We believe the Southern
Indiana Gas and Electric Co. overbuild passes approximately 75,900 homes in our
service area and is expected to pass additional homes, and has commenced
offering telephone and data service.
The Evansville system recently won a competitive bid to supply a data
network to the Evansville school system, as well as a contract to provide video
services to the University of Evansville. We are working with TCI Network
Solutions to supply this data network and have signed a five-year contract to
connect 42 K-12 schools to the data network. Our share of the revenues from this
contract will be $500,000 over the life of the contract.
The Northwest District
As of December 31, 2000, the Northwest District passed approximately
98,700 homes and served approximately 69,100 customers, principally in the
communities of Lafayette, Kokomo, Fowler and Hartford City. The City of
Lafayette is the home of Purdue University. Besides Purdue University, major
employers include Great Lakes Chemical, Lafayette Life Insurance, General Motors
and Delco Remy. The median household income for the area is approximately
$39,900 per year, while the median family income is approximately $51,600 per
year.
The upgrades of the Lafayette, Kokomo and Fowler systems to 750 MHz were
substantially completed at the end of 2000. We launched the Insight@Home service
in all of these markets. AT&T Broadband launched a digital service in the Kokomo
market in late 1998. We are in the process of migrating those customers to our
digital service, simultaneous with the launch throughout the district of our
interactive Insight Digital service, including the LocalSource products and,
during the first quarter of 2001, DIVA's video-on-demand service.
The Northeast District
As of December 31, 2000, the Northeast District passed approximately
177,600 homes and served approximately 112,200 customers in Richmond as well as
in the suburban communities near
12
Indianapolis, including Anderson and Noblesville. Indianapolis is the state
capital of Indiana and is the twelfth largest city in the United States. Major
employers include General Motors, Eli Lilly and Belden Wire and Cable. The
median household income for the area is approximately $46,700 per year, while
the median family income is approximately $56,300 per year.
The upgrade of the Northeast District to 750 MHz is expected to be
completed by the end of first quarter 2001. We have launched the Insight@Home
service throughout the district. AT&T Broadband launched digital service in
several of the markets in 1998, and we are in the process of migrating those
customers to our interactive Insight Digital service, simultaneous with the
launch throughout the district of our Insight Digital service, including the
LocalSource product and, during the second quarter of 2001, DIVA's video-on-
demand service.
The Kentucky Systems
General
As of December 31, 2000, the Kentucky systems passed approximately
748,000 homes and served approximately 442,000 customers. This includes
approximately 40,900 homes passed and approximately 22,400 customers served by
the Jeffersonville, Indiana system, which is owned by Insight Communications
Midwest and operated by the management of the Louisville, Kentucky system. The
Kentucky systems are owned by Insight Kentucky Partners II, L.P., which is the
largest cable operator in the state. Our manager acquired a combined 50%
interest in Insight Kentucky's parent on October 1, 1999, with related parties
of AT&T Broadband holding the other 50% interest. Simultaneous with this
acquisition, all of the equity interests were contributed into us. Through
Insight LP, Insight Communications serves as manager of the Kentucky systems.
Our Kentucky systems are located in and around four of the five largest
cities in the state: Louisville, Lexington, Covington, and Bowling Green. Upon
completion of the network upgrade, over 99% of Insight Kentucky's customers will
be served by a two-way active, 750 MHz network. Additionally, upon completion of
our consolidation of headends, approximately 99% of the systems' customers will
be served by four headends. The network upgrades and consolidation of headends
are substantially completed.
Summary statistics for the Kentucky systems are as follows:
Louisville
As of December 31, 2000, the Louisville system passed approximately
447,700 homes and served approximately 254,500 customers. Louisville is
Kentucky's largest city and is located in the northern region of the state,
bordering Indiana. Louisville is located within a day's drive of nearly 50% of
the United States population, which makes it an important crossroads for trade
and business. Major employers in the Louisville metropolitan area include
Humana, UPS, General Electric and Ford. The median household income for the area
is approximately $40,000 while the median family income is approximately
$48,500. Knology Inc. and TotaLink of Kentucky, LLC have each obtained a
franchise to provide cable television service in the City of Louisville, where
we currently serve 61,900 customers. However, those franchises have been stayed
pending litigation.
The Louisville system substantially completed a network upgrade and we
served substantially all of our customers with two-way, 750 MHz cable at the end
of 2000. The system is also in the process of interconnecting six headends,
which will allow the entire system to be served from a single headend. In the
13
spring of 2000, we began managing our Jeffersonville, Indiana system through the
Louisville system.
InterMedia Capital Partners VI, L.P. launched its digital service in
Louisville in November 1998. The service had approximately 24,500 customers in
Kentucky as of December 31, 2000. We are migrating these customers to our
interactive Insight Digital service, including the LocalSource product and the
DIVA video-on-demand service. The Louisville system has launched the
Insight@Home service.
Lexington
As of December 31, 2000, the Lexington system passed approximately
122,300 homes and served approximately 84,000 customers from a single headend.
Lexington is Kentucky's second largest city, located in the central part of the
state. Major employers in the Lexington area include the University of Kentucky,
Toyota and Lexmark International. The median household income for the area is
approximately $44,000, while the median family income is approximately $56,000.
The Lexington system has completed a network upgrade and, at the end of
2000, we served all of our customers with two-way, 750 MHz cable. InterMedia
Capital Partners VI, L.P. launched its digital service in Lexington in October
of 1998. We are migrating these customers to our interactive Insight Digital
service, including the LocalSource product and the DIVA video-on-demand service.
The Lexington system has launched the Insight@Home service.
Covington
As of December 31, 2000, the Covington system passed approximately
143,800 homes and served approximately 80,900 customers from a single headend.
Covington is Kentucky's fifth largest city. Major employers in the Covington
area include Delta Airlines, Toyota, Citicorp and DHL. The median household
income for the area is approximately $44,500, while the median family income is
approximately $53,800.
The Covington system has completed a network upgrade and, at the end of
2000, we served all of our customers with two-way, 750 MHz cable. The Covington
system recently launched the Insight@Home service. Digital service is also
available in Covington. We are migrating the customers of this digital service
to our interactive Insight Digital service, including the LocalSource product
and the DIVA video-on-demand service.
Bowling Green
As of December 31, 2000, the Bowling Green system passed approximately
34,200 homes and served approximately 22,500 customers from a single headend.
Bowling Green is located 120 miles south of Louisville, 110 miles southwest of
Lexington and 70 miles north of Nashville, Tennessee. Bowling Green is the
fourth largest city in Kentucky and is the home of Western Kentucky University.
Major employers in the Bowling Green area include Fruit of the Loom, Camping
World, Desa International and Holley Replacement Parts. The median household
income for the area is approximately $36,500, while the median family income is
approximately $45,400.
The Bowling Green system is fully upgraded to two-way, 750 MHz cable.
Recently, digital and Insight@Home services have been launched in Bowling Green.
We are migrating the customers of this digital service to our interactive
Insight Digital service, including the LocalSource product.
14
The Illinois Systems
The Illinois systems are owned and operated by Insight Communications
Midwest, and were contributed to us on January 5, 2001 pursuant to the
Transactions. Through Insight LP, Insight Communications serves as manager of
the Illinois systems. These systems are located primarily in second-tier
markets, including Springfield, Rockford, Peoria, Dixon and Champaign/Urbana.
The Rockford system was contributed by Insight LP and the other Illinois systems
were acquired from the AT&T Cable Subsidiaries pursuant to the Transactions.
In total, the Illinois systems pass approximately 664,900 homes and
served 418,000 customers as of December 31, 2000, making us the second largest
operator of cable television systems in the State of Illinois. These systems are
served by networks with approximately 2,320 miles having a capacity greater than
or equal to 750 MHz, 4,160 miles having a capacity greater than or equal to 450
MHz and less than 750 MHz, and 1,020 miles having a capacity less than 450 MHz.
Consistent with our strategy of expeditiously upgrading our network to
facilitate the deployment of our enhanced products and services, we are
upgrading the network of the Illinois systems and intend to migrate the digital
customers to our interactive Insight Digital service. We expect to invest
approximately $56.0 million to upgrade these systems, and that the upgrades will
be completed during 2002. In the interim, we will launch Insight Digital on a
node-by-node basis as system upgrades are completed. We anticipate the initial
deployments of the DIVA video-on-demand service by the end of 2001 in selected
areas in the Illinois systems.
The Illinois systems are organized in five management districts:
The Rockford District
As of December 31, 2000, the Rockford District passed approximately
127,600 homes and served approximately 81,500 customers. Rockford is Illinois'
second largest city. Major employers in the Rockford metropolitan area include:
Chrysler Corporation, Rockford Health System, Sundstrand Corporation and Swedish
American Health Systems. The median household income for the area is
approximately $39,300 per year, while the median family income is approximately
$47,800 per year.
We completed the upgrade of the Rockford system in February 2000, and
began launching our Insight Digital service on a node-by-node basis as system
upgrades were completed beginning in February 1999. Since launching our Insight
Digital service in the Rockford system, the activated areas achieved
approximately 19.5% digital penetration from its customers, with incremental
revenue per digital customer of approximately $21 per month. Average monthly
revenue per customer increased by approximately 21.0% for the year ended
December 31, 2000, compared to the year ended December 31, 1999, primarily as a
result of the increase in digital penetration. We launched the Insight@Home
service throughout the system in April 2000, and have achieved a penetration of
2.8% as of December 31, 2000.
The Peoria District
As of December 31, 2000, the Peoria District passed approximately 194,700
homes and served approximately 125,200 customers, principally in the communities
of Bloomington and Peoria. Bloomington is located in the north central part of
the state. The Bloomington system is home to Illinois State University with over
20,000 students and Illinois Wesleyan University with over 2,000 students.
Peoria is the fourth
15
largest city in Illinois, located in the north central part of the state. Major
employers in the Peoria area include Maytag, Gates Rubber and the headquarters
of Caterpillar. The median household income for the area is approximately
$26,000, while the median family income is approximately $34,000. The City of
Galesburg is considering a municipal overbuild passing approximately 17,000
homes as of December 31, 2000.
The Peoria system is currently undergoing a network upgrade from 550 MHz
to 860 MHz, which is expected to be completed during 2002. An AT&T Cable
Subsidiary launched digital service and achieved penetration levels of nearly
18% in areas where digital service is available. We plan to migrate these
customers to our interactive Insight Digital service, including the Local Source
product and the DIVA video-on-demand service, by the end of 2002. The system has
launched the @Home service and has achieved penetration levels of over 7% as of
December 31, 2000.
The Dixon District
As of December 31, 2000, the Dixon District passed approximately 67,200
homes and served approximately 46,400 customers, principally in the communities
of Rock Falls, Peru and Dixon. Dixon is located in the north/central part of the
State of Illinois. Major employers in the Dixon area include the State of
Illinois, Raynor Manufacturing Company and Borg Warner Automotive. The median
household income for the area is approximately $25,200, while the median family
income is approximately $30,700.
The Dixon system currently operates with a 750 MHz network, with areas
within the Dixon District undergoing a network upgrade from 450 MHz to 860 MHz,
which is expected to be completed by the end of 2002. An AT&T Cable Subsidiary
launched digital service and achieved penetration levels of nearly 12% in areas
where the service is available. We plan to migrate these customers to our
interactive Insight Digital service, including the LocalSource product and the
DIVA video-on-demand service during 2002.
The Springfield District
As of December 31, 2000, the Springfield District passed approximately
179,300 homes and served approximately 115,100 customers, principally in the
communities of Decatur and Springfield. Springfield is the capital of Illinois
and the third largest city in the state, located in the central part of the
state. The major employer in the Springfield area is the State of Illinois. The
median household income for the area is approximately $28,000, while the median
family income is approximately $36,500. The City of Springfield, in which our
system passes approximately 60,900 homes, is considering a municipal overbuild
utilizing an existing plant owned by the city.
The Springfield District is currently undergoing a network upgrade from
450 MHz to two-way, 750 MHz. An AT&T Cable Subsidiary launched digital service
in the system and achieved penetration levels of over 20% in the areas where the
service is available. We plan to migrate these customers to our interactive
Insight Digital service, including the Local Source product and the DIVA video-
on-demand service, by the end of 2002. The system has begun to roll-out the
Insight@Home service on a node-by-node basis.
The Champaign District
As of December 31, 2000, the Champaign District passed approximately
96,100 homes and served approximately 49,800 customers. Champaign/Urbana is
located in the eastern central part of the state. The Champaign District is home
to the University of Illinois with over 36,000 students. Major employers in the
Champaign and Urbana areas include the University of Illinois, Kraft Foods and
the Carle Clinic Association. The median household income for the area is
approximately $22,300 and the median family
16
income for the area is approximately $34,000.
The Champaign District serves substantially all of its customers by a
two-way, 750 MHz network. An AT&T Cable Subsidiary launched digital service in
the system and had approximately 5,400 customers as of December 31, 2000. We
plan to migrate these customers to our interactive Insight Digital service,
including the Local Source service and the DIVA video-on-demand service, by the
end of 2001. The Champaign District has launched the @Home service and as of
December 31, 2000 had over 6,300 customers.
The Griffin, Georgia System
Our Griffin, Georgia system is owned and operated by Insight
Communications Midwest, and was contributed to us on January 5, 2001 pursuant to
the Transactions. Through Insight LP, Insight Communications serves as manager
of the Griffin system. As of December 31, 2000, the Griffin, Georgia system
passed approximately 20,100 homes and served approximately 13,100 customers from
a single headend. Major employers in the area include Springs Industries, North
American Component Manufacturing and William Carter Apparel. The median
household income for the area is approximately $34,700 per year, while the
median family income is approximately $40,500 per year.
We launched our digital service in the Griffin system in December 1998,
bringing many new entertainment options to its customers. Griffin, being a
smaller market that still has unused channel capacity, has a scaled-down version
of the Insight Digital service, similar to the full digital service except that
it is not interactive. Despite a more limited product offering, we have achieved
significant success with nearly 18% penetration within two years of launch,
generating incremental revenue per month of over $19.00 per digital customer.
The Griffin launch was the first digital deployment of our multi-tiered approach
in the country. We will begin upgrading the Griffin system to enhance the
digital service during 2001.
The Ohio System
In connection with the Transactions, the common equity of Insight
Communications of Central Ohio, LLC, the entity holding the Ohio system, was
contributed to us. As of December 31, 2000, the Ohio system passed approximately
184,400 homes and served approximately 85,400 customers from a single headend.
The system serves the eastern portion of the City of Columbus and adjacent
suburban communities within eastern Franklin County and the contiguous counties
of Delaware, Licking, Fairfield and Pickaway. The City of Columbus is the 34th
largest designated market area, the capital of Ohio and the home of Ohio State
University. In addition to the state government and university, the Columbus
economy is well diversified with the significant presence of prominent companies
such as The Limited, Merck, Wendy's, Nationwide Insurance, Borden and
Worthington Industries. The area's strong economy provides for a well-paid
employment base with a current unemployment rate of approximately 2.3%. The
median household income for our service area is approximately $47,800 per year,
while the median family income is approximately $57,000 per year.
We are currently upgrading the Ohio system to 870 MHz, and began
servicing customers from our upgraded network in November 1999. We are currently
launching our interactive Insight Digital service, on a node-by-node basis,
including DIVA's video-on-demand service and the LocalSource interactive
information service. As of December 31, 2000, approximately 60,000 customers
were served by the upgraded network, with approximately 47,800 customers served
by activated digital nodes, and approximately 13,400 customers have subscribed
to our interactive digital service, representing a penetration of over 28%. We
entered into an affiliation agreement with RoadRunner and a network service
agreement with High Speed
17
Access Corp. to deploy the RoadRunner high-speed data service. The RoadRunner
service was launched during the second quarter of 2000, and has achieved a
penetration of 4.5% as of December 31, 2000. In addition, the Ohio system
provides exclusive sports programming under the "Central Ohio Sport!" brand,
featuring sporting events from Ohio State University.
In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus and suburban communities in Franklin County. Ameritech has
built its citywide franchise, both in our service area and in the Time Warner
service area on the west side of Columbus. We and Time Warner service virtually
distinct areas and therefore do not compete with one another. The areas of the
Ohio system served by both us and Ameritech pass approximately 142,700 homes,
representing 77.3% of the Ohio system's total homes passed.
As with our Indiana, Kentucky and Illinois systems, we intend to launch a
telephony service alternative to Ameritech through the arrangement with AT&T
Broadband. Time Warner, the other major cable television provider in the market,
also has previously announced that it is negotiating a telephony agreement with
AT&T Broadband.
Customer Rates
Rates charged to customers vary based on the market served and service selected
as shown below:
Average Monthly Revenue per
Customer
as of December 31, 2000
------------------------------
Basic Service Classic Service
------------- ---------------
Indiana systems............................ $12.59 $16.12
Kentucky systems........................... 12.77 19.33
As of December 31, 2000, the weighted average revenue for our monthly
combined basic and classic service was approximately $31.12 The national average
was estimated to be $30.08 for the same services as of December 31, 2000, as
reported by Paul Kagan & Associates.
A one-time installation fee, which we may reduce during promotional
periods, is charged to new customers, as well as reconnected customers. We
charge monthly fees for set top boxes and remote control devices. We also charge
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. Multiple dwelling unit accounts may be offered a
bulk rate in exchange for single-point billing and basic service to all units.
Sales and Marketing
Our strategy is to sell multiple services to our customers, including
video, high-speed data and telephony services. We regularly use targeted
telemarketing campaigns to sell to our existing customer base. Our customer
service representatives are trained and given the support to use their daily
contacts with customers as opportunities to sell our new service offerings.
Due to the nature of the communities we serve, we are able to market our
services in ways not typically used by urban cable operators. We can market
products and services to our customers at our local
18
offices where many of our customers pay their cable bills in person. Examples of
our in-store marketing include the promotion of premium services as well as
point-of-purchase displays that will allow customers to experience our high-
speed Internet service and digital products. We aggressively promote our
services utilizing both broad and targeted marketing tactics, including outdoor
billboards, outbound telemarketing, retail partnerships, direct mail, door-to-
door sales, cross-channel promotion, print and broadcast.
We build awareness of the Insight Communications brand through
advertising campaigns and strong community relations. As a result of our
branding efforts and consistent service standards, we believe we have developed
a reputation for quality and reliability. We also believe that our marketing
strategies are particularly effective due to our regional clustering and market
significance, which enables us to reach a greater number of both current and
potential customers in an efficient, uniform manner.
Programming Suppliers
Most cable companies purchase their programming product directly from the
program networks by entering into a contractual relationship with the program
supplier. The vast majority of these program suppliers offer the cable operator
license fee rate cards with size-based volume discounts and other financial
incentives, such as launch and marketing support and cross-channel advertising.
Currently there are over 130 cable networks competing for carriage on our
analog and digital platforms. We have continued to leverage both our systems'
analog upgrades and newly deployed digital packages as an incentive to our
suppliers to secure long term programming deals with reasonable price structures
and other creative financial arrangements to offset license fee increases.
Because of our relationship with AT&T Broadband, we have the right to
purchase programming services for our systems directly through AT&T Broadband's
programming supplier Satellite Services, Inc. We believe that Satellite Services
has attractive programming costs. Additionally, given the clustering of our
systems in the Midwest, we have been successful in affiliating with regionally
based programming products such as sports and news, at lower than average
license fees.
Prior to November 1999, the cable systems contributed by Insight LP to us
pursuant to the Transactions were entitled to buy programming services at the
favorable rates being charged to MediaOne Group. Since that time, such systems
have been purchasing programming services at higher rates. These systems are now
able to purchase programming services at the more favorable rates charged by
Satellite Services.
Commitment to Community Relations
We believe that maintaining strong community relations will continue to
be an important factor in ensuring our long-term success. Our community-oriented
initiatives include educational programs and the sponsorship of programs and
events recognizing outstanding local citizens. In addition, members of our
management team host community events for political and business leaders as well
as representatives of the local media where they discuss our operations and
recent developments in the telecommunications industry. We have received
numerous awards recognizing our ongoing community relations. We believe that our
ongoing community relations initiatives result in consumer and governmental
goodwill and name recognition, which have increased customer loyalty and will
likely facilitate any future efforts to provide new communications services.
