SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2001
Commission file numbers 333-33540
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 each registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ______
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 .................................................... 33
Item 3. Legal Proceedings ............................................. 34
Item 4. Submission of Matters to a Vote of Security Holders ........... 35
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters ........................................... 36
Item 6. Selected Financial Data ....................................... 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .... 54
Item 8. Financial Statements and Supplementary Data ................... 54
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...................................... 55
PART III
Item 10. Directors and Executive Officers of the Registrant ............ 56
Item 11. Executive Compensation ........................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management .................................................... 59
Item 13. Certain Relationships and Related Transactions ................ 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ................................................... 61
SIGNATURES .............................................................. 66
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, after giving
effect to the pending AT&T/Comcast merger transaction. Through its wholly-owned
and managed systems, Insight Communications currently serves approximately 1.4
million customers, 99% of which are concentrated in the four contiguous states
of Indiana, Kentucky, Illinois and Ohio. In addition to its geographic
concentration, our manager's communications network is tightly-grouped, or
"clustered," with approximately 95% of our manager's customers served from
fourteen headends after giving effect to the network upgrades expected to be
substantially completed during 2002. As a result, the amount of capital
necessary to deploy new and enhanced products and services is significantly
reduced on a per home basis because of the large number of customers served by a
single headend. A headend processes signals received for distribution to
customers over our network. Clustering enables us to efficiently deploy a
bundled suite of entertainment, information and communications services. This
combination of geographic concentration and clustering has enabled our manager
to offer, under the Insight Digital brand, a complete bundle of interactive
digital video, high-speed data access and telephone services.
To facilitate delivery of telephone services, we have entered into a
long-term agreement with AT&T Broadband, LLC that will allow us to deliver to
our customers local telephone service under the AT&T Digital Phone brand. Under
the terms of the agreement, we will lease for a fee certain capacity on our
network to AT&T Broadband. We will provide certain services and support for
which we will receive additional payments. The capital required to deploy
telephone services 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 telephone
services under the AT&T brand and leveraging AT&T's telephone expertise with our
strong local presence and established customer relationships.
Consistent with our strategy of pursuing value-enhancing transactions that
fit our geographic and clustering strategy, on January 5, 2001, we completed a
series of transactions with our manager and certain cable subsidiaries of AT&T
Corp. that increased by 530,000 the number of customers we serve. We refer in
this report to these transactions, including related bank financing, as the
"AT&T transactions." Specifically, we acquired:
. all of our manager's systems not already owned by us serving
approximately 175,000 customers, as well as systems which our
manager acquired from the AT&T cable subsidiaries serving
approximately 105,000 customers; and
. systems from the AT&T cable subsidiaries located in Illinois
serving approximately 250,000 customers.
1
We acquired the systems from our manager and the AT&T cable subsidiaries subject
to indebtedness in the amount of $685.0 million. 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.
Insight Midwest
We are owned 50% by our manager and 50% by an indirect subsidiary of AT&T
Broadband, which is a subsidiary of AT&T Corp. Through our subsidiaries, we own
and operate cable television systems in Indiana, Kentucky, Illinois, Ohio and
Georgia which pass approximately 2.2 million homes and serve approximately 1.3
million customers. AT&T recently entered into an agreement with Comcast
Corporation to merge their respective cable systems and certain other assets
into a new combined company to be known as AT&T Comcast Corporation. The
transaction will not result in any direct change in our ownership structure, and
upon its completion our manager will continue to serve as our general partner
and as the manager of all of our systems.
As a result of our upgrade efforts, as of the end of 2001, we estimate that
95% of our customers (other than those served by the recently acquired 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 telephone
services. Upon completion of our planned network upgrades during 2002, over 99%
of our customers (including the customers served by the recently acquired
Illinois systems) will be served by the upgraded network.
We are the largest operator of cable television systems in the State of
Indiana. As of December 31, 2001, the Indiana systems passed approximately
548,300 homes and served approximately 320,200 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, we expect that approximately 99% 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 2002.
We are also the largest operator of cable television systems in the State
of Kentucky. As of December 31, 2001, the Kentucky systems passed approximately
758,500 homes and served approximately 447,900 customers. Our Kentucky systems
are located in four of the five largest cities in the state: Louisville,
Lexington, Covington and Bowling Green. Approximately 99% of Insight Kentucky's
customers are served by four headends.
We are the second largest operator of cable television systems in the State
of Illinois. As of December 31, 2001, our Illinois systems passed approximately
679,800 homes and served approximately 416,600 customers. The Illinois systems
are located primarily in mid-sized communities, 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 six
headends. The network upgrades and consolidation of headends are expected to be
substantially completed during 2002.
As of December 31, 2001, our Ohio system passed approximately 191,000 homes
and served approximately 86,100 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 83% of the Ohio
system's customers are served by a network upgraded to 870 MegaHertz (MHz)
capacity, and our upgrade efforts are continuing.
2
We also own a cable television system in Griffin, Georgia which passed
approximately 23,200 homes and served approximately 12,900 customers as of
December 31, 2001. The Griffin system operates from a single 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 continue capitalizing 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 enhances 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 clustered systems, across 95% of our customers, providing for
headends serving an average of 100,000 customers upon completion of our planned
network upgrades, allow 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 capacity, or "bandwidth," and two-way active
capability
3
with 700 homes per fiber node, which can be further subdivided four times. Nodes
are the point of interface between our headends and our network. The result will
be a significant increase in network 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 telephone 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
and technical initiatives with several industry leaders, including: (1) AT&T
Broadband to provide telephone services; (2) AT&T Corp. and RoadRunner to
provide certain 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; and (5)
SourceSuite LLC to provide an interactive program guide as well as local
information and community guides.
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 2001, 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
4
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 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 cable which has a
capacity for a very large number of channels, known as fiber optic cable, 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 telephone services provided by AT&T
Broadband.
As of December 31, 2001, our systems were comprised of 28,049 miles of
network serving approximately 1.3 million customers and passing approximately
2.2 million homes resulting in a density of approximately 78.5 homes per mile.
As of that date, our systems were made up of an aggregate of 63 headends. We
intend to continue our strategy of consolidating headends by eliminating
approximately 42 headends, at which point 95% of our customers will be served by
fourteen headends. At the end of 2001, we estimate that 79% of our customers
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 an analog and digital two-way active network
with fiber optic cable carrying signals from the headend to the distribution
point within our customers' neighborhoods. The signals are transferred to our
coaxial cable 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.
To enable us to deliver telephone 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 are increasing the reliability of the services by
implementing centralized powering and status monitoring on our networks as
telephone services are deployed in our systems.
5
Centralized power provides the reliability, including lifeline reliability,
required in delivering telephone 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 back-up for a limited duration followed by unlimited gas-powered
generator back-up. This reliability will not only benefit the delivery of
telephone 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. As of December 31, 2001, approximately 91.1% 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, 2001, premium units as a percentage of basic
subscribers was approximately 60.9%.
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 channels.
. 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 as a
single channel analog service or as a multi-channel digital
service.
. 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 telephone
services marketed under the AT&T Digital Phone 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
6
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 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.
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 $7.95 per month, our
customers receive the following services:
. A digital set-top box;
. An interactive navigational program guide for all analog and digital
channels;
. A local, interactive Internet-style information and entertainment
service;
. A multi-channel premium service for customers who separately subscribe
to premium channels, such as HBO and Showtime;
. Video-on-demand; and
. A digital 40-channel audio music service.
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, 2001, we deployed approximately
262,600 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 service
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.
On March 14, 2002, our manager purchased the remaining 50% equity
interest in SourceSuite LLC that it did not already own. Through SourceSuite,
our interactive digital platform provides its local Internet-style service and
its interactive program guide.
7
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
22% and 34% since launch.
High-Speed Data
We offer high-speed data service for personal computers for all of our
upgraded systems through our own regional network branded InsightBB.com(SM),
except for our Columbus, Ohio system, which utilizes the RoadRunner service. We
have entered into a four-year agreement with AT&T Corp. under which AT&T will
provide the IP network backbone for our service and certain core Internet
support functions. This new arrangement replaces our previous Internet access
provider Excite@Home. We transitioned our customers from the Excite@Home network
to our new regional network in mid-February 2002. As of December 31, 2001,
high-speed data services were made available in 1.7 million of our homes and
served approximately 88,100 of our customers.
The broad bandwidth of our cable network enables data to be
transmitted significantly 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.