We encourage all of our local management teams to take leadership roles
in community and civic
19
activities. Over the years, our systems have received numerous awards in
recognition of their efforts to support local causes and charities as well as
programs that encourage a better way of life in the communities they serve.
Awards have been received from such diverse organizations as the Epilepsy
Foundation, the YMCA Black Achievers, the Domestic Violence Center and Project
Welcome Home, which provides assistance to less fortunate people in the
community.
Cable industry recognition and awards for excellence in marketing and
programming have been received by several of our systems including the
Lafayette, Indiana system.
All of our systems provide ongoing support for Cable in the Classroom, an
industry initiative that earns recognition both locally and nationally for its
efforts in furthering the education of children. Our newest public affairs
initiative, "In the Know," further underscores our commitment to education by
bringing the vast uses of high-speed Internet access into each accredited school
in our service area. "In the Know" builds upon the cable industry's pledge to
provide free high-speed Internet access to local schools. We have taken that
pledge a step further to offer students and teachers the resources of broadband
content and robust cable programming to enrich the learning experience.
With cable modems in the classroom, teachers and students alike can
benefit from the speedy downloads and access to advanced applications to enhance
the learning experience. In addition to providing this advanced technology free
of charge, we intend to introduce programming enhancements in partnership with
various cable networks. As an increasing number of areas become serviceable for
high-speed service, "In the Know" is designed to incorporate multi-faceted
synergies with these programmers in order to provide specialized educational
offerings for each of our systems.
One of the advantages a local cable operator has over nationally
distributed competitors is its ability to develop local programming. To further
strengthen community relations and differentiate us from direct broadcast
satellite television systems and other multichannel video providers, we provide
locally produced and oriented programming. Several of our systems have full
production capabilities, with in-house and/or mobile production studios to
create local content. To attract viewers, we offer a broad range of local
programming alternatives, including community information, local government
proceedings and local specialty interest shows. In some of our markets, we are
the exclusive broadcaster of local college and high school sporting events,
which we believe provides unique programming and builds customer loyalty. We
believe that our emphasis on local programming creates significant opportunities
for increased advertising revenues. Locally originated programming will also
play an integral role in the deployment of our new and enhanced products and
services. Customized local content will be available to our customers through
our digital cable and high-speed data services, as users will be able to access
local information, such as weather reports, school closings and community event
schedules on-demand.
Franchises
Cable television systems are constructed and operated under fixed-term
non-exclusive franchises or other types of operating authorities that are
granted by either local governmental or centralized state authorities. These
franchises typically contain many conditions, such as:
. Time limitations on commencement and completion of construction;
. Conditions of service, including the number of channels, the provision of
free service to schools and other public institutions;
20
. The maintenance of insurance and indemnity bonds; and
. The payment of fees to communities.
These local franchises are subject to limits imposed by federal law.
As of December 31, 2000, we held 517 franchises in the aggregate,
consisting of 165 in Indiana, 195 in Kentucky, 124 in Illinois, 29 in Ohio and 4
in Georgia. Many of these franchises require the payment of fees to the issuing
authorities of 3% to 5% of gross revenues, as defined by each franchise
agreement, from the related cable system.
The 1984 Cable Act prohibits franchising authorities from imposing annual
franchise fees in excess of 5% of gross annual revenues and also permits the
cable television system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances that render
performance commercially impracticable.
The following table summarizes information relating to the year of
expiration of our franchises, excluding the managed systems, as of December 31,
2000:
Year of Number of Percentage of Number of Percentage Total
Franchise Expiration Franchises Total Franchises Basic Customers Basic Customers
-------------------- ---------- ---------------- --------------- ---------------
Expired*......................... 17 3.3% 13,463 1.1%
2001............................. 30 5.8 82,523 6.4
2002............................. 23 4.4 41,928 3.3
2003............................. 40 7.7 102,416 8.0
2004............................. 35 6.8 54,015 4.2
After 2004....................... 372 72.0 984,176 77.0
____________
* 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 which limits a franchising authority's ability to deny a
franchise renewal if the incumbent operator follows prescribed renewal
procedures. 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.
We believe that our cable systems generally have good relationships with
their respective franchise authorities. We have never had a franchise revoked or
failed to have a franchise renewed.
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
21
favorable operating environment for new and existing technologies, in particular
direct broadcast satellite television systems operators, that have the potential
to provide increased competition to cable systems. Recently enacted legislation
permits direct broadcast satellite companies to retransmit local television
signals, eliminating one of the objections of consumers about switching to
satellites.
The 1996 Telecom Act makes it easier for local exchange telephone
companies and others to provide a wide variety of video services competitive
with services provided by cable systems. Various local exchange telephone
companies currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including the
deployment of broadband cable networks and the use of wireless transmission
facilities. Local exchange telephone companies in various states have either
announced plans, obtained local franchise authorizations or are currently
competing with our cable communications systems. Local exchange telephone
companies and other companies also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The
ability of local exchange telephone companies to cross-subsidize video, data and
telecommunication services also poses some threat to cable operators.
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.
Direct broadcast satellite television systems use digital video
compression technology to increase the channel capacity of their systems. Direct
broadcast satellite television systems' programming is currently available to
individual households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar Communications Corporation. Direct broadcast satellite
television systems have some advantages over cable systems that were not
upgraded, such as greater channel capacity and digital picture quality. In
addition, legislation was recently enacted which permits direct broadcast
satellite television systems to retransmit the signals of local television
stations in their local markets. However, direct broadcast satellite television
systems have a limited ability to offer locally produced programming, and do not
have a significant local presence in the community. In addition, direct
broadcast satellite television systems packages can be more expensive than
cable, especially if the subscriber intends to view the service on more than one
television in the household. Finally, direct broadcast satellite television
systems do not have the same full two-way capability, which we believe will
limit their ability to compete in a
22
meaningful way in interactive television, high-speed data and voice
communications.
Several telephone companies are introducing digital subscriber line
technology, which allows Internet access over traditional phone lines at data
transmission speeds greater than those available by a standard telephone modem.
Although these transmission speeds are not as great as the transmission speeds
of a cable modem, we believe that the transmission speeds of digital subscriber
line technology are sufficiently high that such technology will compete with
cable modem technology. The FCC is currently considering its authority to
promulgate rules to facilitate the deployment of these services and regulate
areas including high-speed data and interactive Internet services. We cannot
predict the outcome of any FCC proceedings, or the impact of that outcome on the
success of our Internet access services or on our operations.
Additionally, the FCC adopted regulations allocating frequencies in the 28
GHz band for a new service called local multipoint distribution service that can
be used to provide video services similar to multipoint multichannel
distribution systems. The FCC has completed spectrum auctions for local
multipoint distribution service licenses.
As we expand our offerings to include telephony services, our AT&T Digital
branded services will be subject to competition from existing providers,
including both local exchange telephone companies and long-distance carriers.
The telecommunications industry is highly competitive and many telephone service
providers may have greater financial resources than we have, or have established
relationships with regulatory authorities. We cannot predict the extent to which
the presence of these competitors will influence customer penetration in our
telephony service areas.
Other new technologies may become competitive with services that cable
communications systems can offer. Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect of ongoing or future
developments on the cable communications industry or on our operations.
Cable television systems are operated under non-exclusive franchises
granted by local authorities thereby allowing more than one cable system to be
built in the same area. Although the number of municipal and commercial
overbuild cable systems is small, the potential profitability of a cable system
is adversely affected if the local customer base is divided among multiple
systems. Additionally, constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We believe that in order
to be successful, a competitor's overbuild would need to be able to serve the
homes in the overbuilt area on a more cost-effective basis than we can. Any such
overbuild operation would require either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
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Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a number of rulemakings to implement the legislation, some of
which have yet to be completed, and such proceedings may materially affect the
cable television industry.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-ownership
between cable television systems and other communications businesses, carriage
of television broadcast programming, cable rates, consumer protection and
customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
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
24
regulation of cable programming service tier rates on March 31, 1999. The 1996
Telecom Act also relaxes existing uniform rate requirements by specifying that
such requirements do not apply where the operator faces effective competition,
and by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation of
basic service rates. Local franchising authorities and the FCC, respectively,
are empowered to order a reduction of existing rates which exceed the maximum
permitted level for basic services and associated equipment, and refunds can be
required. The FCC adopted a benchmark price cap system for measuring the
reasonableness of existing basic service rates. Alternatively, cable operators
have the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment, converter boxes and remote control devices,
for example, and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable
television operator adds or deletes channels. There is also a streamlined cost-
of-service methodology available to justify a rate increase on the basic tier
for "significant" system upgrades.
As a further alternative, in 1995 the FCC adopted a simplified cost-of-
service methodology which can be used by "small cable systems" owned by "small
cable companies." A "small system" is defined as a cable television system which
has, on a headend basis, 15,000 or fewer basic customers. A "small cable
company" is defined as an entity serving a total of 400,000 or fewer basic
customers that is not affiliated with a larger cable television company, that is
to say that a larger cable television company does not own more than a 20
percent equity share or exercise de jure control. This small system rate-setting
methodology almost always results in rates that exceed those produced by the
cost-of-service rules applicable to larger cable television operators. Once the
initial rates are set they can be adjusted periodically for inflation and
external cost changes as described above. When an eligible "small system" grows
larger than 15,000 basic customers, it can maintain its then current rates but
it cannot increase its rates in the normal course until an increase would be
warranted under the rules applicable to systems that have more than 15,000
customers. When a "small cable company" grows larger than 400,000 basic
customers, the qualified systems it then owns will not lose their small system
eligibility. If a small cable company sells a qualified system, or if the
company itself is sold, the qualified systems retain that status even if the
acquiring company is not a small cable company. We were a "small cable company"
prior to the October 30, 1998 completion of the AT&T Broadband transaction but
we no longer enjoy this status and as a result, we are no longer entitled to
this benefit. However, as noted above, the systems with less than 15,000
customers owned by us prior to the completion of the AT&T Broadband transaction
remain eligible for "small system" rate regulation.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, that is to say that the system is located in the
25
station's area of dominant influence, to elect every three years whether to
require the cable television system to carry the station, subject to certain
exceptions, or whether the cable television system will have to negotiate for
"retransmission consent" to carry the station. The next election between must-
carry and retransmission consent will be October 1, 2002. A cable television
system is generally required to devote up to one-third of its activated channel
capacity for the carriage of local commercial television stations whether
pursuant to mandatory carriage requirements or the retransmission consent
requirements of the 1992 Cable Act. Local non-commercial television stations are
also given mandatory carriage rights, subject to certain exceptions, within the
larger of: (i) a 50 mile radius from the station's city of license; or (ii) the
station's Grade B contour, a measure of signal strength. Unlike commercial
stations, noncommercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
television systems have to obtain retransmission consent for the carriage of all
"distant" commercial broadcast stations, except for certain "superstations,"
which are commercial satellite-delivered independent stations such as WGN. To
date, compliance with the "retransmission consent" and "must carry" provisions
of the 1992 Cable Act has not had a material effect on us, although this result
may change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
recently completed a rulemaking proceeding on the carriage of television signals
in high definition and digital formats. The outcome of this proceeding could
have a material effect on the number of services that a cable operator will be
required to carry. Local television broadcast stations transmitting solely in a
digital format are entitled to carriage. Stations transmitting in both digital
and analog formats, which is permitted during the current transition period,
have no carriage rights for the digital format during the transition.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis. FCC
regulations also enable television stations that have obtained exclusive
distribution rights for syndicated programming in their market to require a
cable television system to delete or "black out" such programming from other
television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal and to provide specific grounds for franchising authorities to consider
in making renewal decisions, including a franchisee's performance under
26
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.
27
The 1996 Telecom Act generally prohibits local exchange carriers from
purchasing a greater than 10% ownership interest in a cable television system
located within the local exchange carrier's telephone service area, prohibits
cable operators from purchasing local exchange carriers whose service areas are
located within the cable operator's franchise area, and prohibits joint ventures
between operators of cable television systems and local exchange carriers
operating in overlapping markets. There are some statutory exceptions, including
a rural exemption that permits buyouts in which the purchased cable television
system or local exchange carrier serves a non-urban area with fewer than 35,000
inhabitants, and exemptions for the purchase of small cable television systems
located in non-urban areas. Also, the FCC may grant waivers of the buyout
provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repealed the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act have been eliminated, although the
FCC's regulations prohibiting broadcast/cable common-ownership currently remain
in effect. The FCC's rules also generally prohibit cable operators from offering
satellite master antenna service separate from their franchised systems in the
same franchise area, unless the cable operator is subject to "effective
competition" there.
The 1996 Telecom Act amended the definition of a "cable system" under the
Communications Act so that competitive providers of video services will be
regulated and franchised as "cable systems" only if they use public rights-of-
way. Thus, a broader class of entities providing video programming may be exempt
from regulation as cable television systems under the Communications Act.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number
of subscribers which a single cable television operator can serve. In general,
no cable television operator can have an attributable interest in cable
television systems which serve more than 30% of all multichannel video
programming subscribers nationwide. Attributable interests for these purposes
include voting interests of 5% or more, unless there is another single holder of
more than 50% of the voting stock, officerships, directorships and general
partnership interests. The FCC has also adopted rules which limit the number of
channels on a cable television system which can be occupied by national video
programming services in which the entity which owns the cable television system
has an attributable interest. The limit is 40% of the first 75 activated
channels. The U.S. Court of Appeals for District of Columbia Circuit has
recently upheld the constitutionality of these rules. A petition for certiorari
has been denied by the Supreme Court. The U.S. Court of Appeals for District of
Columbia Circuit has recently decided an appeal on the rules themselves. In that
decision, the Court reversed and remanded the horizontal and vertical ownership
for further proceedings.
The 1996 Telecom Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators over competitors
and requires such programmers to sell their programming to other multichannel
video
28
distributors. This provision limits the ability of vertically integrated cable
programmers to offer exclusive programming arrangements to cable companies. The
prohibition on certain types of exclusive programming arrangements is set to
expire on October 5, 2002, unless the FCC determines that extension of the
prohibition is necessary to preserve and protect competition in video
programming distribution. We expect the FCC to make a determination on this
issue in 2001.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable television operators can collect and disclose data about individual system
customers. The statute also requires that the system operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable television
operator was found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements were strengthened to require
that cable television operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
Technical Requirements
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
29
systems, are required to separate security from non-security functions in the
customer premises equipment which they sell or lease to their customers and
offer their customers the option of using component security modules obtained
from the multichannel video programming distributors with set-top units
purchased or leased from retail outlets. As of January 1, 2005, multichannel
video programming distributors will be prohibited from distributing new set-top
equipment integrating both security and non-security functions to their
customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
emergency alert system. The rules require all cable television systems to
provide an audio and video emergency alert system message on at least one
programmed channel and a video interruption and an audio alert message on all
programmed channels. The audio alert message is required to state which channel
is carrying the full audio and video emergency alert system message. The FCC
rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install EAS equipment capable
of providing audio and video emergency alert system messages on all programmed
channels by December 31, 1998. Cable television systems with 5,000 or more but
fewer than 10,000 basic customers per headend will have until October 1, 2002 to
comply with that requirement. Cable television systems with fewer than 5,000
basic customers per headend will have a choice of providing either a national
level emergency alert system message on all programmed channels or installing
emergency alert system equipment capable of providing audio alert messages on
all programmed channels, a video interrupt on all channels, and an audio and
video emergency alert system message on one programmed channel. This must be
accomplished by October 1, 2002.
Inside Wiring; Customer Access
In a 1997 order, the FCC established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers who are willing to pay the building owner a
higher fee, where such a fee is permissible. Additionally, the FCC has proposed
to restrict exclusive contracts between building owners and cable operators or
other multichannel video programming distributors. The FCC has also issued an
order preempting state, local and private restrictions on over- the-air
reception antennas placed on rental properties in areas where a tenant has
exclusive use of the property, such as balconies or patios. However, tenants may
not install such antennas on the common areas of multiple dwelling units, such
as on roofs. This order limits the extent to which multiple dwelling unit owners
may enforce certain aspects of multiple dwelling unit agreements which otherwise
would prohibit, for example, placement of direct broadcast satellite television
systems television receiving antennae in multiple dwelling unit areas, such as
apartment balconies or patios, under the exclusive occupancy of a renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they adequately regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they adequately regulate the
rates, terms and conditions for pole attachments. Illinois, Ohio, and Kentucky,
states in which we operate, have made such a certification. In the absence of
state regulation, the FCC administers such pole attachment and conduit use rates
through use of a
30
formula which it has devised. Pursuant to the 1996 Telecom Act, the FCC has
adopted a new rate formula for any attaching party, including cable television
systems, which offers telecommunications services. This new formula will result
in higher attachment rates than at present, but they will apply only to cable
television systems which elect to offer telecommunications services. Any
increases pursuant to this new formula begin in 2001, and will be phased in by
equal increments over the five ensuing years. The FCC ruled that the provision
of Internet services will not, in and of itself, trigger use of the new formula.
However, the U.S. Court of Appeals for the Eleventh Circuit held that, since
Internet provision is neither a "cable service" or a "telecommunications
service," neither rate formula applies and, therefore, public utilities are free
to charge what they please. The Supreme Court has agreed to review this
decision. The FCC has also initiated a proceeding to determine whether it should
adjust certain elements of the current rate formula. If adopted, these
adjustments could increase rates for pole attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; equal employment opportunity; deletion of
syndicated programming; registration procedure and reporting requirements;
customer service; closed captioning; obscenity and indecency; program access and
exclusivity arrangements; and limitations on advertising contained in
nonbroadcast children's programming.
The FCC has recently issued a Notice of Inquiry covering a wide range of
issues relating to Interactive Television ("ITV"). Examples of ITV services are
interactive electronic program guides and access to a graphic interface that
provides supplementary information related to the video display. In the near
term, cable systems are likely to be the platform of choice for the distribution
of ITV services. The FCC has 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.
31
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.
32
Internet Access Service
We offer a service which enables consumers to access the Internet at high
speeds via high capacity broadband transmission facilities and cable modems. We
compete with many other providers of Internet access services which are known as
Internet service providers. Internet service providers include such companies as
America Online and Mindspring Enterprises as well as major telecommunications
providers, including AT&T and local exchange telephone companies. Recently,
several Internet service providers asked the FCC as well as local authorities to
require cable companies offering Internet access services over their broadband
facilities to allow access to those facilities on an unbundled basis to other
Internet service providers. In a recent report on the deployment of advanced
telecommunications capability under Section 706 of the 1996 Telecom Act, the FCC
declined to convene a proceeding to consider whether to impose such an access
requirement on cable companies. However, the FCC indicated that it would
continue to monitor the issue of broadband deployment and, to that end, the FCC
has recently issued a notice of inquiry in which it asks, among other things,
questions regarding what regulatory approach it should pursue. Also, the FCC
denied requests by certain Internet service providers that it condition its
approval of the merger of AT&T Broadband and TCI, now known as AT&T Broadband,
on a requirement that those companies allow access by Internet service providers
to their broadband facilities. Several local jurisdictions also are reviewing
this issue. Last year, the Ninth Circuit overturned a requirement, imposed by a
local franchising authority in the context of a franchise transfer, that the
cable operator, if it chooses to provide Internet service, must provide open
access to its system for other Internet service providers on the ground that
Internet access is not a cable service and thus is not subject to local
franchising authority regulation. U.S. District Courts in Virginia and Florida
have also held that a local franchising authority cannot impose an open access
requirement. An appeal from the Virginia ruling is pending before the Fourth
Circuit.
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act, added to that act by the 1996 Telecom Act, declares it to be the policy of
the United States to promote the continued development of the Internet and other
interactive computer services and interactive media, and to preserve the vibrant
and competitive free market that presently exists for the Internet and other
interactive computer services, unfettered by federal or state regulation. One
area in which Congress did attempt to regulate content over the Internet
involved the dissemination of obscene or indecent materials. The provisions of
the 1996 Telecom Act, generally referred to as the Communications Decency Act,
were found to be unconstitutional, in part, by the United States Supreme Court
in 1997. In response, Congress passed the Child Online Protection Act. The
constitutionality of this act is currently being challenged in the courts.
Local Telecommunications Services
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require fair and reasonable, competitively neutral and
non-discriminatory compensation for management of the public rights-of-way when
cable operators provide telecommunications service. State and local governments
must publicly disclose such required payments.
We have entered into a ten-year agreement with AT&T Broadband that will
allow AT&T Broadband to provide to customers telephony services using our
network infrastructure and AT&T Broadband's switching and long distance
transport facilities. Local telecommunications service is subject to
33
regulation by state utility commissions. Use of local telecommunications
facilities to originate and terminate long distance services, a service commonly
referred to as "exchange access," is subject to regulation both by the FCC and
by state utility commissions. As a provider of local exchange service, AT&T
Broadband would be subject to the requirements imposed upon local exchange
carriers by the 1996 Telecom Act. These include requirements governing resale,
telephone number portability, dialing parity, access to rights-of-way and
reciprocal compensation. AT&T Broadband's ability to successfully offer local
telecommunications service will be dependent, in part, on the opening of local
telephone networks by incumbent local telephone companies as required of them by
the 1996 Telecom Act.
In January 1999, the United States Supreme Court reversed and vacated in
part an earlier decision of a federal court of appeals striking down portions of
the FCC's 1996 rules governing local telecommunications competition. The Supreme
Court held that the FCC has authority under the Communications Act to establish
rules to govern the pricing of facilities and services provided by incumbent
local exchange carriers ("ILECs") to open their local networks to competition.
However, on July 18, 2000, the United States Court of Appeals for the Eighth
Circuit vacated several FCC rules concerning interconnection and pricing of ILEC
network elements, including a rule that mandates that ILECs set prices for
unbundled network elements at the lowest cost network configuration, and another
rule that would have required the ILECs to bundle combinations of network
elements at the competing carrier's request. The U.S. Supreme Court decided to
review this decision (consolidated with four other lower court challenges to the
FCC's interconnection rules) in its next session, which commences in October
2001. In April 2000, the FCC ruled that incumbent local exchange carriers must
use their "best efforts" to acquire intellectual property rights from third
party vendors for the benefit of a competing carrier seeking unbundled access to
network elements associated with such intellectual property rights.
Employees
As of December 31, 2000, after giving effect to the Transactions, we
employed approximately 2,600 full-time employees and 120 part-time employees. We
consider our relations with our employees to be good.
Item 2. Properties
A cable television system consists of three principal operating
components:
. The first component, the signal reception processing and originating
point called a "headend," receives television, cable programming service,
radio and data signals that are transmitted by means of off-air antennas,
microwave relay systems and satellite earth systems. Each headend
includes a tower, antennae or other receiving equipment at a location
favorable for receiving broadcast signals and one or more earth stations
that receives signals transmitted by satellite. The headend facility also
houses the electronic equipment, which amplifies, modifies and modulates
the signals, preparing them for passage over the system's network of
cables.
. The second component of the system, the distribution network, originates
at the headend and extends throughout the system's service area. A cable
system's distribution network consists of microwave relays, coaxial or
fiber optic cables placed on utility poles or buried underground and
associated electronic equipment.
. The third component of the system is a "drop cable," which extends from
the distribution network
34
into each customer's home and connects the distribution system to the
customer's television set.
We own and lease parcels of real property for signal reception sites
which house our antenna towers and headends, microwave complexes and business
offices which includes our principal executive offices. In addition, we own our
cable systems' distribution networks, various office fixtures, test equipment
and service vehicles. The physical components of our cable systems require
maintenance and periodic upgrading to keep pace with technological advances. We
believe that our properties, both owned and leased, are in good condition and
are suitable and adequate for our business operations as presently conducted and
as proposed to be conducted.
Item 3. Legal Proceedings
Certain of our systems, including systems contributed as part of the
Transactions, were named in class actions in which the plaintiffs generally
alleged that late fees charged by the systems were not reasonably related to the
costs incurred by the cable systems as a result of the late payment. Plaintiffs
sought compensation from the systems for late fees charged in past periods.
These actions were settled in March 2000 pursuant to a settlement agreement
entered into with the defendants and their attorneys.
Various local franchising authorities in the Kentucky systems filed basic
service rate orders requiring us to cease collecting state and local property
taxes from customers. We have announced that certain of our Kentucky systems
will grant a one-time credit to customers as a result of settlement agreements
with local franchising authorities. However, the Telecommunications Board of
Northern Kentucky has commenced administrative proceedings relating to such rate
order, which we are vigorously defending. There can be no assurance that we will
enter into a similar settlement agreement in Northern Kentucky. As part of the
settlements, AT&T Broadband has agreed to reimburse the Kentucky systems for
rate refunds payable to customers in those communities subject to rate orders.
Insight Kentucky and certain prior owners of the Kentucky systems,
including affiliates of AT&T Broadband, have been named in class actions
generally alleging that the Kentucky systems have improperly passed through
state and local property tax charges to customers. The plaintiffs in these
actions seek monetary damages and the enjoinment of the collection of such
taxes. Such class actions are (i) Alfred P. Sykes, Jr., Charles Pearl, Linda
Pearl vs. InterMedia Partners of Kentucky, L.P. and TCI TKR of Jefferson County,
Inc., which was filed on March 26, 1999 in Jefferson County Circuit Court and
consolidated with James F. Dooley vs. TCI TKR of Jefferson County and InterMedia
Partners of Kentucky, L.P., which was filed on March 24, 1999 in Jefferson
County Circuit Court, and (ii) Charles Shaw and Loretta Shaw vs. TCI TKR of
Northern Kentucky, Inc. TCI TKR of Southern Kentucky, Inc., TCI Cablevision of
North Central Kentucky, Inc., TCI Cablevision of Kentucky, Inc. and InterMedia
Partners of Kentucky, L.P., which was filed on June 4, 1999 in the Franklin
County Circuit Court. The classes have not been certified in these actions and
we are defending these actions vigorously. Plaintiff's counsel filed an
additional class action lawsuit in Boone County Circuit Court entitled R.
Stafford Johnson v. Insight Kentucky Partners II, L.P., TCI/TKR of Northern
Kentucky, Inc. et. al. on October 27, 1999, making the same allegations as the
other filed actions. This lawsuit was dismissed on January 21, 2000, due to the
existence of the Franklin County case, which was held to be a superior action
with identical issues. We believe that the Kentucky systems have substantial and
meritorious defenses to these claims, especially claims by customers that reside
in the communities that have entered into settlement agreements with the
Kentucky systems, as described above. Motions to dismiss both the Jefferson
County and Franklin County actions were denied and we have filed appeals of
these decisions to the Supreme Court of Kentucky. In addition, the Kentucky
systems have filed a declaratory judgement action in the United States District
Court for the Eastern District of Kentucky asking the federal courts to declare
that the issues at bar in the purported class actions are preempted under
federal
35
law. This action was dismissed by the District Court and is on appeal to the 6th
Circuit Court of Appeals. On April 30, 1999, InterMedia Capital Partners VI,
L.P. submitted a request for indemnity to affiliates of AT&T Broadband for
certain losses arising out of these matters pursuant to the contribution
agreement dated October 30, 1997 under which these systems were contributed to
InterMedia Capital Partners VI, L.P.
The City of Louisville, Kentucky has granted additional franchises to
Knology, Inc. and TotaLink of Kentucky, LLC. Our Kentucky subsidiary's franchise
from the City of Louisville provides us with the right to challenge the grant of
any subsequent franchises that are on terms more favorable than our own.
Pursuant to such franchise provision, we filed for declaratory judgment in the
Jefferson County Circuit Court against the City of Louisville, Kentucky for its
grant of a more favorable franchise to Knology on November 2, 2000, and to
TotaLink on December 21, 2000. The assertion of the declaratory judgment actions
effectively stays the grant of these franchises until the court determines
whether the franchises were granted on more favorable terms. These actions are
awaiting finalization of a discovery schedule. On November 8, 2000, Knology,
Inc. filed a federal court action in the United States District Court for the
Western District of Kentucky, naming Insight LP and our Kentucky operating
subsidiary as defendants. The action also named the City of Louisville, Kentucky
as a defendant. The suit seeks unspecified money damages and injunctive relief
for alleged violations of the antitrust laws, the Communications Act and the
Civil Rights Act of 1899, arising out of our having filed, under provisions of
our own franchise from the City, the state court challenge to Knology's cable
television franchise awarded by the City. On December 20, 2000, we moved to
dismiss the federal court action for failure to state a claim for relief and for
being outside the jurisdiction of the federal court. On the same date, Knology
moved for a preliminary injunction "against" a provision of its franchise that
suspends the franchise's effectiveness during the pendency of our state court
challenge. Both the motion to dismiss and the motion for preliminary injunction
are pending before the federal court. We believe the claims in the federal
action to be without merit and intend to defend it vigorously.
We believe there are no other pending or threatened legal proceedings
that, if adversely determined, would have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
None.
36
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no public trading market for our equity, all of which is held
equally by our manager, through Insight LP, and AT&T Broadband, through TCI of
Indiana Holdings.
Item 6. Selected Financial Data
In the table below, we provide you with our selected consolidated
historical financial and other data, including our predecessors, as of and for
the five years ended December 31, 2000. We have prepared the selected financial
information using:
. our audited financial statements for the year ended December 31, 2000;
. our audited financial statements for the year ended December 31, 1999,
which includes the Insight Communications Midwest (formerly known as
Insight Communications of Indiana) systems for the year ended December
31, 1999 and the Insight Kentucky systems from October 1, 1999 (date of
acquisition) through December 31, 1999;
. the audited financial statements of Insight Communications Midwest for
the period from November 1, 1998 through December 31, 1998, which
includes the Insight Communications Midwest systems which were
contributed by Insight LP and AT&T Broadband as of October 31, 1998;
. the audited financial statements for the Noblesville, Jeffersonville and
Lafayette, Indiana cable television systems for the ten-month period
ended October 31, 1998 and for the year ended December 31, 1997, which
includes the Lafayette system from December 16, 1997 (date of
acquisition); and
. the unaudited financial statements for the Noblesville, Jeffersonville
and Lafayette, Indiana cable television systems for the year ended
December 31, 1996. In our opinion, the unaudited financial data for the
year ended December 31, 1996 has been prepared on the same basis as the
audited financial statements and includes all normal recurring
adjustments and accruals necessary for a fair presentation of such
information.
When you read this selected consolidated historical financial and other
data, it is important that you read along with it the historical financial
statements and related notes in our consolidated financial statements included
herein, as well as "Management's Discussion and Analysis of Financial Condition
and Results of Operations," also included herein.
37
Year Ended December 31,
----------------------------------------------------------
2000 1999 1998 (1) 1997 1996
----------------------------------------------------------
Statement of Operations Data: (dollars in thousands)
Revenues $ 379,720 $ 201,286 $ 57,411 $ 22,055 $19,264
Operating costs and expenses:
Programming and other operating costs 130,306 59,587 15,234 5,852 5,064
Selling, general and administrative expenses 73,378 44,199 9,856 3,296 2,933
Depreciation and amortization 195,669 109,110 24,788 5,498 3,941
--------------------------------------------------------
Operating income (loss) (19,633) (11,610) 7,533 7,409 7,326
--------------------------------------------------------
Interest expense, net (112,135) (50,900) (5,824) -- --
Other income (expense) (342) (167) (91) (26) 5
--------------------------------------------------------
Net income (loss) $ (132,110) $ (62,677) $ 1,618 $ 7,383 $ 7,331
========================================================
Other Financial Data:
EBITDA (2) $ 175,694 $ 97,333 $ 32,230 $ 12,881 $11,272
Adjusted EBITDA (3) 187,000 103,432 33,006 12,907 11,267
Adjusted EBITDA margin (4) 49.2% 51.4% 57.5% 58.5% 58.5%
Capital expenditures $ 196,103 $ 107,901 $ 25,454 $ 17,246 $ 6,371
Net cash provided by operating activities 60,151 102,918 41,375 13,339
Net cash used in investing activities (199,812) (110,441) (26,052) (25,891)
Net cash provided by financing activities 109,400 21,627 4,318 12,588
Balance Sheet Data (as of end of period):
Cash and cash equivalents $ 5,735 $ 35,996 $ 19,493 $ 143 $ 107
Fixed assets, net 681,490 596,246 129,776 45,783 30,960
Total assets 1,699,547 1,706,599 527,332 105,289 30,193
Total debt 1,347,523 1,232,000 460,000 -- --
Partners' equity 236,437 368,547 44,195 102,134
38
As of December 31, 2000, except where noted
---------------------------------------------------------
Pro Forma
---------------------------------------------------------
Indiana Kentucky Illinois Ohio Total
Systems Systems Systems (5) System Systems
------- ------- ----------- ------ -------
Technical Data:
Network miles 7,752 8,998 7,876 2,686 27,312
Number of headends 28 11 39 1 79
Number of headends
expected upon
completion of upgrades
during 2001 (6) 6 5 8 1 20
Number of headends
serving 95% of our
customers expected
upon completion of
upgrades during
2001 (6) 3 4 5 1 13
Operating Data:
Homes passed (7) 515,800 748,000 685,100 184,400 2,133,300
Basic customers (8) 320,000 442,000 431,100 85,400 1,278,500
Basic penetration (9) 62.0% 59.1% 62.9% 46.3% 59.9%
Digital ready homes (10) 246,800 404,700 364,700 47,800 1,064,000
Digital customers (11) 27,900 47,000 63,800 13,400 152,000
Digital penetration (12) 11.3% 11.6% 17.5% 28.0% 14.3%
Premium units (13) 208,000 290,700 345,200 84,700 928,600
Premium penetration (14) 65.0% 65.8% 80.1% 99.2% 72.6%
Cable modem 7,800 15,700 23,400 4,900 51,800
customers (15)
(1) Represents the combination of the operating results of Insight
Communications Midwest (formerly known as Insight Communications of
Indiana) from November 1, 1998 to December 31, 1998 and the Noblesville,
Indiana, Jeffersonville, Indiana and Lafayette, Indiana Cable Television
Systems of Insight LP from January 1, 1998 to October 31, 1998, including
depreciation and amortization of approximately $14.0 million and
approximately $10.8 million during the periods from November 1, 1998 to
December 31, 1998 and from January 1, 1998 to October 31, 1998
respectively. The combination of the two periods is not necessarily
indicative of what the results of Insight Communications Midwest or the
Noblesville, Indiana, Jeffersonville, Indiana and Lafayette, Indiana Cable
Television Systems would have been for the 1998 calendar year.
(2) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the
cable television industry to analyze and compare cable television companies
on the basis of operating performance, leverage and liquidity. However,
EBITDA is not intended to be a performance measure that should be regarded
as an alternative to, or more meaningful than, either operating income or
net income as an indicator of operating performance or cash flows as a
measure of liquidity, as determined in accordance with generally accepted
accounting principles. EBITDA, as computed by management, is not
necessarily comparable to similarly titled amounts of other companies. See
our financial statements, including the statements of cash flows, which
appear elsewhere in this report.
39
(3) Represents EBITDA prior to non-cash items and other non-recurring income
and expense items. The following table sets forth a reconciliation of
EBITDA to Adjusted EBITDA:
Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
EBITDA $175,694 $ 97,333 $32,230 $12,881 $11,272
Other (income) expense 342 167 91 26 (5)
Management fees 10,964 5,932 685 -- --
-------- -------- ------- ------- -------
Adjusted EBITDA $187,000 $103,432 $33,006 $12,907 $11,267
======== ======== ======= ======= =======
(4) Represents Adjusted EBITDA as a percentage of total revenues.
(5) Includes our Griffin, Georgia system.
(6) The upgrades of the newly acquired Illinois systems are scheduled to be
completed by the end of 2002.
(7) 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.
(8) 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.
(9) Basic penetration means basic customers as a percentage of total number of
homes passed.
(10) Digital ready homes means the total number of homes passed to which digital
service is available.
(11) Customers with a digital converter box.
(12) Digital penetration means digital service units as a percentage of digital
ready homes.
(13) Premium units mean the number of subscriptions to premium services, which
are paid for on an individual unit basis.
(14) Premium penetration means premium service units as a percentage of the
total number of basic customers. A customer may purchase more than one
premium service, each of which is counted as a separate premium service
unit. This ratio may be greater than 100% if the average customer
subscribes to more than one premium service unit.
(15) Customers receiving high-speed Internet service.
40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Because of the corporate transactions completed over the past three
years, including the contribution agreements with affiliates of AT&T Broadband
with respect to the Indiana, Kentucky, Ohio and Illinois systems, we do not
believe the discussion and analysis of our historical financial condition and
results of operations below are indicative of our future performance.
On October 31, 1998, our manager exchanged its Utah systems for AT&T
Broadband's Evansville, Indiana system. Simultaneously, our manager completed a
contribution agreement with AT&T Broadband forming Insight Communications
Midwest (formerly Insight Communications of Indiana, LLC) and contributed
certain of its Indiana systems, the Noblesville, Lafayette and Jeffersonville
systems (the "Insight Contributed Systems"), as well as the Evansville system to
Insight Communications Midwest. At the same time, AT&T Broadband contributed
most of its Indiana systems to Insight Communications Midwest.
On October 1, 1999, our manager acquired a combined 50% interest in
InterMedia Capital Partners VI, L.P. (now known as Insight Communications of
Kentucky) from related parties of Blackstone Cable Acquisition Company, LLC,
related parties of InterMedia Capital Management VI, LLC and a subsidiary and
related party of AT&T Broadband, for approximately $341.5 million (inclusive of
expenses), and we assumed debt of approximately $742.1 million.
On October 1, 1999, our manager completed an agreement with affiliates of
AT&T Broadband, pursuant to which our manager and affiliates of AT&T Broadband
each contributed their respective 50% interests in Insight Kentucky and in
Insight Communications Midwest in exchange for a 50% interest in us.
On July 17, 2000, we entered into a ten-year agreement with AT&T
Broadband that will allow AT&T Broadband to provide telephony services under the
AT&T Digital brand using our network infrastructure and AT&T Broadband's
switching and transport facilities.
On August 8, 2000, our manager completed the purchase of the remaining
25% common equity interest in Insight Ohio, which it previously did not own. At
the same time, the Insight Ohio operating agreement was amended to provide our
manager with 70% of its total voting power.
On January 5, 2001, we completed a series of transactions with our
manager and the AT&T Cable Subsidiaries. As a result of the Transactions,
additional cable television systems (including Insight Ohio) serving
approximately 530,000 customers were contributed to us. Specifically, we
acquired all of Insight LP's systems not already owned by us as well as systems
which Insight LP purchased from the AT&T Cable Subsidiaries (comprising in total
approximately 280,000 customers). The AT&T Cable Subsidiaries contributed to us
systems located in Illinois serving approximately 250,000 customers. Both
Insight LP and the AT&T Cable Subsidiaries contributed their respective systems
to us subject to an amount of indebtedness so that we remain equally owned by
Insight LP and AT&T Broadband. Insight LP continues to serve as our general
partner and manages and operates our systems.
Results of Operations
Substantially all of our historical revenues of each of our systems were
earned from customer fees for cable television programming services including
premium and pay-per-view services and ancillary
41
services, such as rental of converters and remote control devices and
installations, and from selling advertising. In addition, we earned revenues
from commissions for products sold through home shopping networks.
We have generated increases in revenues and Adjusted EBITDA for each of
the past three fiscal years, primarily through a combination of acquisitions,
internal customer growth, increases in monthly revenue per customer and growth
in advertising and increasingly new revenue from selling new services including
high-speed data access and interactive digital video.
As the Insight Contributed Systems and Insight Communications Midwest are
the predecessors of Insight Midwest, the following discussion includes the
results of operations for Insight Contributed Systems for the period January 1,
1998 through October 31,1998 combined with the results of operations of Insight
Communications Midwest for the period November 1, 1998 (date of inception)
through December 31, 1998; the results of operations of Insight Communications
Midwest for the year ended December 31, 1999 combined with the results of
operations for Insight Kentucky for the period October 1, 1999 through December
31, 1999; and the results of Insight Midwest for the year ended December 31,
2000. The following table reflects these results of operations:
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- --------
(in thousands)
Revenues.................................................. $ 379,720 $ 201,286 $ 57,411
Operating costs and expenses:
Programming and other operating costs..................... 130,306 59,587 15,234
Selling, general and administrative....................... 73,378 44,199 9,856
Depreciation and amortization............................. 195,669 109,110 24,788
--------- --------- --------
Operating income (loss)................................... (19,633) (11,610) 7,533
EBITDA.................................................... 175,694 97,333 32,230
Adjusted EBITDA........................................... 187,000 103,432 33,006
Interest expense, net..................................... 112,135 50,900 5,824
Net income (loss)......................................... (132,110) (62,677) 1,618
Net cash provided by operating activities................. 60,151 102,917 41,375
Net cash used in investing activities..................... (199,812) (110,441) (26,052)
Net cash provided by financing activities................. 109,400 21,627 4,318
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased 88.6% to $379.7 million for the year ended December
31, 2000 compared to $201.3 million for the year ended December 31, 1999. The
results were impacted by the acquisition of Insight Kentucky on October 1, 1999.