Telephone Services
We have a long-term agreement with AT&T Broadband that allows us to
deliver local telephone service under the AT&T Digital Phone brand using our
network infrastructure and AT&T Broadband's switching and transport facilities.
We 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, AT&T
Broadband is required to pay us a monthly fee per customer. We are also entitled
to additional compensation 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 telephone
services provided to our customers. The AT&T Broadband digital telephone
services are marketed and carried under the AT&T Digital Phone 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
8
provide cable television service, other than our Illinois systems. If
both parties agree, the agreements can be expanded to include the Illinois
systems. Telephone services have been deployed in areas within Louisville,
Kentucky and Evansville, Indiana and are available to a total of approximately
210,000 households, with approximately 7,500 active customers. In addition,
capital investment has been made in preparation for the deployment of telephone
services in Columbus, Ohio and Lexington, Kentucky, with commercial launch
expected early in 2002.
The capital required to deploy telephone services 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 an average 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 telephone services under the AT&T brand and
leveraging AT&T's telephone expertise with our strong local presence and
established customer relationships.
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' 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.
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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 on January 5, 2001 with respect to
the 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, 2001, it owned, operated and managed a cable television
network serving approximately 1.4 million customers with approximately 99% 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
Communications Company, L.P, ("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 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 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, 2001, the Indiana systems passed approximately
548,300 homes and served approximately 320,200 customers. This does not include
approximately 9,600 homes passed and approximately 5,100 customers served by
systems in Bloomington, Anderson and Cynthiana which we acquired on January 1,
2002. The Indiana systems are owned by Insight Communications Midwest, which is
the largest cable operator in the state. Insight Communications Midwest, which
was capitalized on
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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. Insight Communications serves as manager of the Indiana
systems. 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 99% 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 Communications 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 117,200 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. This management agreement expires on June 30, 2002.
The Indiana systems are organized in four management districts:
The Central District
As of December 31, 2001, the Central District passed approximately
138,100 homes and served approximately 78,900 customers, principally in the
community of Bloomington. 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. All Bloomington
digital customers have been migrated to our interactive Insight Digital service,
including the DIVA video-on-demand service. Our InsightBB.com high-speed
Internet service is also available in portions of the district. We expect to
substantially complete the upgrade of this district by the end of 2002.
The Southwest District
As of December 31, 2001, the Southwest District passed
approximately 126,300 homes and served approximately 59,300 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.
By the end of 2001, 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. Our InsightBB.com
high-speed Internet service is available in Evansville. In addition, AT&T
Digital Phone service was launched in parts of Evansville in August of 2001,
with service expected to be available throughout most of the district by the end
of the second quarter of 2002.
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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 77,100 homes in our
service area and is expected to pass additional homes, and has commenced
offering telephone and data service.
The Northwest District
As of December 31, 2001, the Northwest District passed approximately
101,200 homes and served approximately 69,000 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 and Kokomo systems to 750 MHz are
substantially completed. Our InsightBB.com high-speed Internet service is
available 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 DIVA's video-on-demand service.
The Northeast District
As of December 31, 2001, the Northeast District passed approximately
182,700 homes and served approximately 113,000 customers in Richmond as well as
in the suburban communities near 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 was substantially
completed in 2001. Our InsightBB.com high-speed Internet service is available
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 DIVA's video-on-demand service.
The Kentucky Systems
General
As of December 31, 2001, the Kentucky systems passed approximately
758,500 homes and served approximately 447,900 customers. This includes
approximately 42,700 homes passed and approximately 21,700 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. Insight
Communications serves as manager of the Kentucky systems.
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Our Kentucky systems are located in and around four of the five
largest cities in the state: Louisville, Lexington, Covington, and Bowling
Green. Over 99% of Insight Kentucky's customers are served by a two-way active,
750 MHz network. Additionally, approximately 99% of the systems' customers are
served by four headends.
Summary statistics for the Kentucky systems are as follows:
Louisville
As of December 31, 2001, the Louisville system passed approximately
449,900 homes and served approximately 259,100 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,
although neither has built a cable system as of December 31, 2001.
The Louisville system substantially completed a network upgrade and we
serve substantially all of our customers with two-way, 750 MHz cable. The system
is also in the process of interconnecting six headends, which will allow 99% of
the customers in the system to be served from a single headend.