The incremental revenue generated from the Kentucky systems approximated $173.4
million accounting for 97.2% of the consolidated revenue increase. In addition,
revenues increased as a result of rate increases and growth in advertising
revenues.
Revenues per customer per month averaged $42.65 for the year ended
December 31, 2000 compared to $39.08 for the year ended December 31, 1999. The
increase is primarily attributable to customer rate increases as we continued to
activate nodes in rebuilt areas resulting in higher basic rates. The average
monthly basic revenue per customer increased by approximately $2.56 or 8.4% from
$27.85 for the year ended December 31, 1999 to $30.41 for the year ended
December 31, 2000. In addition, we continued the roll out of our high speed
data service which increased our average monthly revenue per customer by
approximately $.73 per month.
42
Programming and other operating costs increased 118.7% to $130.3 million
for the year ended December 31, 2000 compared to $59.6 million for the year
ended December 31, 1999. The Kentucky systems accounted for approximately 87.9%
or approximately $62.2 million of the total increase. Excluding these systems,
these costs increased by approximately $8.5 million accounting for 12.1% of the
total increase, primarily as a result of increased programming rates and
additional programming carried by our systems.
Selling, general and administrative expenses increased 63.1% to $62.4
million for the year ended December 31, 2000 compared to $38.3 million for the
year ended December 31, 1999. The increase is primarily attributable to the
Kentucky Systems.
Depreciation and amortization expense increased 79.3% to $195.7 million
for the year ended December 31, 2000 compared to $109.1 million for the year
ended December 31, 1999. This increase was primarily due to the Kentucky
acquisition discussed above and additional capital expenditures associated with
the rebuilds of our systems, partially offset by a decrease in depreciation
expense attributable to a change in estimate as of January 1, 2000 which
resulted in new assets being depreciated over longer lives.
For the year ended December 31, 2000, an operating loss of $19.6 million
was incurred as compared to $11.6 million for the year ended December 31, 1999,
for reasons set forth above.
EBITDA increased 80.5% to $175.7 million for the year ended December 31,
2000 as compared to $97.3 for the year ended December 31, 1999 primarily
reflecting the acquisition of the Kentucky systems. EBITDA represents earnings
(loss) before interest, taxes, depreciation and amortization. Our management
believes that EBITDA is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, EBITDA is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as determined in
accordance with generally accepted accounting principles. EBITDA, as computed by
management, is not necessarily comparable to similarly titled amounts of other
companies.
Net interest expense increased 120.3% to $112.1 million for the year
ended December 31, 2000 compared to $50.9 million for the year ended December
31, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the acquisitions. Average debt outstanding during the
year ended December 31, 2000 was $1.3 billion at an average interest rate of
8.8%.
For the year ended December 31, 2000 a net loss of $132.1 million was
realized for the reasons set forth above.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues increased 250.6% to $201.3 million for the year ended December
31, 1999, as compared to the prior year. The incremental revenue generated from
AT&T Broadband's contributed systems and the Evansville system approximated
$77.4 million accounting for 53.8% of the total increase in combined revenue.
The contribution of Insight Kentucky to Insight Midwest on October 1, 1999
accounted for approximately $57.0 million or 39.6% of the revenue increase. In
addition, revenues increased as a result of internal customer growth and rate
increases. Excluding the transactions described above, revenues increased by
approximately $9.5 million due to an increase of approximately 1,800 customers
on average, and by approximately $7.2 million attributable to an increase of
approximately $5.98 in the average monthly revenue per customer. The increase in
the average monthly revenue per customer is primarily attributable to
43
customer rate increases as the Insight Contributed Systems turned on nodes in
upgraded areas resulting in higher monthly basic rates.
Programming and other operating costs increased 291.1% to $59.6 million
for the year ended December 31, 1999 as compared to the prior year of which the
additional Indiana systems contributed by AT&T Broadband and the Evansville
system accounted for approximately 49.7% of the increase and the Insight
Kentucky systems accounted for approximately 42.9% of the increase. Excluding
this transaction, these costs increased by 21.5% to $18.5 million, primarily as
a result of increased programming costs and additional programming carried by
our systems.
Selling, general and administrative expenses increased 317.3% to $38.3
million for the year ended December 31, 1999 as compared to the prior year of
which the additional Indiana systems contributed by AT&T Broadband and the
Evansville system accounted for approximately 69.0% of the increase and the
Insight Kentucky systems accounted for approximately 34.5% of the increase.
Excluding these transactions, these costs decreased by 11.0% to $8.2 million.
Management fees for the year ended December 31, 1998 totaled
approximately $700,000 reflecting only two months of charges to Insight
Communications Midwest compared to the year ended December 31, 1999 which
reflects charges to Insight Communications Midwest totaling approximately $4.3
million and charges to Insight Kentucky of approximately $1.6 million for the
period October 1 through December 31, 1999.
Depreciation and amortization expense increased 340.2% to $109.1 million
for the year ended December 31, 1999 as compared to the prior year. Of the $84.3
million increase, approximately 59.8% was attributable to the additional Indiana
systems contributed by AT&T Broadband and the Evansville system while the
Insight Kentucky systems accounted for approximately 29.7% of the increase.
Excluding these transactions, these costs increased by 35.6% to $33.6 million,
primarily due to additional capital expenditures associated with the network
upgrades of the Insight Contributed Systems.
Operating income decreased to a loss of $11.6 million for the year ended
December 31, 1999, a decrease of 254.1% as a result of the items discussed
above.
Adjusted EBITDA increased 213.4% to $103.4 million for the year ended
December 31, 1999 as compared to the prior year reflecting the additional
Indiana systems contributed by AT&T Broadband and the Evansville system in
addition to the contribution of the Insight Kentucky systems which accounted for
approximately 89.7% of the increase on a combined basis.
Interest expense increased to $50.9 million for the year ended December
31, 1999 reflecting: (a) interest on the Indiana credit facility totaling
approximately $34.3 million, (b) interest on the Kentucky credit facility for
the period from October 1, 1999 through December 31, 1999 totaling approximately
$12.0 million and (c) interest on our 9 3/4% senior notes due 2009 for the
period from October 1, 1999 through December 31, 1999 totaling approximately
$4.9 million. Interest expense increased by $45.1 million over the prior year as
1998 reflected only two months of borrowing under the Indiana credit facility.
Net income of $1.6 million for the year ended December 31, 1998 decreased
by $64.3 million to a net loss of $62.7 million for the year ended December 31,
1999 primarily reflecting increased depreciation and amortization charges and
increased interest expense.
Liquidity and Capital Resources
44
Our business requires cash for operations, debt service, capital
expenditures and acquisitions. The cable television business has substantial on-
going capital requirements for the construction, expansion and maintenance of
its broadband networks. Expenditures have primarily been used to upgrade our
existing cable network, and in the future will be used for network extensions,
new services, converters and network upgrades. Historically, we have been able
to meet our cash requirements with cash flow from operations, borrowings under
our credit facilities, and private and public debt and equity.
For the year ended December 31, 1999 and the year ended December 31,
2000, we spent $107.9 million and $196.1 million, respectively, for capital
expenditures largely to support our network upgrades, digital converter
purchases and to a lesser extent network extensions. For the year ended December
31, 1999 and the year ended December 31, 2000, cash from operations totaled
$102.9 million and $60.1 million, respectively, which together with borrowings
under our credit facilities, funded the above noted capital expenditures.
For the year ending December 31, 2001, it is anticipated that we will
spend approximately $300 million on capital expenditures, including capital
expenditures required for success-based deployment of new services and telephony
and the upgrade of the Illinois cable television systems, which will involve the
wide deployment of fiber optics and other capital projects associated with
implementing our clustering strategy.
We have concluded a number of financing transactions, which fully support
our operating plan. These transactions are detailed as follows:
On October 1, 1999, in connection with our formation, we completed an
offering of $200.0 million principal amount of 9 3/4% senior notes due 2009. The
net proceeds of the offering were used to repay certain outstanding debt of the
Kentucky systems. On November 6, 2000, we completed an offering of $500.0
million principal amount of 10 1/2% senior notes due 2010. The net proceeds of
the offering of $486.0 million were used to repay a portion of the Indiana and
Kentucky credit facilities. Interest on our 9 3/4% senior notes is payable on
April 1 and October 1 of each year and interest on our 10 1/2% senior notes is
payable on May 1 and November 1 of each year. The indentures relating to these
senior notes impose certain limitations on our ability to, among other things,
incur debt, make distributions, make investments and sell assets.
On January 5, 2001, we consummated the Transactions with our manager and
the AT&T Cable Subsidiaries. As a result of these Transactions, additional cable
television systems serving approximately 530,000 customers were contributed to
us. In conjunction with the Transactions, our subsidiary Insight Midwest
Holdings, LLC, which subsidiary serves as a holding company for all of our
systems other than the Columbus, Ohio system, consummated on January 5, 2001 a
$1.75 billion credit facility from which it borrowed $663 million to repay the
Indiana and Kentucky credit facilities and $685 million to finance the
Transactions, providing for unused availability of approximately $402 million to
support the aforementioned capital expenditures. In connection with the
financing of the Transactions, Insight LP borrowed approximately $20.0 million
from Midwest Holdings pursuant to a three-year revolving note. On February 15,
2001, Insight LP repaid the note in full including interest.
The Midwest Holdings credit facility permits the distribution of cash
from our operating subsidiaries to us to enable us to pay interest on our 9 3/4%
senior notes and 10 1/2% senior notes, so long as there exists no default under
the credit facility. The Midwest Holdings credit facility contains covenants
restricting, among other things, the ability of Midwest Holdings and its
subsidiaries to acquire or dispose of assets, make investments and engage in
transactions with related parties. The facility also requires
45
compliance with certain financial ratios, and contains customary events of
default.
We acquired all of the common equity interests of Insight Ohio as part of
the Transactions. Insight Ohio is an unrestricted subsidiary under the
indentures governing our senior notes, and is prohibited by the terms of its
indebtedness from making distributions to us. Insight Ohio has a $25.0 million
reducing revolving credit facility, maturing in September 2004, which supports
the Ohio system. As of December 31, 2000, $25.0 million was outstanding under
this credit facility.
Insight Holdings of Ohio LLC, our wholly owned subsidiary, owns 100% of
the common equity of Insight Ohio and Coaxial Communications of Central Ohio,
Inc. owns 100% of the preferred equity of Insight Ohio. Such common and
preferred equity was issued in August 1998 as part of a financing plan which
resulted in (i) Coaxial Communications contributing the Ohio system to Insight
Ohio, (ii) Coaxial Communications and Phoenix Associates, an affiliate of
Coaxial Communications, issuing $140.0 million principal amount of 10% senior
notes due 2006, (iii) Coaxial LLC and Coaxial Financing Corp., an affiliate of
Coaxial LLC, issuing $55.9 million principal amount at maturity of 12 7/8%
senior discount notes due 2008 and (iv) the Coaxial 10% senior notes and the
Coaxial 12 7/8% senior discount notes being conditionally guaranteed by Insight
Ohio.
Interest on the Coaxial 10% senior notes is payable on February 15 and
August 15 of each year. The indenture governing the Coaxial 10% senior notes
imposes certain limitations on the ability of Coaxial Communications, Phoenix
and Insight Ohio to, among other things, incur debt, make distributions, make
investments and sell assets. Interest on the Coaxial 12 7/8% senior discount
notes does not accrue and is not payable prior to August 15, 2003. Thereafter,
cash interest on the Coaxial 12 7/8% senior discount notes will be payable on
February 15 and August 15 of each year, commencing on February 15, 2004. The
indenture governing the Coaxial 12 7/8% senior discount notes imposes certain
limitations on the ability of Coaxial LLC, Coaxial Financing, Coaxial
Communications and Insight Ohio to, among other things, incur debt, make
distributions, make investments and sell assets.
We have a substantial amount of debt. We believe that the Midwest
Holdings credit facility and our cash flow from operations are sufficient to
support our current operating plan.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133,
as amended by SFAS No. 137, became effective for us on January 1, 2001. SFAS No.
133 will require us to recognize all derivatives on the balance sheet at fair
value. Management does not anticipate that the adoption of this statement will
be material.
Risk Factors
We have substantial debt and have significant interest payment requirements
We have a substantial amount of debt. The following table shows certain
important credit statistics about us and is presented on a pro forma basis to
give effect to the Transactions and the repayment of our inter-company loan to
Insight LP.
46
As of December 31,
2000
Pro Forma
----------------------
(dollars in thousands)
Total debt.......................................... $2,058,023
Partners' Capital................................... 1,186,710
Debt to equity ratio................................ 1.73x
Our high level of combined debt could have important consequences for you,
including the following:
. We may have difficulty raising additional funds;
. We will need to use a large portion of our revenues to pay interest on
our borrowings, which will reduce the amount of money available to
finance our operations, capital expenditures and other activities;
. Some of our debt has a variable rate of interest, which exposes us to the
risk of increased interest rates;
. Borrowings under subsidiary credit facilities will be secured and will
mature prior to our outstanding notes;
. We are more vulnerable to economic downturns and adverse developments in
our business;
. We are less flexible in responding to changing business and economic
conditions, including increased competition and demand for new products
and services; and
. We may not be able to implement our strategy.
We depend upon our operating subsidiaries for cash.
Our subsidiaries conduct all of our consolidated operations and own
substantially all of our consolidated assets. Our only source of the cash we
need to pay our obligations and to repay the principal amount of these
obligations is the cash that our subsidiaries generate from their operations and
their borrowings. Our subsidiaries are not obligated to make funds available to
us.
Our subsidiaries' ability to make payments to us will depend upon their
operating results and will be subject to applicable laws and contractual
restrictions. Our subsidiaries must make payments to Insight LP under their
management agreements. Our ability to receive cash from our subsidiaries is
restricted by the terms of the Midwest Holdings credit facility. The Midwest
Holdings credit facility permits Midwest Holdings' subsidiaries to distribute
cash to us, but only so long as there is no default under such credit facility.
If there is a default under the Midwest Holdings credit facility, we would not
have any cash to pay
47
interest on our obligations. The terms of its indebtedness prohibit Insight Ohio
from making distributions to us.
We may not be able to generate enough cash to service our debt
Our ability to make payments on and to refinance our debt and to fund
planned capital expenditures will depend on our ability to generate cash. This
is subject, in part, to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Accordingly, we cannot
assure you that our business will generate sufficient cash flows from operations
or that future distributions will be available to us in amounts sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness on or
before maturity. We cannot assure you that we will be able to refinance any of
our indebtedness on commercially reasonable terms or at all.
Midwest Holdings' credit facility imposes significant restrictions
The Midwest Holdings credit facility contains covenants that restrict
Midwest Holdings' subsidiaries ability to:
. distribute funds or pay dividends to us;
. incur additional indebtedness or issue additional equity;
. repurchase or redeem equity interests and indebtedness;
. pledge or sell assets or merge with another entity;
. create liens; and
. make certain capital expenditures, investments or acquisitions.
The ability of Midwest Holdings' subsidiaries to comply with these
provisions may be affected by events beyond our control. If they were to breach
any of these covenants, they would be in default under the credit facility and
they would be prohibited from making distributions to us.
We have a history of net losses, and may not be profitable in the future
We have a history of net losses and expect to incur additional net losses
in the future. We reported net losses of $132.1 million and $62.7 million for
the years ended December 31, 2000 and December 31, 1999. On a pro forma basis
after giving effect to the Transactions, we would have reported net losses of
$235.9 million and $247.0 million for the years ended December 31, 2000 and
December 31, 1999.
We have and will continue to have a substantial amount of interest
expense in respect of debt incurred and depreciation and amortization expenses
relating to acquisitions of cable systems as well as expansion and upgrade
programs. Such expenses have contributed to the net losses we experienced. We
expect that we will continue to incur such non-operating expenses at increased
levels as a result of our recent acquisitions and our network upgrade program,
which expenses will result in continued net losses.
48
We have a limited history of operating our current cable television systems
and these systems may not generate sales at or exceeding historical levels
We have served the customers of our existing Indiana systems for two
years and the customers of our existing Kentucky systems for one year, and we
are still in the process of integrating these systems. We are still in the
process of integrating our newly purchased Illinois systems. The historical
financial information of our systems may not fully indicate our future operating
results. This makes it difficult for you to completely evaluate our performance.
Our programming costs are substantial and they may increase, which could
result in a decrease in profitability if we are unable to pass that increase on
to our customers
In recent years the cable industry has experienced a rapid escalation in
the cost of programming, and sports programming in particular. For 1998 through
2000, programming costs increased significantly. Our cable programming services
are dependent upon our ability to procure programming that is attractive to our
customers at reasonable rates. Programming costs may continue to escalate and we
may not be able to pass programming cost increases on to our customers. Our
financial condition and results of operations could be negatively affected by
further increases in programming costs. Programming has been and is expected to
continue to be our largest single expense item and accounted for approximately
46% of the total operating expenses for our systems, without giving effect to
the Transactions, for the year ended December 31, 2000.
If we are unable to successfully integrate our newly acquired cable systems
our business could be adversely affected
The integration of new cable systems by us, including the cable systems
we have recently acquired, will place significant demands on our management and
our operational, financial and marketing resources. We expect to continue to
acquire and enter into swaps and joint ventures with respect to cable systems in
nearby or adjacent locations as an element of our strategy. Our current
operating and financial systems and controls may not be adequate. Any steps
taken to improve these systems and controls may not be sufficient to
successfully integrate and manage new cable systems in a timely manner, causing
our business, financial condition, prospects and results of operations to suffer
materially.
As we introduce telephony services, a failure to predict and react to
consumer demand or successfully integrate new technology could adversely affect
our business
The cable television industry is in the early stages of introducing
telephony services. The inability to effectively introduce, market and sell
telephony services, to anticipate consumer demand for such services or to
successfully integrate new technology could have a material adverse effect on
our business, results of operations, prospects and financial condition.
If our manager were to lose members of its senior management and could not
find appropriate replacements in a timely manner, our business could be
adversely affected
If any member of our manager's senior management team ceases to
participate in our business and operations, our profitability could suffer. Our
success is substantially dependent upon the retention of, and the continued
performance by, our manager's senior management.
Our manager continually needs to hire, integrate and retain personnel for
customer relations and
49
field operations positions which require a higher level of technical expertise
and the ability to communicate technical concepts to our customers. There is no
guarantee that our manager will be able to recruit or retain these skilled
workers. Failure to do so could impair our ability to operate efficiently and
maintain our reputation for high quality service. This could impair our ability
to retain current customers and attract new customers, which could cause our
financial performance to decline.
The competition we face from other cable networks and alternative service
providers may cause us to lose market share
The impact from competition, particularly from direct broadcast satellite
television systems and companies that overbuild in our market areas, has
resulted in a decrease in customer growth rates as well as a loss of
subscribers. The industry growth rate for basic customers for the years ended
December 2000 and 1999 was 1.8% in each year, while satellite penetration as of
December 2000 averaged 17.1% nationwide, up from 11.5% in December 1999. This in
turn has negatively impacted our financial performance. Increased competition
may continue to impact our financial performance. Many of our potential
competitors have substantially greater resources than we do, and we cannot
predict the market share our competitors will eventually achieve, nor can we
predict their ability to develop products which will compete with our planned
new and enhanced products and services such as high-speed data access, video-on-
demand and telephony services.
Direct broadcast satellite service consists of television programming
transmitted via high-powered satellites to individual homes, each served by a
small satellite dish. Legislation permitting direct broadcast satellite
operators to transmit local broadcast signals was enacted on November 29, 1999.
This eliminates a significant competitive advantage that cable system operators
have had over direct broadcast satellite operators. Direct broadcast satellite
operators have begun delivering local broadcast signals in the largest markets
and there are plans to expand such carriage to many more markets over the next
year.
Since our cable systems are operated under non-exclusive franchises,
competing operators of cable systems and other potential competitors, such as
municipalities and municipal utility providers, may be granted franchises to
build cable systems in markets where we hold franchises. Competition in
geographic areas where a secondary franchise is obtained and a cable network is
constructed is called "overbuilding." As of December 31, 2000, approximately
10.2% of the homes passed by our cable systems were overbuilt. An affiliate of
Southern Indiana Gas and Electric Co. has overbuilt our Evansville, Indiana
system and passes approximately 75,900 homes also passed by us. In addition,
Knology Inc. and TotaLink of Kentucky LLC have each obtained a franchise to
provide cable television service in our City of Louisville, Kentucky system
which passes approximately 61,900 homes, although those franchises have been
stayed pending litigation. TotaLink of Kentucky, LLC is also in discussions with
the Jefferson County local franchising authority to obtain a franchise to
provide cable television in our system which passes approximately 139,200 homes.
In addition, Ameritech has overbuilt our Columbus, Ohio system and passes
approximately 142,700 homes also passed by us. In our newly acquired Illinois
system, the cities of Galesburg which passes approximately 17,000 homes and
Springfield which passes approximately 60,900 homes are considering municipal
overbuilds. We cannot predict whether competition from these or future
competitors will have a material adverse effect on us and our business and
operations.
We will face competition from providers of alternatives to our Internet and
telephony services
Several telephone companies are introducing digital subscriber line
technology (also known as 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
50
transmission speeds of a cable modem, we believe that the transmission speeds of
digital subscriber line technology are sufficiently high that such technology
will compete with cable modem technology. We cannot predict the impact DSL
technology will have on our Internet access services or on our operations.
As we expand our offerings to include telephony services, our AT&T
branded telephony services will be subject to competition from existing
providers, including both local exchange telephone companies and long-distance
carriers. We cannot predict the extent to which the presence of these
competitors will influence customer penetration in our telephony service areas.
We may be required to provide access to our networks to other Internet
service providers, which could significantly increase our competition and
adversely affect our ability to provide new products and services
The U.S. Congress and the Federal Communications Commission have been
asked to require cable operators to provide access over their cable systems to
other Internet service providers. If we are required to provide open access, it
could prohibit us from entering into or limit our existing agreements with
Internet service providers, adversely impact our anticipated revenues from high-
speed Internet access services and complicate marketing and technical issues
associated with the introduction of these services. To date, the U.S. Congress
and the Federal Communications Commission have declined to impose these
requirements although the FCC has recently issued a notice of inquiry on this
matter. This same open access issue is also being considered by some local
franchising authorities and several courts. Franchise renewals and transfers
could become more difficult depending upon the outcome of this issue.
Our business has been and continues to be subject to extensive governmental
legislation and regulation, and changes in this legislation and regulation could
increase our costs of compliance and reduce the profitability of our business
The cable television industry is subject to extensive legislation and
regulation at the federal and local levels, and, in some instances, at the state
level, and many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. The rules and
regulations governing our business have at times had a material adverse effect
on our business. In addition, operating in a regulated industry increases the
cost of doing business generally. We may also become subject to additional
regulatory burdens and related increased costs. As we continue to introduce
additional communications services, we may be required to obtain federal, state
and local licenses or other authorizations to offer such services. We may not be
able to obtain such licenses or authorizations in a timely manner, or at all, or
conditions could be imposed upon such licenses and authorizations that may not
be favorable to us. Future changes in legislation or regulations could have a
material adverse effect on our business, financial condition, prospects and
results of operations.
Our franchises are subject to non-renewal or termination, which could cause
us to lose our right to operate some of our systems
We operate under non-exclusive franchises granted by local authorities
that are subject to renewal, renegotiation and termination from time to time.
Our cable systems are dependent upon the retention and renewal of their
respective local franchises. We may not be able to retain or renew our
franchises and any renewals may not be on terms favorable to us. The non-renewal
or termination of franchises with respect to a significant portion of any of our
cable systems could have a material adverse effect on our business, financial
condition, prospects and results of operations.
51
Midwest
-------
If we are unable to procure the necessary software and equipment, our ability
to offer our services could be impaired
We depend on vendors to supply the set-top converter boxes, fiber and
other equipment as well as the enabling software for analog and digital cable
services. Equipment is available from a limited number of suppliers. We
typically purchase equipment under purchase orders placed from time to time and
do not carry significant inventories of equipment. If there are delays in
obtaining software or if demand for equipment exceeds our inventories and we are
unable to obtain required software and equipment on a timely basis and at an
acceptable cost, our ability to recognize additional revenue and to add
additional subscribers from these services could be delayed or impaired. In
addition, if there are no suppliers who are able to provide converter devices
that comply with evolving Internet and telecommunications standards or that are
compatible with other products or components we use, our business may be
materially impaired.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our revolving credit and term loan agreements bear interest at floating
rates. Accordingly, we are exposed to potential losses related to changes in
interest rates. We do not enter into derivatives or other financial instruments
for trading or speculative purposes. In order to manage our exposure to interest
rate risk, we enter into derivative financial instruments, typically interest
rate swaps and collars. The counterparties to our swap and collar agreements are
major financial institutions. As of December 31, 2000, our interest rate swap
and collar agreements expire in varying amounts through 2002.
The fair market value of our long-term debt approximates its carrying
value as it bears interest at floating rates of interest and current fair market
value of the senior notes approximates par value. As of December 31, 2000, the
estimated fair value of our interest rate swap and collar agreements was
approximately $(1.9 million), which amount represents the amount
required to enter into offsetting contracts with similar remaining maturities
based on quoted market prices.
As of December 31, 2000, we had entered into interest rate swaps that
approximated $701.0 million, or 95.4%, of our borrowings under all of our credit
facilities. A significant portion of such interest rate swaps were kept in
place as of December 31, 2000 in anticipation of a need to hedge additional
borrowings incurred in connection with our refinancing on January 5, 2001, the
effects of which are mentioned below. Accordingly, a hypothetical 100 basis
point increase in interest rates along the entire interest rate yield curve
would increase our annual interest expense by approximately $299.0 million.
These statistics are not necessarily indicative of our current interest rate
exposure, as these facilities were replaced by the Midwest Holdings credit
facility on January 5, 2001 in connection with the Transactions which resulted
in an increase in our outstanding borrowings.
As of January 5, 2001, primary market risk exposures and methods for
managing such exposures had not changed. Additionally, the notional amount of
our interest rate swaps was also unchanged at approximately $701.0 million or
51% of our borrowings under all our credit facilities. Accordingly, a
hypothetical 100 basis points increase in interest rates along the entire
interest rate yield curve would increase our projected interest expense by
approximately $6.7 million for the year ending December 31, 2001.
Item 8. Financial Statements and Supplementary Data
Reference is made to pps. F-1 through F-34 comprising a portion of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
52
PART III
Item 10. Directors and Executive Officers of the Registrant
Insight LP is our sole general partner. Insight Communications is the
sole general partner of Insight LP. The following table sets forth certain
information with respect to the executive officers of Insight Capital and
Insight Communications. Insight Communications, through Insight LP, serves as
manager of Insight Midwest. The table also includes the members of the Advisory
Committee of Insight Midwest.
The executive officers and key employees of Insight Capital and our manager
and members of the Advisory Committee of Insight Midwest are:
Name Age Position
- ---- --- --------
Sidney R. Knafel............. 70 Chairman of the Board of Insight Capital and Insight
Communications and Chairman of the Advisory Committee
Michael S. Willner........... 48 President and Chief Executive Officer of Insight Capital and
Insight Communications and Member of the Advisory Committee
Kim D. Kelly................. 44 Executive Vice President and Chief Operating and Financial Officer
of Insight Capital and Insight Communications and Member of the
Advisory Committee
Daniel E. Somers............. 52 Member of the Advisory Committee
David Jefferson.............. 49 Member of the Advisory Committee
Elliot Brecher............... 35 Senior Vice President, General Counsel and Secretary of Insight
Communications
E. Scott Cooley.............. 40 Senior Vice President, Employee Relations and Development of
Insight Communications
Charles E. Dietz............. 53 Senior Vice President, Engineering of Insight Communications
David R. Finch............... 40 Senior Vice President, Operations, Illinois Region of Insight
Communications
Gregory B. Graff............. 38 Senior Vice President, Operations, Western Kentucky Region of
Insight Communications
Pamela Euler Halling......... 53 Senior Vice President, Marketing and Programming of Insight
Communications
Daniel Mannino............... 41 Senior Vice President and Controller of Insight Communications
Judy Poole................... 54 Senior Vice President, Human Resources of Insight
Communications
Colleen Quinn................ 47 Senior Vice President, Corporate Relations of Insight
Communications
Mary Rhodes.................. 51 Senior Vice President, Customer Service of Insight
Communications
David Servies................ 40 Senior Vice President, Operations, Indiana Region of Insight
Communications
Matthew Siegel............... 38 Senior Vice President, Finance and Treasurer of Insight
Communications
James A. Stewart............. 49 Senior Vice President, Operations, Eastern Kentucky and National
Regions of Insight Communications
53
Sidney R. Knafel, a director of Insight Communications, has been Chairman of
the Board of Insight Communications 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 NTL Incorporated,
General American Investors Company, Inc., IGENE Biotechnology, Inc. and Source
Media, 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 Communications, co-founded and has
served as President and Chief Executive Officer since 1985. Previously, 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. Currently, Mr. Willner is a director
of NTL Incorporated. He is also a director of Source Media, Inc. and
Commerce.TV. He is a member of the National Cable Television Association's Board
of Directors and Executive Committee, serving as its Vice-Chairman. 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 Communications, has been Executive Vice
President and Chief Financial Officer of Insight Communications since 1990. Ms.
Kelly has also been Chief Operating Officer of Insight Communications since
January 1998. Prior thereto, 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 serves as a member of the National Cable
Television Association Subcommittee for Telecommunications Policy, as well as
the National Cable Television Association Subcommittee for Accounting. She also
serves as a director of Bank of New York Hamilton Funds and Source Media, Inc.
and serves on the boards of Cable in the Classroom and Cable Advertising Bureau.
Ms. Kelly is a graduate of George Washington University.
Daniel E. Somers has served as President and Chief Executive Officer of AT&T
Broadband since October 1999 and Senior Executive Vice President and Chief
Financial Officer of AT&T Corp. from May 1997 to September 1999. Prior to
joining AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer
for Bell Cablemedia, plc, of London for two years and, from 1992 to 1995, Mr.
Somers was Executive Vice President and Chief Financial Officer for Bell Canada
International. Mr. Somers also serves as a director of Lubrizol Corporation,
Excite@Home, Cablevision Systems Corp. and CableLabs.
David Jefferson has served as Executive Vice President of AT&T Broadband
Cable Affiliates and Commercial Sales since March 2000. Mr. Jefferson joined
AT&T Corp. in 1972 and held a number of executive positions including Vice
President Local Services--Atlantic States Region, Customer Care Vice President,
Market and Business Development Vice President and Sales Operations Vice
President.
Elliot Brecher has served as Senior Vice President and General Counsel of
Insight Communications since January 2000. Previously, he was associated with
the law firm Cooperman Levitt Winikoff Lester & Newman, P.C., which served as
Insight Communications' legal counsel until July 2000. He joined that firm in
February 1994 and served as a partner from January 1996 until joining Insight
Communications. 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.
E. Scott Cooley joined Insight Communications in 1998 as Senior Vice
President, Operations with
54
responsibility for Insight Communications' Indiana cluster. In October 2000, he
became Senior Vice President, Employee Relations and Development of Insight
Communications. Formerly, Mr. Cooley was an employee of TCI Communications for
18 years, having worked in the areas of technical operations and purchasing and
as general manager of the Bloomington system. In 1994, he was appointed area
manager of TCI Communications' southern Indiana, Illinois and Missouri systems
serving 260,000 customers. In 1997, he received TCI Communications' Manager of
the Year award. Mr. Cooley is currently the president of the Indiana Cable
Telecommunications Association and serves as a member of the subcommittee for
public relations.
Charles E. Dietz joined Insight Communications as Senior Vice President,
Engineering in 1996. From 1973 to 1995, Mr. Dietz was employed by Vision Cable
Communications serving as Vice President of Technical Operations from 1988
through 1991, becoming Vice President of Operations in 1991.
David R. Finch joined Insight Communications as Senior Vice President,
Operations, Illinois Region in November 2000. Previously, Mr. Finch served as
Director of Operations with Triax Telecommunications in their Great Lakes
Region. Mr. Finch has 17 years of experience in the cable industry.
Gregory B. Graff served as Senior Vice President and General Manager of
Insight Ohio since its acquisition by Insight Communications in August 1998. In
June 2000, he became the Senior Vice President, Operations, Western Kentucky
Region of Insight Communications. Previously, Mr. Graff served as Senior Vice
President, Marketing, Programming and Advertising for Coaxial Communications of
Central Ohio, Inc. from 1997 to 1999, Vice President, Marketing and Sales for
Coaxial Communications from 1995 to 1997, and Director of Marketing for KBLCOM's
Paragon Cable operation in San Antonio, Texas. He began his cable television
career in 1984 with Continental Cablevision.
Pamela E. Halling joined Insight Communications as Vice President, Marketing
in 1988 and has since become Senior Vice President of Marketing and Programming.
Prior to joining Insight Communications, she had served since 1985 as Director
of Consumer Marketing for the Disney Channel. Previously, she was Vice President
of Affiliate Marketing for Rainbow Programming Holdings, Inc. and a marketing
consultant for TCI. She began her cable television career in 1973 with
Continental Cablevision.
Daniel Mannino joined Insight Communications as Controller in 1989 and
became Vice President and Controller in 1991 and Senior Vice President in 1999.
Previously, Mr. Mannino was employed by Vision Cable from 1983 to 1989, becoming
its Controller in 1986. Mr. Mannino is a certified public accountant.
Judy Poole joined Insight Communications in 1998 as Vice President, Human
Resources and became Senior Vice President, Human Resources in 1999. Prior to
joining Insight Communications, Ms. Poole spent 13 years at Cablevision Systems,
most recently as Corporate Director of Employee Relations.
Colleen Quinn joined Insight Communications as Senior Vice President,
Corporate Relations in 1999. Prior to joining Insight Communications, Ms. Quinn
was the Senior Vice President, Government Affairs, of the New York City
Partnership and Chamber of Commerce from 1997 to April 1999. She has also held
positions at MacAndrews & Forbes Holdings, Inc. and the Revlon Foundation as
Vice President from 1996 to 1997 and at Pacific Telesis Group as Executive
Director and Director of Government Relations from 1993 to 1996.
Mary Rhodes joined Insight Communications in 1986 and became Vice President,
Customer Service Administration in 1996 and Senior Vice President, Customer
Service Administration in 2000. Ms. Rhodes previously served as general manager
of our Jeffersonville, Indiana and Sandy, Utah cable systems.
55
David Servies joined Insight Communications in 1990 and became Senior Vice
President, Operations, Indiana Region in October 2000. From 1998 to 2000, Mr.
Servies served as District Vice President for Insight Communications' Northeast
Indiana District. Mr. Servies has worked in the cable industry for the past 21
years. Mr. Servies is a member of the Indiana Cable Telecommunications
Association and the National Cable Television Association.
Matthew Siegel joined Insight Communications in May 2000 as Senior Vice
President, Finance and Treasurer. From June 1991 until May 2000, Mr. Siegel was
employed by The Seagram Company Ltd, most recently as Assistant Treasurer. Mr.
Siegel is a graduate of The Graduate School of Business of The University of
Chicago and has a B.S. degree from the Wharton School at the University of
Pennsylvania.
James A. Stewart joined Insight Communications in 1987 as a Vice President,
and now serves as Senior Vice President, Operations, Eastern Kentucky and
national regions. Formerly, Mr. Stewart was Operations Manager for National
Guardian Security Services. He was also employed by Viacom International, Inc.'s
cable television division for eight years, where he ultimately became Vice
President and General Manager of Viacom Cablevision's Nashville, Tennessee
system.
Except as described in this report, there are no arrangements or
understandings between any Member of the Advisory Committee or executive officer
and any other person pursuant to which that person was elected or appointed to
his or her position.
Advisory Committee
The Partnership Agreement of Insight Midwest provides for a five member
Advisory Committee. Insight Communications, through Insight LP, is entitled to
designate three of the members of the Advisory Committee. The remaining members
are designated by AT&T Broadband, through TCI of Indiana Holdings, LLC. Insight
Communications' designees are Sidney R. Knafel, Michael S. Willner and Kim D.
Kelly. AT&T Broadband's designees are Daniel E. Somers and David Jefferson. The
Advisory Committee serves in an advisory capacity only. Insight LP is our
general partner and has the exclusive authority to manage our business,
operations and affairs, subject to certain approval rights of AT&T Broadband.
Item 11. Executive Compensation
None of the executive officers of Insight Capital are compensated for
their services as such officers. Rather, executive management of Insight Capital
receive compensation from Insight Communications. None of the members of the
Advisory Committee of Insight Midwest are compensated for their services as such
members, but are entitled to reimbursement for travel expenses.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Insight Capital is a wholly-owned subsidiary of Insight Midwest.
The following table sets forth information with respect to the beneficial
ownership of Insight Midwest's partnership interests:
56
Percent of
Name and Address of Beneficial Owner Type of Interest Partnership Interest
Insight Communications Company, L.P. (1)
810 Seventh Avenue, New York, NY 10019........................... General Partner 50%
TCI of Indiana Holdings, LLC (2)
Terrace Tower II, 5619 DTC Parkway, Englewood, CO 80111.......... Limited Partner 50%
- -------------------------------------
(1) Insight LP is a wholly-owned subsidiary of Insight Communications. The
Class A common stock of Insight Communications is quoted on The Nasdaq
National Market. Sidney R. Knafel and trusts for the benefit of his
children, Michael S. Willner and Kim D. Kelly, through their ownership of
Insight Communications' Class B common stock have approximately 63% of
Insight Communications' voting power.
(2) TCI of Indiana Holdings is an indirect wholly-owned subsidiary of AT&T
Corp., a publicly held company.
Item 13. Certain Relationships and Related Transactions
On November 17, 1999, our manager formed a joint venture with Source
Media, Inc. known as SourceSuite, LLC to conduct all lines of business of Source
Media relating to its VirtualModem and Interactive Channel products and
businesses. Our manager capitalized the joint venture with $13.0 million in
exchange for its 50% equity interest. As part of the transaction, our manager's
subsidiary acquired 842,105 shares of Source Media's common stock for $12.0
million and warrants to purchase up to an additional 4,596,786 shares at an
exercise price of $20 per share.
Our manager is entitled to designate three members of the board of
directors of Source Media. Our manager's designees are Sidney R. Knafel,
Chairman of the Board and a director of our manager, Michael S. Willner, the
President, Chief Executive Officer and a director of our manager, and Kim D.
Kelly, Executive Vice President, Chief Operating and Financial Officer and a
director of our manager.
Our manager is currently providing the joint venture's interactive
services to customers of its systems under a letter of intent entered into on
July 29, 1998. Pursuant to the letter of intent, we pay Interactive Channel a
monthly license fee for the right to distribute LocalSource in an amount that is
based on the number of digital customers as adjusted for penetration. We share
50% of all revenues, other than advertising revenues, generated by LocalSource.
On March 3, 2000, our manager and Source Media sold all of the joint
venture's Virtual Modem business to Liberate Technologies in exchange for the
issuance to each of our manager's subsidiary and Source Media of 886,000 shares
of Liberate common stock. The joint venture continues to own and operate its
programming assets, LocalSource and SourceGuide, and has entered into preferred
content and programming services agreements with Liberate.
Our manager, Insight LP, receives a management fee for each twelve-month
period equal to 3% of substantially all revenue arising out of or in connection
with the operations of our systems. For the years ended December 31, 1998, 1999
and 2000, Insight LP received management fees of $685,000, $5.9 million and
$11.0 million. Our manager owns 50% of the partnership interests of Insight
Midwest and Insight Midwest owns 100% of the common stock of Insight Capital. In
addition, Sidney Knafel, Michael Willner and Kim Kelly, who are each executive
officers of our manager, are members of and collectively constitute a majority
of Insight Midwest's advisory committee.