InterMedia Capital Partners VI, L.P. launched its digital service in
Louisville in November 1998. The service had approximately 62,600 customers in
Kentucky as of December 31, 2001. We are migrating these customers to our
interactive Insight Digital service, including the LocalSource product and the
DIVA video-on-demand service. Our InsightBB.com high-speed Internet service is
available in the Louisville system.
Lexington
As of December 31, 2001, the Lexington system passed approximately
124,600 homes and served approximately 85,000 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 we serve all
of our customers with two-way, 750 MHz cable. Our InsightBB.com high-speed
Internet service and Insight Digital service, including the LocalSource product
and the DIVA video-on-demand service are available throughout the system.
Covington
As of December 31, 2001, the Covington system passed approximately
149,100 homes and served approximately 81,500 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.
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The Covington system has completed a network upgrade and we serve all
of our customers with two-way, 750 MHz cable. Our InsightBB.com high-speed
Internet service and Insight Digital service, including the LocalSource product
and the DIVA video-on-demand service are available in Covington.
Bowling Green
As of December 31, 2001, the Bowling Green system passed approximately
34,900 homes and served approximately 22,300 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.
Our InsightBB.com high-speed Internet service and Insight Digital service,
including the LocalSource product are available in Bowling Green.
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 AT&T
transactions. Insight Communications serves as manager of the Illinois systems.
These systems are located primarily in mid-sized communities, including
Springfield, Rockford, Peoria, Dixon and Champaign/Urbana. The Rockford system
was contributed by Insight Communications and the other Illinois systems were
acquired from the AT&T cable subsidiaries pursuant to the AT&T transactions.
In total, the Illinois systems passed approximately 679,800 homes and
served 416,600 customers as of December 31, 2001, making us the second largest
operator of cable television systems in the State of Illinois. These systems are
served by networks with approximately 3,312 miles having a capacity greater than
or equal to 750 MHz, 3,589 miles having a capacity greater than or equal to 450
MHz and less than 750 MHz, and 846 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 substantially completed during 2002. In the interim, we will launch Insight
Digital on a node-by-node basis as system upgrades are completed. We anticipate
additional deployments of the DIVA video-on-demand service by the end of 2002 in
selected areas in the Illinois systems.
The Illinois systems are organized in five management districts:
The Rockford District
As of December 31, 2001, the Rockford District passed approximately
129,200 homes and served approximately 78,900 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.
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We completed the upgrade of the Rockford system, 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 22%
digital penetration from its customers, with incremental revenue per digital
customer of approximately $21 per month. Our InsightBB.com high-speed Internet
service is available throughout the district.
The Peoria District
As of December 31, 2001, the Peoria District passed approximately
199,000 homes and served approximately 124,400 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 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 Peoria system is currently undergoing a network upgrade from 550
MHz to 860 MHz, which is expected to be completed during 2002. As of December
31, 2001, the Peoria District achieved penetration levels for its digital
service of nearly 17% in areas where digital service is available. We continue
to migrate these customers to our interactive Insight Digital service, including
the Local Source product and the DIVA video-on-demand service, during 2002. The
system has launched high-speed data service and has achieved penetration levels
of over 9% as of December 31, 2001.
The Dixon District
As of December 31, 2001, the Dixon District passed approximately
67,700 homes and served approximately 45,600 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 substantially completed by the end of 2002. As of
December 31, 2001, the district achieved penetration levels for its digital
service of nearly 14% in areas where the service is available. We continue to
migrate these customers to our interactive Insight Digital service, including
the LocalSource product and the InsightBB.com high-speed Internet service during
2002.
The Springfield District
As of December 31, 2001, the Springfield District passed approximately
186,100 homes and served approximately 116,500 customers, principally in the
communities of Decatur and Springfield. This includes approximately 9,800 homes
passed and approximately 4,400 customers served by systems in Chatham, Divernon
and Pawnee, which we acquired on October 1, 2001. 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 is
considering a municipal overbuild utilizing an existing plant owned by the city.
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The Springfield District is currently undergoing a network upgrade
from 450 MHz to two-way, 750 MHz. As of December 31, 2001, the district achieved
penetration levels for its digital service of over 20% in the areas where the
service is available. We continue 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 is currently rolling out
the InsightBB.com high speed Internet service on a node-by-node basis.