On August 8, 2000, Insight Ohio purchased its non-voting common equity
interest held by
57
Coaxial Communications of Central Ohio, Inc. for 800,000 shares of the Class A
common stock of Insight Communications plus $2.6 million in cash. In connection
with the purchase, Insight Ohio's operating agreement was amended to, among
other things, (i) remove certain special rights of the principals of Coaxial
Communications' shareholders (the "Coaxial Entities"), (ii) vest in the common
equity interests of Insight Ohio 70% of its total voting power and in the
preferred equity interests of Insight Ohio 30% of its total voting power and
(iii) make Insight LP the manager. Coaxial Communications retained its preferred
interests in Insight Ohio and Insight Holdings became the sole owner of the
common equity interests of Insight Ohio.
Insight Communications also agreed that if the 10% senior notes issued by
Coaxial Communications or the 12 7/8% senior discount notes issued by Coaxial
LLC are repaid or modified, or at any time after August 15, 2008, the principals
of the Coaxial Entities may require Insight Communications to purchase their
interests in the Coaxial Entities for $32.6 million, with credit given toward
that amount for the value at such time of the 800,000 shares described above.
The amount due to the principals of the Coaxial Entities will be payable, at the
option of Insight Communications, in cash or in additional shares of Class A
common stock of Insight Communications.
58
Midwest
-------
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
Our financial statements, as indicated by the Index to Consolidated
Financial Statements set forth below, begin on page F-1 of this Form 10-K, and
are hereby incorporated by reference. Financial statement schedules have been
omitted because they are not applicable or the required information is included
in the financial statements or notes thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Insight Midwest, L.P.
Report of Independent Auditors--Ernst & Young LLP F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations and Partners' Capital for the years ended
December 31, 2000 and 1999 F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2000
and 1999 F-4
Notes to Consolidated Financial Statements F-5
Insight Communications of Indiana, LLC
Report of Independent Auditors--Ernst & Young LLP F-17
Balance Sheet at December 31, 1998 F-18
Statement of Operations and Members' Equity for the period November 1, 1998
to December 31, 1998 F-19
Statement of Cash Flows for the period November 1, 1998 to December 31, 1998 F-20
Notes to Financial Statements F-21
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette, Indiana Cable
Television Systems
Report of Independent Auditors--Ernst & Young LLP F-26
Combined Balance Sheet at October 31, 1998 F-27
Combined Statements of Operations for the year ended December 31, 1997
and for the period January 1, 1998 to October 31, 1998 F-28
Combined Statements of Changes in Net Assets for the year ended December 31,
1997 and for the period January 1, 1998 to October 31, 1998 F-29
Combined Statements of Cash Flows for the year ended December 31, 1997
and for the period January 1, 1998 to October 31, 1998 F-30
Notes to Combined Financial Statements F-31
Insight Capital, Inc.
Report of Independent Auditors--Ernst & Young LLP F-35
Balance Sheets as of December 31, 2000 and 1999 F-36
Notes to Balance Sheets F-37
(b) Reports on Form 8-K:
We filed the following report on Form 8-K during the fourth quarter of
the year ended December 31, 2000:
Current Report on Form 8-K filed October 24, 2000.
59
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
Exhibit
Number Exhibit Description
------ -------------------
2.1 Purchase Agreement, dated as of April 18, 1999, among InterMedia
Capital Management VI, LLC, InterMedia Management Inc., Robert
J. Lewis, TCI ICM VI, Inc., InterMedia Capital Management VI,
L.P., Blackstone KC Capital Partners, L.P., Blackstone KC
Offshore Capital Partners, L.P., Blackstone Family Investment
Partnership III L.P., Leo J. Hindery, Jr., TCI IP-VI, LLC and
Insight Communications Company, L.P. (1)
2.2 Contribution and Formation Agreement, dated April 18, 1999,
between TCI of Indiana Holdings, LLC and Insight
Communications Company, L.P. (1)
2.3 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 (2)
2.4 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., TCI of Bloomington/Normal, Inc., TCI
Cablevision of Texas, Inc., UACC Midwest, Inc., United Cable
Television of 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") (3)
2.5 Amendment to the Asset Contribution Agreement, dated January 5,
2001 (4)
2.6 Asset Exchange Agreement, dated August 15, 2000, by and between
MediaOne of Illinois, Inc. and Insight Communications Company,
L.P. ("Asset Exchange Agreement") (3)
2.7 Amendment to the Asset Exchange Agreement, dated January 5, 2001
(4)
2.8 Asset 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") (3)
2.9 Amendment to the Asset Purchase and Sale Agreement, dated
January 5, 2001 (4)
3.1 Certificate of Limited Partnership of Insight Midwest (5)
3.2 Amended and Restated Limited Partnership Agreement of Insight
Midwest, L.P., dated January 5, 2001 (4)
3.3 Restated Certificate of Incorporation of Insight Capital, Inc.
(5)
3.4 By-laws of Insight Capital, Inc. (5)
10.1 Credit Agreement, dated as of January 5, 2001, among Insight
Midwest Holdings, LLC, several banks and financial
institutions or entities, and The Bank of New York, as
administrative agent (4)
10.2 Second Amended and Restated Operating Agreement of Insight
Communications Midwest, LLC, dated as of January 5, 2001 (6)
60
10.3 Amended and Restated Management Agreement by and between Insight
Communications of Indiana, LLC (now known as Insight
Communications Midwest, LLC) and Insight Communications
Company, L.P., dated as of October 1, 1999 (5)
10.4 First Amendment to Amended and Restated Management Agreement
dated as of January 5, 2001, by and between Insight
Communications Midwest, LLC and Insight Communications
Company, L.P. (6)
10.5 Amended and Restated Limited Partnership Agreement of Insight
Kentucky Partners II, L.P., dated as of October 1, 1999 (6)
10.6 First Amendment to Amended and Restated Limited Partnership
Agreement of Insight Kentucky Partners II, L.P., dated as of
January 5, 2001 (6)
10.7 Management Agreement by and between Insight Kentucky Partners
II, L.P. and Insight Communications Company, L.P., dated as of
October 1, 1999 (5)
10.8 Amended and Restated Operating Agreement of Insight Ohio, dated
as of August 8, 2000 (2)
10.9 Indenture relating to 9 3/4% senior notes of Registrants, dated
as of October 1, 1999 (7)
10.10 Indenture relating to 10 1/2% senior notes of Registrants, dated
as of November 6, 2000 (6)
10.11 Indenture relating to 10% senior notes of Coaxial Communications
of Central Ohio, Inc. and Phoenix Associates, dated as of
August 21, 1998 (8)
10.12 Indenture relating to 12 7/8% senior discount notes of Coaxial
LLC and Coaxial Financing Corp., dated as of August 21, 1998
(9)
10.13 Cable Facilities Lease Agreement, dated July 17, 2000, among
AT&T Broadband, LLC, Registrant and certain of Registrant's
affiliates (portions of this exhibit have been omitted and
filed separately with the SEC pursuant to a request for
confidential treatment) (2)
21.1 Subsidiaries of Registrants (previously filed)
___________________
(1) Filed as an exhibit to the Registration Statement on Form S-1
(Registration No. 333-78293) of Insight Communications Company, Inc. and
incorporated herein by reference.
(2) Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 of Insight Communications Company,
Inc. and incorporated herein by reference.
(3) Filed as an exhibit to the Current Report on Form 8-K, dated August 15,
2000, of Insight Communications Company, Inc. and incorporated herein by
reference.
(4) Filed as an exhibit to the Current Report on Form 8-K, dated January 5,
2001, of Insight Communications Company, Inc. and incorporated herein by
reference.
(5) Filed as an exhibit to Registrants' Registration Statement on Form S-4
(Registration No. 333- 33540) and incorporated herein by reference.
(6) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2000 of Insight Communications Company, Inc. and incorporated
herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1999 of Insight Communications Company, Inc. and incorporated
herein by reference.
(8) Filed as an exhibit to the Registration Statement on Form S-4 of Coaxial
Communications of Central Ohio, Inc., Phoenix Associates and Insight
Communications of Central Ohio, LLC (Registration No. 333-63677) and
incorporated herein by reference.
(9) Filed as an exhibit to the Registration Statement on Form S-4 of Coaxial
LLC, Coaxial Financing Corp., and Insight Communications of Central Ohio,
LLC (Registration No. 333- 64449) and incorporated herein by reference.
61
SIGNATURES
Pursuant to the requirements 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 MIDWEST, L.P.
By: Insight Communications Company, L.P., its
general partner
By: Insight Communications Company, Inc., its
general partner
Date: April 26, 2001 By: /s/ Michael S. Willner
---------------------------------
Michael S. Willner, President and
Chief Executive Officer
SIGNATURES
Pursuant to the requirements 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 CAPITAL, INC.
Date: April 26, 2001 By: /s/ Michael S. Willner
------------------------------------------
Michael S. Willner, President and
Chief Executive Officer
REPORT OF INDEPENDENT AUDITORS
The Partners
Insight Midwest, LP
We have audited the accompanying consolidated balance sheets of Insight Midwest,
LP as of December 31, 2000 and 1999, and the related consolidated statements of
operations and partners' capital, and cash flows for each of the two years ended
December 31, 2000 and 1999. 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 consolidated financial position of Insight Midwest,
LP, at December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the two years ended December 31,
2000 and 1999, in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
New York, New York
March 12, 2001
F-1
INSIGHT MIDWEST, LP
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2000 1999
-----------------------------------
Assets
Cash and cash equivalents $ 5,735 $ 35,996
Trade accounts receivable, net of allowance for doubtful accounts of $979 and $735
as of December 31, 2000 and 1999 13,686 10,778
Launch funds receivable 13,077 -
Prepaid expenses and other assets 8,922 10,980
-----------------------------------
Total current assets 41,420 57,754
Fixed assets, net 681,490 596,246
Intangible assets, net 950,299 1,033,399
Deferred financing costs, net of accumulated amortization of $2,962 and $857
as of December 31, 2000 and 1999 26,338 18,339
Launch funds receivable - 861
-----------------------------------
Total assets $ 1,699,547 $ 1,706,599
===================================
Liabilities and partners' capital
Accounts payable $ 38,575 $ 42,071
Accrued expenses and other liabilities 38,227 37,552
Deferred revenue 3,284 1,562
Interest payable 19,919 19,397
Due to affiliates 4,047 1,220
-----------------------------------
Total current liabilities 104,052 101,802
Deferred revenue 11,535 4,250
Debt 1,347,523 1,232,000
-----------------------------------
Total liabilities 1,463,110 1,338,052
Partners' capital 236,437 368,547
-----------------------------------
Total liabilities and partners' capital $ 1,699,547 $ 1,706,599
===================================
See accompanying notes
F-2
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
(in thousands)
Year ended December 31,
2000 1999
------------------------------------------
Revenue $ 379,720 $ 201,286
Operating costs and expenses:
Programming and other operating costs 130,306 59,587
Selling, general and administrative 62,414 38,267
Management fees 10,964 5,932
Depreciation and amortization 195,669 109,110
------------------------------------------
Total operating costs and expenses 399,353 212,896
Operating loss (19,633) (11,610)
Other income (expense):
Interest expense (113,054) (51,235)
Interest income 919 335
Other (342) (167)
------------------------------------------
Net loss (132,110) (62,677)
Partners' capital, beginning of period 368,547 44,195
Partners' contributions - 387,029
------------------------------------------
Partners' capital, end of period $ 236,437 $ 368,547
==========================================
See accompanying notes
F-3
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2000 1999
-----------------------------------
Operating activities:
Net loss $ (132,110) $ (62,677)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 195,669 109,110
Provision for losses on trade accounts receivable 6,717 1,239
Amortization of bond discount 123 -
Changes in operating assets and liabilities:
Trade accounts receivable (9,625) (6,272)
Launch funds receivable (12,216) (861)
Prepaid expenses and other assets 2,058 3,746
Accounts payable and accrued expenses (2,821) 35,772
Deferred revenue 9,007 5,812
Interest payable 522 13,573
Due to affiliates 2,827 3,475
-----------------------------------
Net cash provided by operating activities 60,151 102,917
-----------------------------------
Investing activities:
Purchase of fixed assets (196,103) (107,901)
Purchase of intangible assets (3,709) (2,540)
-----------------------------------
Net cash used in investing activities (199,812) (110,441)
-----------------------------------
Financing activities:
Proceeds from borrowings under credit facilities 110,400 21,000
Repayments of credit facilities (487,500) (191,661)
Net proceeds from issuance of senior notes 492,500 200,000
Debt issuance costs (6,000) (7,712)
-----------------------------------
Net cash provided by financing activities 109,400 21,627
-----------------------------------
Net increase (decrease) in cash and cash equivalents (30,261) 14,104
Cash and cash equivalents, beginning of year 35,996 21,892
-----------------------------------
Cash and cash equivalents, end of year $ 5,735 $ 35,996
===================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 116,726 $ 37,904
Cash paid for income taxes 61 57
Supplemental disclosure of significant non-cash financing activities:
Contribution of cable system assets by partner $ - $ 387,029
See accompanying notes
F-4
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
We were formed in September 1999 to serve as the holding company and a financing
vehicle for our cable television system joint venture with AT&T Broadband, LLC
(formerly Tele-Communications, Inc.) ("AT&T Broadband"). We are owned 50% by
Insight Communications Company L.P. ("Insight LP"), which is wholly-owned by
Insight Communications Company, Inc., and 50% by AT&T Broadband, through its
indirect subsidiary TCI of Indiana Holdings, LLC ("TCI"). On October 1, 1999,
certain Indiana and Kentucky systems and operations were contributed to us, as
described below. Through two of our operating subsidiaries, Insight Indiana and
Insight Kentucky, we own and operate cable television systems in Indiana and
Kentucky, which passed approximately 1.2 million and 1.2 million homes and
served approximately 737,000 and 749,000 customers as of December 31, 2000 and
1999.
On January 5, 2001, we 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 (the
"AT&T Transactions"). As a result of the AT&T Transactions, we acquired all of
Insight LP's wholly-owned systems serving approximately 280,000 customers,
including systems which Insight LP purchased from the AT&T Subsidiaries. At the
same time, we acquired from the AT&T Subsidiaries systems serving approximately
250,000 customers. The purchase price will be allocated to the cable television
assets acquired in relation to their fair values as increases in property and
equipment and franchise costs. The AT&T Transactions were financed through a
credit facility established on January 5, 2001, the Midwest Holdings Credit
Facility (Note G).
Both Insight LP and the AT&T Subsidiaries contributed their respective systems
to us subject to an amount of indebtedness so that Insight Midwest remains
equally owned by Insight LP and AT&T Broadband. Insight LP continues to serve as
our general partner and manages and operates our systems. As a result of the
AT&T Transactions, we currently own and operate cable television systems in
Indiana, Kentucky, Illinois, Ohio and Georgia which pass approximately 2.1
million homes and serve approximately 1.3 million customers.
As a result of the AT&T Transactions, the financial results of Insight Ohio will
be consolidated into our financial statements, effective January 1, 2001. For
financing purposes, Insight Ohio is an unrestricted subsidiary under our
indentures and is prohibited by the terms of its indebtedness from making
distributions to us.
Indiana Systems
On October 31, 1998, Insight LP and TCI contributed certain of their cable
television systems located in Indiana and Northern Kentucky (the "Indiana
Systems" or "Insight Indiana") to form Insight Indiana in exchange for a 50%
equity interest. The cable television systems contributed to Insight Indiana by
Insight LP included the Jasper and Evansville systems that were acquired by
Insight LP from TCI on October 31, 1998
F-5
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. Organization and Basis of Presentation (continued)
and the Noblesville, Jeffersonville and Lafayette systems already owned by
Insight LP (the "Insight Contributed Systems").
On October 1, 1999, as part of a joint venture restructuring, Insight Indiana
became our wholly-owned subsidiary. In addition to managing the day-to-day
operations of the Indiana Systems, Insight LP is the general partner and
therefore effectively controls us and is responsible for all of the operating
and financial decisions pertaining to the Indiana Systems. Pursuant to the terms
of their respective operating agreements, we and Insight Indiana will continue
for a twelve-year term through October 1, 2011, unless extended by Insight LP
and TCI.
The historical carrying values of the Indiana Systems contributed by TCI were
increased by an amount equivalent to 50% of the difference between the fair
value of such systems and their respective carrying values ($89.1 million) as of
October 31, 1998. In addition, the historical values of the Insight Contributed
Systems were increased by $44.3 million, an amount equivalent to 50% of the
difference between the fair value of such systems and their respective carrying
values as of October 31, 1998. The aggregate step-up to fair value (including
the step-up recorded in connection with the acquisition of the Jasper and
Evansville systems) was allocated to the cable television assets contributed by
TCI in relation to their fair values as increases in property and equipment of
$58.0 million and franchise costs of $181.6 million. Neither Insight LP nor TCI
is contractually required to contribute additional capital to us and, because we
are a limited partnership, neither Insight LP nor TCI is liable for the
obligations of Insight Indiana or the Indiana Systems.
Kentucky Systems
On October 1, 1999, Insight LP acquired a combined 50% interest in InterMedia
Capital Partners VI, LP (the "IPVI Partnership") from related parties of
Blackstone Cable Acquisition Company, LLC, InterMedia Capital Management VI, LLC
and a subsidiary and related party of AT&T Broadband, for $341.5 million,
(inclusive of expenses). We assumed debt of $742.1 million (the total debt of
the IPVI Partnership) in connection with this transaction. The IPVI Partnership,
through several intermediary partnerships, owned and operated cable television
systems in four major markets in Kentucky: Louisville, Lexington, Bowling Green
and Covington (the "Kentucky Systems" or "Insight Kentucky"). On October 1,
1999, concurrently with this acquisition, the Kentucky Systems were contributed
to us. As a result of the IPVI Partnership's historical ownership structure, the
Kentucky Systems are owned and operated by Insight Kentucky Partners II, L.P., a
subsidiary partnership of ours.
Similar to Insight Indiana, in addition to managing the day-to-day operations of
the Kentucky Systems, Insight LP controls all of the operating and financial
decisions pertaining to the Kentucky Systems. The Kentucky Systems and each of
the other Kentucky partnerships also have twelve-year terms through October 1,
2011, unless extended by Insight and TCI.
F-6
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. Organization and Basis of Presentation (continued)
The assets of the Kentucky Systems have been valued based on the purchase price
and have been allocated between fixed and intangible assets based on our
evaluation of each individual operating system including such factors as the age
of the cable plant, the progress of rebuilds and franchise relations. This
resulted in a step-up in the carrying values of fixed assets of $160.3 million
and intangible assets of $272.1 million. Franchise costs arising from this
transaction are being amortized over 15 years.
B. Significant Accounting Policies
Revenue Recognition
Revenue includes service, connection and launch fees. Service fees are recorded
in the month the cable television and pay television services are provided to
subscribers. Connection fees are charged for the hook-up of new customers and
are recognized as current revenues. Launch fees are deferred and amortized over
the period of the underlying contract.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents
We consider all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Fixed Assets
Fixed assets include costs capitalized for labor and overhead incurred in
connection with the installation of cable television systems and are stated at
cost (Note D). Depreciation for cable plant, furniture, fixtures, office
equipment and buildings is calculated using the straight-line method over
estimated useful lives ranging from 3 to 30 years. Leasehold improvements are
being amortized using the straight-line method over the remaining terms of the
leases or the estimated lives of the improvements, whichever period is shorter.
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 our undiscounted future
cash flows, an impairment loss would be recognized for the amount that the
asset's carrying value
F-7
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. Significant Accounting Policies (continued)
exceeds its fair value. We believe that no material impairment of fixed assets
existed at December 31, 2000 or 1999.
Effective January 1, 2000, we changed the estimated useful lives of fixed assets
which related to our recent rebuild program. The changes in estimated useful
lives were made to reflect our evaluation of the economic lives of the newly
rebuilt plant in conjunction with industry practice. The weighted average useful
lives of such fixed assets changed from approximately 5 years to approximately
11 years. This change was made on a prospective basis and resulted in a
reduction of our net loss for the year ended December 31, 2000 of $19.4 million.
Depreciation expense for the years ended December 31, 2000 and 1999 was $110.9
million and $61.2 million.
Intangible Assets
Intangible assets consist of franchise costs and goodwill (Note E). Costs
incurred in negotiating and renewing franchise agreements are capitalized and
amortized over the life of the franchise. Franchise rights and goodwill acquired
through the purchase of cable television systems are amortized using the
straight-line method over a period of up to 15 years.
The carrying value of intangible assets is reviewed if facts and circumstances
suggest that they may be impaired. If this review indicates that the carrying
value of the intangible assets will not be recovered from our undiscounted
future cash flows, an impairment loss would be recognized for the amount that
the asset's carrying value exceeds its fair value. We believe that no material
impairment of intangible assets existed at December 31, 2000 or 1999.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal and bank facility
fees, incurred to negotiate and secure bank loans and other sources of
financing. These costs are amortized over the life of the applicable debt.
Income Taxes
No provision has been made in the accompanying financial statements for federal,
state or local income taxes since our income or loss is reportable by the
individual partners in their respective tax returns.
F-8
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. Significant Accounting Policies (continued)
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. For the years ended
December 31, 2000 and 1999, marketing and promotional expense was $9.9 million
and $3.0 million.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No.
137, is effective for us beginning January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133 will require us to recognize
all derivatives on the balance sheet at fair value. We do not anticipate that
adoption of this standard will have a material impact on our results of
operations or statement of position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
C. Pro Forma Results of Operations
The pro forma unaudited results of operations for the year ended December 31,
1999, assuming the acquisition of the Kentucky Systems had been consummated on
January 1, 1999, is as follows:
Revenue $ 360,483
Net loss 142,436
F-9
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. Fixed Assets
Fixed assets consist of:
December 31,
2000 1999
-----------------------------------
(in thousands)
Land, buildings and improvements $ 15,809 $ 12,887
Cable television equipment 857,674 662,175
Furniture, fixtures and office equipment 6,844 9,162
-----------------------------------
880,327 684,224
Less accumulated depreciation and amortization (198,837) (87,978)
-----------------------------------
Total fixed assets $ 681,490 $ 596,246
===================================
E. Intangible Assets
Intangible assets consist of:
December 31,
2000 1999
-----------------------------------
(in thousands)
Franchise rights $1,086,647 $1,087,042
Goodwill 1,190 1,190
-----------------------------------
1,087,837 1,088,232
Less accumulated amortization (137,538) (54,833)
-----------------------------------
Total intangible assets $950,299 $1,033,399
===================================
F. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of:
December 31,
2000 1999
-----------------------------------
(in thousands)
Accrued programming costs $ 17,649 $ 17,335
Accrued property taxes 11,564 12,629
Other 9,014 7,588
-----------------------------------
Total accrued expenses and other liabilities $ 38,227 $ 37,552
===================================
F-10
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Debt
Debt consists of:
December 31,
2000 1999
------------------------------------------
(in thousands)
Insight Indiana Credit Facility $ 298,600 $ 470,000
Insight Kentucky Credit Facility 356,300 562,000
Insight Midwest 9 3/4% Senior Notes 200,000 200,000
Insight Midwest 10 1/2% Senior Notes 500,000 -
------------------------------------------
1,354,900 1,232,000
Unamortized discount on Senior Notes (7,377) -
------------------------------------------
Total debt $ 1,347,523 $ 1,232,000
==========================================
Insight Indiana Credit Facility
Insight Indiana's credit facility (the "Insight Indiana Credit Facility")
provides for term loans of up to $300.0 million and for revolving credit loans
of up to $250.0 million. Obligations under this credit facility are secured by
all of the membership interests of Insight Indiana and any amounts payable to
its members. The Insight Indiana Credit Facility requires Insight Indiana to
meet certain financial and other debt covenants. Loans under the Insight Indiana
Credit Facility bear interest at an ABR or LIBOR plus an additional margin tied
to certain debt ratios of Insight Indiana. The interest rates in effect as of
December 31, 2000 and 1999 were 8.8% and 8.1%.
On January 5, 2001, the Insight Indiana Credit Facility was repaid in full and
replaced by the Midwest Holdings Credit Facility. This will result in a first
quarter 2001 extraordinary loss of approximately $4.8 million related to the
write-off of unamortized deferred financing costs.
Insight Kentucky Credit Facility
The Kentucky credit facility (the "Insight Kentucky Credit Facility") provides
for two term loans of up to $100.0 million and $250.0 million and for revolving
credit loans of up to $325.0 million. Obligations under the Insight Kentucky
Credit Facility are guaranteed by Insight Kentucky and its subsidiaries and any
intercompany notes made in favor of Insight Kentucky and its subsidiaries. The
Insight Kentucky Credit Facility requires Insight Kentucky to meet certain
financial and other debt covenants. In addition, the Insight Kentucky Credit
Facility requires compliance with certain financial ratios, requiring Insight
Kentucky to enter into interest rate protection agreements covering at least
50%, subject to increase to 60% under certain circumstances, of its total
indebtedness and also contains customary events of default. Loans under the
Insight Kentucky Credit Facility bear interest at Insight Midwest's option at an
ABR or Eurodollar rate, plus an additional margin tied to Insight Kentucky's
ratio of total debt to
F-11
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Debt (continued)
annualized cash flow. The term loans under the Insight Kentucky Credit Facility
also bear interest, at our option, at an ABR or Eurodollar rate, plus an
additional margin. The interest rates in effect as of December 31, 2000 and 1999
were 8.7% and 8.3%.
On January 5, 2001, the Insight Kentucky Credit Facility was repaid in full and
replaced by the Midwest Holdings Credit Facility. This will result in a first
quarter 2001 extraordinary loss of approximately $4.1 million related to the
write-off of unamortized deferred financing costs.
Insight Midwest Senior Notes
On October 1, 1999 simultaneously with the closing of the purchase of Insight
Kentucky, we completed a $200.0 million offering of 9 3/4% senior notes due in
October 2009. The proceeds of the offering were used to repay certain debt of
the IPVI Partnership. Interest payments on these Senior Notes, which commenced
on April 1, 2000, are payable semi-annually on April 1 and October 1.
In April 2000, we completed an exchange offer pursuant to which the 9 3/4%
Senior Notes were exchanged for identical notes registered under the Securities
Act of 1933. Insight Capital, Inc., a wholly-owned subsidiary of us, was a
co-issuer of the Senior Notes. Insight Capital, Inc. has only nominal assets and
does not conduct any operations.
On November 6, 2000, we completed a $500.0 million offering of 10 1/2% senior
notes due in November 2010. We received proceeds of $487.5 million, net of an
underwriting fee of $5.0 million and a bond discount of $7.5 million which is
being amortized through November 2010. The proceeds of the offering were used to
repay a portion of the outstanding debt under the Insight Indiana Credit
Facility and Insight Kentucky Credit Facility. Interest payments on these Senior
Notes, which commence on May 1, 2001, are payable semi-annually on May 1 and
November 1.
The 9 3/4% Senior Notes and 10 1/2% Senior Notes are redeemable on or after
October 1, 2004 and November 1, 2005, respectively. In addition, we can redeem
up to 35% of the 9 3/4% Senior Notes and 10 1/2% Senior Notes prior to October
1, 2002 and November 1, 2005, respectively, with the net proceeds from certain
sales of our equity. Each holder of these Senior Notes may require us to redeem
all or part of that holder's notes upon certain changes of control. These Senior
Notes are general unsecured obligations and are subordinate to all our
liabilities, the amounts of which were $770.5 million and $1.1 billion as of
December 31, 2000 and 1999. The Senior Notes contain certain financial and other
debt covenants.
Midwest Holdings Credit Facility
On January 5, 2001, through an affiliate, we entered into a credit facility (the
"Midwest Holdings Credit Facility") in connection with the AT&T Transactions and
to repay the outstanding indebtedness under the Insight Indiana Credit Facility
and Insight Kentucky Credit Facility. The Midwest Holdings Credit Facility
expires in 2009 and provides for maximum borrowings of $1.75 billion.
Obligations under this credit facility are secured by a pledge of the
outstanding equity interests of Midwest Holdings and its subsidiaries. The
Midwest Holdings Credit Facility requires us to meet certain financial and other
debt covenants. Borrowings under this credit facility bear interest at either an
alternative base
F-12
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Debt (continued)
rate or Eurodollar rate, plus an additional margin yield to Midwest Holdings'
leverage ratio, of between 0.5% and 2.8%.
Debt Facility Principal Payments
As of December 31, 2000, annual principal payments required on our
debt are as follows (in thousands):
2001 $ 19,695
2002 50,816
2003 92,554
2004 112,468
2005 124,820
Thereafter 947,170
-------------------
$ 1,347,523
===================
As a result of the AT&T Transactions, as of January 5, 2001, principal payments
required on our debt have changed to (in thousands):
2001 $ -
2002 2,500
2003 3,750
2004 78,750
2005 81,250
Thereafter 1,901,250
-------------------
$ 2,067,500
===================
Interest Rate Swap and Collar Agreements
We enter into interest-rate swap agreements to modify the interest
characteristics of our outstanding debt from a floating rate to a fixed rate
basis. These agreements involve the payment of fixed rate amounts in exchange
for floating rate interest receipts over the life of the agreement without an
exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to interest expense related to the debt. The related amount payable or
receivable is included in other liabilities or assets.
As of December 31, 2000 and 1999 we had entered into various interest rate swap
and collar agreements effectively fixing interest rates between 4.5% and 7.0%,
plus the applicable margin, on $701.0 million and $766.0 million notional value
of debt. These agreements expire between December 2001 and July 2003.
F-13
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. @Home Warrants
Under distribution agreements with At Home Corporation, a high-speed internet
access service provider ("@Home"), we provide high-speed Internet access to
subscribers over our network in certain of our cable television systems. In
connection with the acquisition of the Kentucky systems, Insight Kentucky
obtained agreements whereby @Home issued warrants, effective January 1, 1999, to
Insight Kentucky to purchase shares of @Home Series A Common Stock ("@Home
Stock") at an exercise price of $5.25 per share as adjusted for a two-for-one
stock split which occurred on June 17, 1999. The warrants become vested and
exercisable, subject to certain forfeiture and other conditions, based on
obtaining specified numbers of @Home subscribers through December 31, 2001. If
Insight Kentucky were to meet the target number of @Home subscribers through
December 31, 2001, as set forth in the agreement, 180,267 warrants would become
vested and exercisable. We have not recognized any income related to the
warrants for the years ended December 31, 2000 or 1999.
I. Financial Instruments
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivable.
We maintain cash and cash equivalents with various financial institutions. These
financial institutions are located throughout the country and our policy is
designed to limit exposure to any one institution. Concentrations of credit risk
with respect to accounts receivable are limited due to the large number of
customers comprising our customer base.
Fair Value
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
Cash equivalents and accounts receivable: The carrying amount reported in the
balance sheet for cash equivalents and accounts receivable approximates fair
value.
Debt: The carrying amounts of our borrowings under our credit arrangements
approximate fair value as they bear interest at floating rates. The fair value
of Insight Midwest's 9 3/4% Senior Notes as of December 31, 2000 was $198.5
million. The fair value of Insight Midwest's 10 1/2% Senior Notes as of December
31, 2000 was $515.0 million.
Interest rate swap agreements: The fair value of swap agreements are not
recognized in the financial statements. The fair value (cost) to us if we would
have disposed of such swap agreements would have been $(1.9) million and $7.2
million as of December 31, 2000 and 1999.
F-14
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. Related Party Transactions
Through November 1999, we had an agreement with Media One that enabled us to
obtain certain services (principally pay and basic cable programming services)
and equipment at rates lower than those that would be available from independent
parties. In each of the years ended December 31, 1999 and 1998, programming and
other operating costs include $200,000 of expenses for programming services paid
directly to Media One.
In addition, we purchase substantially all of our pay television and other
programming for the Indiana and Kentucky Systems from affiliates of AT&T
Broadband. Charges for such programming were $56.7 million and $29.6 million for
the years ended December 31, 2000 and 1999. As of December 31, 2000 and 1999,
$9.8 million and $10.4 million of accrued programming costs were due to
affiliates of AT&T Broadband. We believe that the programming rates charged by
affiliates of AT&T Broadband are lower than those available for independent
parties.
Telephony Agreements
On July 17, 2000, we entered into definitive agreements with AT&T Broadband, LLC
for the provision by AT&T Broadband of all-distance telephone service utilizing
our cable infrastructures under the AT&T brand name. Telephony revenues are to
be attributed to AT&T Broadband who, in turn, will pay us a monthly per line
access fee. AT&T Broadband will also pay us for marketing, installation and
billing support. AT&T Broadband would be required to install and maintain the
necessary switching equipment and would be the local exchange carrier of
record. It is expected that we will market the telephone services both
independently and as part of a bundle of services.
K. 401(k) Plan
Through our subsidiaries, Insight Indiana and Insight Kentucky, we sponsor a
savings and investment 401(k) Plan (the "Plan") for the benefit of our
employees. All employees who have completed six months of employment and have
attained age 18 are eligible to participate in the Plan. We make matching
contributions equal to a portion of the employee's contribution up to 5% of the
employee's wages. During 2000 and 1999, we matched contributions of $661,000 and
$302,000.
F-15
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. Commitments and Contingencies
Operating Lease Agreements
We lease and sublease equipment and office space under various operating lease
arrangements expiring through December 31, 2015. Future minimum rental payments
required under operating leases as of December 31, 2000 are as follows (in
thousands):
2001 $ 1,730
2002 1,315
2003 1,156
2004 772
2005 501
Thereafter 264
-----------------
Total $ 5,738
=================
Rental expense for the years ended December 31, 2000 and 1999 was $2.1 million
and $1.2 million.
Litigation
Insight Kentucky and certain prior owners of the Kentucky systems have been
named in class actions regarding the pass through of state and local property
tax charges to customers by the prior owners of the Kentucky systems. The
plaintiffs seek monetary damages and the enjoinment of the collection of such
taxes. The classes have not been certified. We believe that the Kentucky systems
have substantial and meritorious defenses to these claims.
We are subject to other various legal proceedings that arise in the ordinary
course of business. While it is impossible to determine with certainty the
ultimate outcome of these matters, it is our opinion that the resolution of
these matters will not have a material adverse affect on our consolidated
financial condition.
M. Subsequent Events
Cable System Acquisitions
On January 11, 2001, we acquired Cable One, Inc.'s, Greenwood, Indiana cable
system serving approximately 14,800 customers for $62.0 million. The purchase
price will be allocated to the cable television assets acquired in relation to
their fair values as increases in property and equipment and franchise costs.
Debt Offering
On February 6, 2001, Insight Communications Company, Inc. ("Insight Inc.")
completed a $400.0 million offering of 12 1/4% Senior Discount Notes due in
February 2011. These notes were issued at a discount to their principal amount
at maturity resulting in gross proceeds to Insight Inc. of $220.1 million.
Insight Inc. utilized $20.2 million of the proceeds to repay an outstanding
inter-company loan from us, which Insight Inc. incurred in connection with the
AT&T Transactions.
F-16
REPORT OF INDEPENDENT AUDITORS
The Members
Insight Communications of Indiana, LLC
We have audited the accompanying balance sheet of Insight Communications
of Indiana, LLC as of December 31, 1998 and the related statements of
operations and members' equity, and cash flows for the period from November 1,
1998 (date of inception) through December 31, 1998. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Insight
Communications of Indiana, LLC, at December 31, 1998 and the results of its
operations and its cash flows for the period from November 1, 1998 (date of
inception) through December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
New York, New York
March 31, 1999
F-17
INSIGHT COMMUNICATIONS OF INDIANA, LLC
BALANCE SHEET
December 31, 1998
(in thousands)
Assets
Cash and cash equivalents............................................ $ 19,493
Trade accounts receivable, net of allowance for doubtful accounts of
$339.............................................................. 6,701
Prepaid expenses and other........................................... 651
Fixed assets, net.................................................... 129,776
Intangible assets, net............................................... 367,029
Deferred financing costs, net of amortization........................ 3,682
--------
$527,332
========
Liabilities and Members' Equity
Accounts payable..................................................... $ 12,467
Accrued expenses and other liabilities............................... 4,324
Interest payable..................................................... 5,824
Due to Tele-Communications, Inc...................................... 522
Debt................................................................. 460,000
--------
Total liabilities.................................................. 483,137
Members' equity...................................................... 44,195
--------
$527,332
========
See accompanying notes.
F-18
INSIGHT COMMUNICATIONS OF INDIANA, LLC
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
For the period from November 1, 1998
(date of inception) through December 31, 1998
(in thousands)
Revenue................................................................ $23,925
Costs and expenses:
Programming and other operating costs................................ 6,206
Selling, general and administrative.................................. 4,653
Depreciation and amortization........................................ 13,998
-------
24,857
Loss from operations................................................... (932)
Other income (expense):
Interest expense..................................................... (5,824)
Other................................................................ (64)
-------
Net loss............................................................... (6,820)
Members' equity at November 1, 1998 (date of inception)................ 51,015
-------
Members' equity at December 31, 1998................................... $44,195
=======
See accompanying notes.
F-19
INSIGHT COMMUNICATIONS OF INDIANA, LLC
STATEMENT OF CASH FLOWS
For the period from November 1, 1998 (date of inception)
through December 31, 1998
(in thousands)
Operating activities
Net loss........................................................... $ (6,820)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.................................... 13,998
Provision for losses on trade accounts receivable................ 226
Changes in operating assets and liabilities:
Trade accounts receivable....................................... (552)
Prepaid expenses and other...................................... (651)
Accounts payable and accrued expenses........................... 7,223
Due to Tele-Communications, Inc................................. 522
Interest payable................................................ 5,824
---------
Net cash provided by operating activities.......................... 19,770
---------
Investing activities:
Purchases of fixed assets........................................ (4,022)
Increase in intangible assets.................................... (573)
---------
Net cash used in investing activities.............................. (4,595)
---------
Financing activities:
Proceeds from bank credit facility............................... 460,000
Repayment of amounts due to Tele-Communications, Inc............. (214,552)
Repayment of amounts due to Insight Communications Company, LP... (237,448)
Debt issuance costs.............................................. (3,682)
---------
Net cash provided by financing activities........................ 4,318
---------
Cash and cash equivalents, December 31, 1998..................... $ 19,493
---------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest......................... $ --
=========
Supplemental disclosures of significant non cash financing
activities:
Contribution of cable system assets by partner................... $ 44,195
=========
See accompanying notes.
F-20
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
Pursuant to the terms of a Contribution Agreement dated October 31, 1998,
Insight Communications Company, L.P. ("Insight") and Tele-Communications, Inc.
("TCI") contributed certain of their cable television systems located in
Indiana and Northern Kentucky to Insight Communications of Indiana, LLC
("Insight Indiana"), a newly formed limited liability corporation, in exchange
for 50% equity interests therein. The cable television systems contributed to
Insight Indiana by Insight included the Jasper and Evansville systems that were
acquired by Insight from TCI on October 31, 1998 and the Noblesville,
Jeffersonville and Lafayette systems. Pursuant to the terms of the Insight
Indiana operating agreement (the "Operating Agreement"), Insight Indiana has a
twelve year life, unless extended by TCI and Insight. In addition, the
Operating Agreement states that Insight is the manager of Insight Indiana and
effectively controls its board, including all of the operating and financial
decisions pertaining to Insight Indiana. Accordingly, the historical carrying
values of the TCI contributed systems have been increased by an amount
equivalent to 50% of the difference between the fair value of the systems and
their respective carrying values ($89.1 million). In addition, the historical
values of the Noblesville, Jeffersonville and Lafayette systems have been
increased by $44.3 million, an amount equivalent to 50% of the difference
between the fair value of such systems and their respective carrying values.
Furthermore, in connection with Insight's acquisition of the Jasper and
Evansville systems, the historical values of such systems were increased by
$112 million, an amount equivalent to the difference between the fair value of
such systems and their carrying values. The aggregate step-up to fair value was
allocated to the cable television assets contributed by TCI in relation to
their fair values as increases in property and equipment of $58 million and
franchise costs of $181.6 million. The accompanying financial statements
include the results of operations of Insight Indiana from November 1, 1998
(date of inception) through December 31, 1998.