The Champaign District
As of December 31, 2001, the Champaign District passed approximately
97,800 homes and served approximately 51,300 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 income for the area is approximately
$34,000.
The Champaign District serves substantially all of its customers by a
two-way, 750 MHz network. The district had approximately 6,400 digital customers
as of December 31, 2001. We continue 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 2002. The Champaign District has
launched high-speed data service and as of December 31, 2001, had over 7,700
customers.
The Griffin, Georgia System
The Griffin, Georgia system is owned and operated by Insight
Communications Midwest, and was contributed to us on January 5, 2001 pursuant to
the AT&T Transactions. Insight Communications serves as manager of the Griffin
system. As of December 31, 2001, the Griffin, Georgia system passed
approximately 23,200 homes and served approximately 12,900 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 20% penetration as of December 31, 2001. The
Griffin launch was the first digital deployment of our multi-tiered approach in
the country. During 2002, we will upgrade the Griffin system to enhance the
digital service.
The Ohio System
In connection with the AT&T 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, 2001, the Ohio system passed approximately
191,000 homes and served approximately 86,100 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,
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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 3.1%. 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, 2001, approximately 22,600 customers
have subscribed to our interactive digital service, representing a penetration
of nearly 34%. The RoadRunner high-speed data service, launched in 2000, has
achieved a penetration of 7.3% as of December 31, 2001. 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. WideOpenWest
acquired the assets of Ameritech in December 2001, and has built its citywide
franchise, both in our service area and in the Time Warner service area on the
west side of Columbus. 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 WideOpenWest pass approximately 130,000 homes, representing 68.1%
of the Ohio system's total homes passed.
As with our Indiana, Kentucky and Illinois systems, we intend to
launch a telephone service alternative to WideOpenWest 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 telephone
services agreement with AT&T Broadband.
Customer Rates
Rates charged to customers vary based on the market served and service
selected. As of December 31, 2001, the weighted average revenue for our monthly
combined basic and classic service was approximately $30.97 The national average
was estimated to be $31.58 for the same services as of December 31, 2001, 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 telephone services. Customers who purchase more than
one service are eligible for a bundled discount. We regularly use targeted
campaigns to sell the appropriate services to both our existing and our
potential 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.
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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 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
demonstrations 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 160 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.
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 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, and we believe that
such initiatives result in consumer and governmental goodwill and name
recognition, increasing customer loyalty and likely facilitating any future
efforts to provide new communications services.
We encourage all of our local management teams to take leadership
roles in community and civic 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.
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Cable industry recognition and awards for excellence in marketing and
programming have been received by several of our systems.
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.
In 2001, our Louisville, Kentucky system partnered with Oxygen Media
to form "The Young Women's Technology Fellowship" as part of our "In the Know"
efforts. This program was a synergy of the common goals between Insight and
Oxygen in order to address the issue of the digital divide through cable's
robust resources. The Fellowship provided advanced training and resources to 12
motivated young women most in need. This program received a great deal of
recognition both locally and industry-wide, including a 2002 Beacon Award by the
Cable Television Public Affairs Association.
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.
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;
. The maintenance of insurance and indemnity bonds; and
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. The payment of fees to communities.
These local franchises are subject to limits imposed by federal law.
As of December 31, 2001, 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,
2001:
Year of Number of Percentage of Number of Percentage Total
Franchise Expiration Franchises Total Franchises Basic Customers Basic Customers
-------------------- ---------- ---------------- --------------- ---------------
Expired* .............. 32 6.2% 99,207 7.7%
2002 .................. 27 5.2 38,936 3.0
2003 .................. 49 9.5 96,330 7.5
2004 .................. 35 6.8 44,637 3.5
2005 .................. 38 7.4 93,665 7.3
After 2005 ............ 336 64.9 910,916 71.0
____________
* 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 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.
20
Congress has also enacted legislation which permits direct broadcast satellite
companies to retransmit local television signals, eliminating one of the
objections of consumers about switching to satellites.
The 1996 Telecom Act makes it easier for local exchange telephone
companies and others to provide a wide variety of video services competitive
with services provided by cable systems. Various local exchange telephone
companies currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including the
deployment of broadband cable networks and the use of wireless transmission
facilities. Local exchange telephone companies in various states have either
announced plans, obtained local franchise authorizations or are currently
competing with our cable communications systems. Local exchange telephone
companies and other companies also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The
ability of local exchange telephone companies to cross-subsidize video, data and
telecommunication services also poses some threat to cable operators.