Because Insight Indiana is a limited liability company, the liability of
its members is limited to their respective investments.
B. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues include service fees, connection fees, and launch fees. Service
fees are recorded in the month the cable television and pay television services
are provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues to the extent of direct
selling costs incurred. Launch fees are deferred and amortized over the period
of the underlying contract. Any fees in excess of such costs are deferred and
amortized into income over the period that subscribers are expected to remain
connected to the system.
F-21
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash Equivalents
Insight Indiana considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost, which includes amounts capitalized for
labor and overhead expended in connection with the installation of cable
television systems. Depreciation for furniture, fixtures, office equipment,
buildings and equipment is computed using the straight-line method over
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
being amortized using the straight-line method over the remaining terms of the
leases or the estimated lives of the improvements, whichever period is shorter.
Management does not believe that any events or changes in circumstances
indicate that the carrying amount of these long-lived assets may not be
recovered.
Intangible Assets
Intangible assets consist of franchise costs and goodwill. Costs incurred
in negotiating and renewing franchise agreements are capitalized and amortized
over the life of the franchise. Franchise rights acquired through the purchase
of cable television systems represent the excess of the cost of the properties
acquired over the amounts assigned to the tangible assets at the date of
acquisition and are amortized using the straight line method over a period of
up to fifteen years. Goodwill is amortized using the straight-line method over
a period of 40 years. The carrying value of intangible assets will be reviewed
if facts and circumstances suggest that they may be impaired. If this review
indicates that the intangible assets will not be recovered from the
undiscounted future cash flows of the individual system comprising Insight
Indiana, the carrying value of such intangible assets would be considered
impaired and will be reduced by a charge to operations in the amount of the
impairment. Based on its most recent analysis, management believes that no
material impairment of intangible assets exists as of December 31, 1998.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal fees and bank
facility fees, incurred to negotiate and secure bank loans. These costs are
being amortized on a straight line basis over the life of the applicable loan.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. For the period
from November 1, 1998 (date of inception) through December 31, 1998, marketing
and promotional expense approximated $205,000.
Income Taxes
No provision has been made in the accompanying financial statements for
federal, state, or local income taxes since the income or loss of Insight
Indiana is reportable by the individual partners in their respective tax
returns.
F-22
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). Insight Indiana expects to adopt the Statement effective January 1,
2000. The Statement will require Insight Indiana to recognize all derivatives
on the balance sheet at fair value. Although management has not completed its
assessment of the impact of SFAS No. 133 on its results of operations, and
financial position, management does not anticipate that the adoption of this
Statement will be material.
C. Fixed Assets
Fixed assets consist of:
December 31,
1998
--------------
(in thousands)
Land, buildings and improvements........................... $ 4,010
Cable television equipment................................. 149,194
Furniture, fixtures and office equipment................... 6,681
--------
159,885
Less accumulated depreciation and amortization............. (30,109)
--------
$129,776
========
D. Intangible Assets
Intangible assets consist of:
December 31,
1998
--------------
(in thousands)
Franchise rights........................................... $378,631
Goodwill................................................... 930
--------
379,561
Less accumulated amortization.............................. (12,532)
--------
$367,029
========
E. Debt
Debt consists of:
December 31,
1998
--------------
(in thousands)
Revolving credit facility.................................. $160,000
Term loan.................................................. 300,000
--------
$460,000
========
F-23
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, Insight Indiana had a credit facility (the "Credit
Facility") that provides for term loans of $300 million and for revolving
credit loans of up to $250 million. The Credit Facility matures in December
2006, and contains quarterly reductions in the amount of outstanding loans and
commitments commencing in March 2001. Obligations under this Credit Facility
are secured by substantially all of Insight Indiana's assets. Loans under the
Credit Facility bear interest at an alternate base or Eurodollar rate plus an
additional margin tied to certain debt ratios of Insight Indiana. The Credit
Facility requires Insight Indiana to meet certain debt financial covenants. For
the two months ended December 31, 1998, average interest rates approximated
7.60%.
At December 31, 1998 required annual principal payments under the
aforementioned Credit Facility are as follows (in thousands):
2001............................................................. $ 55,000
2002............................................................. 74,250
2003............................................................. 90,750
Thereafter....................................................... 240,000
--------
$460,000
========
F. Financial Instruments
Concentrations of Credit Risk
Financial instruments that potentially subject Insight Indiana to
significant concentrations of credit risk consist principally of cash
investments and accounts receivable. Insight Indiana maintains cash and cash
equivalents, with various financial institutions. Insight Indiana's policy is
designed to limit exposure to any one institution. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
customers comprising Insight Indiana's customer base.
The following methods and assumptions were used by Insight Indiana in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Debt: The carrying amounts of Insight Indiana's borrowings under its
credit facility approximate its fair value as it bears interest at floating
rates.
The carrying amounts and fair values of Insight Indiana's financial
instruments at December 31 approximate fair value.
Insight Indiana enters into interest-rate swap agreements to modify the
interest characteristics of its outstanding debt from a floating rate to a
fixed rate basis. These agreements involve the payment of fixed rate amounts in
exchange for floating rate interest receipts over the life of the agreement
without an exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense
F-24
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. At December 31,
1998 Insight Indiana has entered into various interest rate swap and collar
agreements effectively fixing interest rates at 4.4% to 5.1% on $75 million
notional value of debt. The fair values of the swap agreements are not
recognized in the financial statements and approximated $.1 million at
December 31, 1998.
G. 401(k) Plan
Insight Indiana sponsors a savings and investment 401(k) Plan (the
"Plan") for the benefit of its employees. All employees who have completed six
months of employment and have attained age 21 are eligible to participate in
the Plan. Insight Indiana makes matching contributions equal to a percentage
of the employee's contribution. For the two months ended December 31, 1998,
the matching contribution approximated $71,000.
H. Commitments and Contingencies
Insight Indiana leases and subleases equipment and office space under
operating lease arrangements expiring through December 31, 2015. Future
minimum rental payments required under operating leases are as follows (in
thousands):
1999............................................................... $ 477
2000............................................................... 191
2001............................................................... 143
2002............................................................... 130
2003............................................................... 119
Thereafter......................................................... 378
------
$1,438
======
Rental expense for the two month period ended December 31, 1998
approximated $.1 million.
I. Related Party Transactions
In addition, in connection with the Contribution Agreement (see note D),
Insight Indiana purchases substantially all of its pay television and other
programming from affiliates of TCI. Charges for such programming were $1.4
million for the period from November 1, 1998 through December 31, 1998.
Management believes that the programming rates charged by TCI affiliates are
lower than those which would be available for independent parties.
In connection with the formation of Insight Indiana, $214.6 million and
$237.5 million of intercompany debt due to TCI and Insight was assumed. During
November 1998, such amounts were repaid. Insight Indiana pays Insight a
management fee equivalent to 3% of its revenue. For the two month period ended
December 31, 1998, such management fee approximated $.7 million.
F-25
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Insight Communications Company, Inc.
We have audited the accompanying combined balance sheets of the
Noblesville IN, Jeffersonville IN and Lafayette IN cable television systems
(collectively the "Combined Systems") included in Insight Communications
Company, L.P., as of October 31, 1998, and the related combined statements of
operations, changes in net assets, and cash flows for the year ended December
31, 1997 and the period from January 1, 1998 to October 31, 1998. These
combined financial statements are the responsibility of the Combined Systems'
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 combined financial position of the Combined
Systems, included in Insight Communications Company, L.P., October 31, 1998,
and the combined results of their operations and their cash flows for the year
ended December 31, 1997 and the period from January 1, 1998 to October 31,
1998, in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
New York, New York
September 13, 1999
F-26
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED BALANCE SHEETS
(in thousands)
October 31,
1998
-----------
Assets
Cash and cash equivalents......................................... $ 291
Trade accounts receivable, net of allowance for doubtful accounts
of $40......................................................... 1,456
Prepaid expenses.................................................. 141
Fixed assets, net................................................. 59,304
Intangible assets, net............................................ 55,194
--------
Total assets...................................................... $116,386
========
Liabilities and Net Assets
Accounts payable.................................................. $ 3,085
Accrued expenses and other liabilities............................ 2,729
--------
Total liabilities................................................. 5,814
Net assets........................................................ 110,572
--------
Total Liabilities and Net Assets.................................. $116,386
========
See accompanying notes.
F-27
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Ten months
Year ended ended
December 31, October 31
1997 1998
------------ ----------
Revenue................................................. $22,055 $33,486
Costs and expenses:
Programming and other operating costs................. 5,852 9,028
Selling, general and administrative................... 3,296 5,203
Depreciation and amortization......................... 5,498 10,790
------- -------
14,646 25,021
Operating income...................................... 7,409 8,465
Other expense......................................... (26) (27)
------- -------
Net income............................................ $ 7,383 $ 8,438
======= =======
See accompanying notes.
F-28
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands)
Balance at January 1, 1997............................................ $ 14,751
Effect of cable system exchange (see Note A).......................... 80,000
Net income............................................................ 7,383
--------
Balance at December 31, 1997.......................................... 102,134
Net income............................................................ 8,438
--------
Balance at October 31, 1998........................................... $110,572
========
See accompanying notes.
F-29
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Ten months
Year ended ended
December 31, October 31,
1997 1998
------------ -----------
Operating activities
Net income........................................... $ 7,383 $ 8,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 5,497 10,790
Provision for losses on trade accounts receivable.. 192 281
Changes in operating assets and liabilities:
Trade accounts receivable......................... (686) (939)
Prepaid expenses and other assets................. (349) 376
Accounts payable.................................. 846 1665
Accrued expenses and other liabilities............ 456 994
-------- --------
Net cash provided by operating activities............ 13,339 21,605
-------- --------
Investing activities
Purchases of fixed assets............................ (17,246) (21,432)
Increase in intangible assets........................ (8,645) (25)
-------- --------
Net cash used in investing activities................ (25,891) (21,457)
-------- --------
Financing activities
Net proceeds from system exchange.................... 12,588 --
-------- --------
Net cash provided by financing activities............ 12,588 --
-------- --------
Net increase in cash and cash equivalents............ 36 148
Cash and cash equivalents, beginning of period....... 107 143
-------- --------
Cash and cash equivalents, end of period............. $ 143 $ 291
======== ========
See accompanying notes.
F-30
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS
A. Description of Business and Basis of Presentation
Description of Business
The cable television systems operating in the metropolitan areas of
Noblesville, IN; Jeffersonville, IN; and Lafayette, IN (the "Combined Systems")
are principally engaged in the cable television business under non-exclusive
franchise agreements, which expire at various times beginning in 1999. Through
October 31, 1998 the Combined Systems were owned by Insight Communications
Company, L.P. (the "Partnership").
Basis of Presentation
The accompanying combined financial statements of the Combined Systems
reflect the "carved out" historical financial position, results of operations,
changes in net assets and cash flows of the operations of the Combined Systems
as if they had been operating as a separate company. Significant intercompany
accounts and transactions between the Combined Systems have been eliminated.
Significant accounts and transactions with the Partnership and its affiliates
are disclosed as related party transactions (See Note C). Effective December
16, 1997 the Partnership exchanged its Phoenix, Arizona system ("Phoenix")
servicing 36,250 subscribers for Cox Communications, Inc.'s Lafayette, Indiana
system ("Lafayette") servicing approximately 38,100 subscribers. In addition to
the Lafayette system received, the Partnership received $12.6 million in cash.
The Lafayette purchase price ($80 million) was allocated to the cable
television assets acquired in relation to their fair values as increases in
property and equipment of $22.4 million and franchise costs of $56.6 million.
Purchase price adjustments for differences in working capital between the
Phoenix and Lafayette systems were not significant.
Accordingly, the results of operations of the Layafette system are
included in the accompanying financial statements from the date of acquisition.
The pro forma unaudited results of operations of the Combined Systems for
the year ended December 31, 1997 assuming the acquisition of the Lafayette
system occurred on January 1, 1997 is as follows (in thousands):
Revenues......................................................... $40,203
Income before extraordinary item................................. 10,932
Net income....................................................... 10,932
Effective as of October 31, 1998, the Combined Systems' financial
statements reflect the new basis of accounting arising from their contribution
into Insight Communications of Indiana LLC ("Insight Indiana") (See Note E).
The combined financial statements have been adjusted to include the
allocation of certain expenses incurred by the Partnership on the Combined
Systems' behalf, based upon the ratio of
F-31
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Combined System subscribers to total Partnership subscribers. These allocations
reflect all costs of doing business that the Combined Systems would have
incurred on a stand alone basis as disclosed in Note C. Management believes
that these allocations are reasonable.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
A significant portion of the customer base is concentrated within the
local geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is a significant credit risk which could
have a significant effect on the financial condition of the Combined Systems.
Revenue Recognition
Revenues include service fees, connection fees and launch fees. Service
fees are recorded in the month the cable television and pay television services
are provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues to the extent of direct
selling costs incurred. Launch fees are deferred and amortized over the period
of the underlying contract. Any fees in excess of such costs are deferred and
amortized into income over the period that subscribers are expected to remain
connected to the system.
Statement of Cash Flows
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of such cash receipts over payments
is included in net assets. Amounts shown as cash represent the Combined
Systems' net cash receipts not transferred to the centralized account as of
December 31, 1997 and October 31, 1998. For purposes of this statement, cash
and cash equivalents includes all highly liquid investments purchased with
original maturities of three months or less.
F-32
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Fixed Assets
Fixed assets are stated at cost, which includes amounts capitalized for
labor and overhead expanded in connection with the installation of cable
television systems. Depreciation is computed using the straight-line method
over estimated useful lives ranging from 5 to 10 years. Management does not
believe that any events or changes in circumstances indicate that the carrying
value of these long-lived assets may not be recovered. Fixed assets consist of
the following:
December 31, October 31,
1997 1998
------------ -----------
(in thousands)
Land, buildings and
improvements......... $ 2,243 $ 2,024
Cable television
equipment............ 53,431 75,446
Furniture, fixtures and
office equipment..... 1,420 894
Less accumulated
depreciation and
amortization......... (11,311) (19,060)
-------- --------
$45,783 $ 59,304
======== ========
Intangible Assets
Intangible assets consist of franchise costs and goodwill. Costs incurred
negotiating and renewing franchise agreements are capitalized and amortized
over the life of the franchise. Franchise rights acquired through the purchase
of cable television systems represent the excess cost of the properties
acquired over the amounts assigned to the tangible assets at the date of
acquisition. During 1997 and 1998, the Combined Systems amortized cable
television franchises over periods up to 15 years using the straight-line
method. The carrying value of intangible assets, will be reviewed if facts and
circumstances suggest that that they may be impaired. Upon a determination that
the carrying value of intangible assets will not be recovered from the
undiscounted future cash flows of the acquired business, the carrying value of
such intangible assets would be considered impaired and would be reduced by a
charge to operations in the amount of the impairment. Based on its recent
analysis, management believes that no material impairment of long-lived assets
exists at October 31, 1998.
Income Taxes
As a U.S. partnership, the Partnership is not subject to federal and most
state income taxes and, therefore, no income taxes are recorded in the
accompanying financial statements.
C. Related Parties
In the normal course of business, the Combined Systems had various
transactions with the Partnership and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
F-33
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The assets of the Combined Systems serve as security under the
Partnership's lending agreements. No amount of interest charged under these
agreements has been allocated to the Combined Systems' operations. Interest
expense on a consolidated basis for the Partnership was approximately $16.0
million and $28.1 million for the years ended December 31, 1997 and 1998,
respectively.
Included in the Combined Systems' operating expenses are charges for
programming and promotional services provided by the Partnership. These charges
are based on customary rates and are in the ordinary course of business. For
the year ended December 31, 1997 and the ten months ended October 31, 1998
these charges totaled $4.3 million and $7.2 million, respectively.
D. Commitment and Contingencies
The Combined Systems had rental expense of approximately $83,000 and
$112,000 for the year ended December 31, 1997 and the ten months ended October
31, 1998, respectively, under various lease agreements for offices, utility
poles, warehouses and computer equipment. Future minimum rental payments
required under operating leases over the next five years are as follows:
(in thousands)
--------------
1999....................................................... $40,831
2000....................................................... 1,150
2001....................................................... 500
2002....................................................... 500
2003....................................................... 500
Thereafter................................................. 1,208
-------
$44,689
=======
E. Subsequent Event (Unaudited)
Effective October 31, 1998, the Partnership and Tele-Communications, Inc.
("TCI") entered into a contribution agreement ("Contribution Agreement").
Pursuant to the terms of the Contribution Agreement, the Partnership and TCI
contributed certain of their cable television systems located in Indiana and
Northern Kentucky to Insight Communications of Indiana, LLC ("Insight Indiana")
in exchange for 50% equity interests therein. All three of the Combined Systems
were contributed into Insight Indiana effective October 31, 1998. The
Partnership recognized a gain of $44.3 million on the contribution of the
Combined Systems to Insight Indiana, equivalent to 50% of the difference
between the carrying value of such systems and their fair value.
F-34
Report of Independent Auditors
The Shareholders
Insight Capital, Inc.
We have audited the accompanying balance sheets of Insight Capital, Inc. (the
"Company") as of December 31, 2000 and 1999. The balance sheets are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these balance sheets 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 balance sheets are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheets. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999 in conformity with accounting principles generally accepted in the
United States.
As indicated 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.
/s/ Ernst & Young LLP
New York, New York
March 12, 2001
F-35
INSIGHT CAPITAL, INC.
BALANCE SHEETS
December 31,
2000 1999
-----------------------
Assets
Cash $1,000 $1,000
-----------------------
Total assets $1,000 $1,000
=======================
Liabilities and shareholders' equity
Senior notes (to be paid by Insight Midwest L.P. - See Note 2) $ - $ -
Shareholders' equity:
Common stock; $.01 par value; 1,000 shares authorized, issued
and outstanding 10 10
Additional paid in capital 990 990
-----------------------
Total liabilities and shareholders' equity $1,000 $1,000
=======================
See accompanying notes
F-36
INSIGHT CAPITAL, INC.
NOTES TO BALANCE SHEETS (CONTINUED)
1. Nature of Business
Insight Capital, Inc. (the "Company"), a Delaware corporation, was formed on
September 23, 1999, for the sole purpose of being a co-issuer of the senior
notes described in Note 2, which allows certain investors the ability to be
holders of the debt. The Company has no operations. The outstanding shares of
the Company are owned by Insight Midwest L.P. ("Insight Midwest").
2. Notes Payable
On October 1, 1999, the Company and Insight Midwest completed a $200.0 million
offering of 9 3/4% senior notes due in October 2009. The proceeds of the
offering were used to repay certain debt of Insight Midwest. Interest payments
on these Senior Notes, which commenced on April 1, 2000, are payable semi-
annually on April 1 and October 1.
In April 2000, Insight Midwest completed an exchange offer pursuant to which
the 9 3/4% Senior Notes were exchanged for identical notes registered under the
Securities Act of 1933.
On November 6, 2000, the Company and Insight Midwest completed a $500.0 million
offering of 10 1/2% senior notes due in November 2010. Insight Midwest received
proceeds of $487.5 million, net of an underwriting fee of $5.0 million and a
bond discount of $7.5 million. The proceeds of the offering were used to repay
certain debt of Insight Midwest. Interest payments on these Senior Notes, which
commence on May 1, 2001, are payable semi-annually on May 1 and November 1.
The 9 3/4% Senior Notes and 10 1/2% Senior Notes are redeemable on or after
October 1, 2004 and November 1, 2005, respectively. In addition, Insight Midwest
can redeem up to 35% of the 9 3/4% Senior Notes and 10 1/2% Senior Notes prior
to October 1, 2002 and November 1, 2005, respectively, with the net proceeds
from certain sales of Insight Midwest's equity. Each holder of the Senior Notes
may require redemption of all or part of that holder's notes upon certain
changes of control. All future funding on the Senior Notes, including principal
and interest payments, are dependent upon the operating results of Insight
Midwest LP The Senior Notes are general unsecured obligations and are
subordinate to all Insight Midwest's liabilities, the amounts of which were
$770.5 million and $1.1 billion as of December 31, 2000 and 1999. The Senior
Notes contain certain financial and other debt covenants.
F-37