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.
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. As of December 31, 2001, our Evansville, Indiana
and Columbus, Ohio systems were overbuilt. As a result, approximately 8.7% of
the total homes passed by our systems were overbuilt as of such date.
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
21
system service is currently being provided by DIRECTV, Inc., and EchoStar
Communications Corporation. Direct broadcast satellite television systems have
some advantages over cable systems that were not upgraded, such as greater
channel capacity and digital picture quality. In addition, legislation has been
enacted which permits direct broadcast satellite television systems to
retransmit the signals of local television stations in their local markets.
However, direct broadcast satellite television systems have a limited ability to
offer locally produced programming, and do not have a significant local presence
in the community. In addition, direct broadcast satellite television systems
packages can be more expensive than cable, especially if the subscriber intends
to view the service on more than one television in the household. Finally,
direct broadcast satellite television systems do not have the same full two-way
capability, which we believe will limit their ability to compete in a meaningful
way in interactive television, high-speed data and voice communications. Direct
broadcast satellite has enjoyed a 17.5% average penetration nationwide, and we
believe that satellite penetration in our various markets generally is in
accordance with such average.
Several telephone companies are introducing digital subscriber line
technology, which allows Internet access over traditional phone lines at data
transmission speeds greater than those available by a standard telephone modem.
Although these transmission speeds are not as great as the transmission speeds
of a cable modem, we believe that the transmission speeds of digital subscriber
line technology are sufficiently high that such technology will compete with
cable modem technology. The FCC is currently considering its authority to
promulgate rules to facilitate the deployment of these services and regulate
areas including high-speed data and interactive Internet services. We cannot
predict the outcome of any FCC proceedings, or the impact of that outcome on the
success of our Internet access services or on our operations.
Additionally, the FCC adopted regulations allocating frequencies in
the 31 Gigahertz (GHz) band for a new service that can be used to provide video
services similar to multipoint multichannel distribution systems, which transmit
television channels from a fixed station to multiple receiving facilities
located at fixed points. The FCC has completed spectrum auctions for local
multipoint distribution service licenses.
As we expand our offerings to include telephone services, our AT&T
Digital Phone 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 telephone service areas. While we intend to add our telephone
service offering to our various markets, the service has only recently been
launched in selected markets and has not yet achieved any material penetration
levels.
Other new technologies may become competitive with services that cable
communications systems can offer. Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect of ongoing or future
developments on the cable communications industry or on our operations.
22
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
Federal Legislation
The principal federal statute governing the cable television industry
is the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has adopted regulations covering such areas as
cross-ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, cable rates, consumer
protection and customer service, leased access, indecent programming, programmer
access to cable television systems, programming agreements, technical standards,
consumer electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional non-basic program tiers. The 1984
Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the previous statutory and FCC rate regulation standards.
The 1992 Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable television systems were not subject to rate
regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to rate regulation of basic service. The
1996 Telecom Act expanded the definition of effective competition to cover
situations where a local telephone company or its affiliate, or any multichannel
video provider using telephone company facilities, offers comparable video
service by any means except direct broadcast satellite television systems.
Satisfaction of this test deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable
Act required the FCC to
23
adopt a formula for franchising authorities to assure that basic cable rates are
reasonable; allowed the FCC to review rates for cable programming service tiers,
other than per-channel or per-program services, in response to complaints filed
by franchising authorities and/or cable customers; prohibited cable television
systems from requiring basic customers to purchase service tiers above basic
service in order to purchase premium services if the system is technically
capable of compliance; required the FCC to adopt regulations to establish, on
the basis of actual costs, the price for installation of cable service, remote
controls, converter boxes and additional outlets; and allowed the FCC to impose
restrictions on the retiering and rearrangement of cable services under certain
limited circumstances. The 1996 Telecom Act limited the class of complainants
regarding cable programming service tier rates to franchising authorities only,
and ended FCC regulation of cable programming service tier rates on March 31,
1999. The 1996 Telecom Act also relaxes existing uniform rate requirements by
specifying that such requirements do not apply where the operator faces
effective competition, and by exempting bulk discounts to multiple dwelling
units, although complaints about predatory pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the
regulation of basic service rates. Local franchising authorities are empowered
to order a reduction of existing rates which exceed the maximum permitted level
for basic services and associated equipment, and refunds can be required. The
FCC adopted a benchmark price cap system for measuring the reasonableness of
existing basic service rates. Alternatively, cable operators have the
opportunity to make cost-of-service showings which, in some cases, may justify
rates above the applicable benchmarks. The rules also require that charges for
cable-related equipment, converter boxes and remote control devices, for
example, and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable
television operator adds or deletes channels. There is also a streamlined
cost-of-service methodology available to justify a rate increase on the basic
tier for "significant" system upgrades.
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
24
to any tier of service, other than the basic service tier, unless the cable
television system is technically incapable of doing so. Generally, this
exemption from compliance with the statute for cable television systems that do
not have such technical capability is available until a cable television system
obtains the capability, but not later than October 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, that is to say that the system is located in the station's area of
dominant influence, to elect every three years whether to require the cable
television system to carry the station, subject to certain exceptions, or
whether the cable television system will have to negotiate for "retransmission
consent" to carry the station. The next election between must-carry and
retransmission consent will be October 1, 2002. A cable television system is
generally required to devote up to one-third of its activated channel capacity
for the carriage of local commercial television stations whether pursuant to
mandatory carriage requirements or the retransmission consent requirements of
the 1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger of:
(i) a 50 mile radius from the station's city of license; or (ii) the station's
Grade B contour, a measure of signal strength. Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable television systems
have to obtain retransmission consent for the carriage of all "distant"
commercial broadcast stations, except for certain "superstations," which are
commercial satellite-delivered independent stations such as WGN. To date,
compliance with the "retransmission consent" and "must carry" provisions of the
1992 Cable Act has not had a material effect on us, although this result may
change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
recently completed a rulemaking proceeding on the carriage of television signals
in high definition and digital formats. The outcome of this proceeding could
have a material effect on the number of services that a cable operator will be
required to carry. Local television broadcast stations transmitting solely in a
digital format are entitled to carriage. Stations transmitting in both digital
and analog formats, which is permitted during the current transition period,
have no carriage rights for the digital format during the transition.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must,
upon the appropriate request of a local television station, delete the
simultaneous or nonsimultaneous network programming of a distant 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
25
relating to facilities, equipment and services, whether or not cable-related.
The 1984 Cable Act, under certain limited circumstances, permits a cable
operator to obtain modifications of franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal
procedures and criteria designed to protect incumbent franchisees against
arbitrary denials of renewal and to provide specific grounds for franchising
authorities to consider in making renewal decisions, including a franchisee's
performance under the franchise and community needs. Even after the formal
renewal procedures are invoked, franchising authorities and cable television
operators remain free to negotiate a renewal outside the formal process.
Nevertheless, renewal is by no means assured, as the franchisee must meet
certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account the
cost of meeting such requirements. Similarly, if a franchising authority's
consent is required for the purchase or sale of a cable television system or
franchises, such authority may attempt to impose burdensome or onerous franchise
requirements in connection with a request for such consent. Historically,
franchises have been renewed for cable television operators that have provided
satisfactory services and have complied with the terms of their franchises. At
this time, we are not aware of any current or past material failure on our part
to comply with our franchise agreements. We believe that we have generally
complied with the terms of our franchises and have provided quality levels of
service.
The 1992 Cable Act makes several changes to the process under which a
cable television operator seeks to enforce its renewal rights which could make
it easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it fails to respond to a written notice from the cable
television operator of its failure or inability to cure. Courts may not reverse
a denial of renewal based on procedural violations found to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require
cable television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local
exchange carriers providing video programming directly to customers within their
local exchange telephone service areas. Consequently, the 1996 Telecom Act
permits telephone companies to compete directly with operations of cable
television systems. Under the 1996 Telecom Act and FCC rules adopted to
implement the 1996 Telecom Act, local exchange carriers may provide video
service as broadcasters, common carriers, or cable operators. In addition, local
exchange carriers and others may also provide video service through "open video
systems," a regulatory regime that may give them more flexibility than
traditional cable television
26
systems. Open video system operators (including local exchange carriers) can,
however, be required to obtain a local cable franchise, and they can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
In general, open video system operators must make their systems available to
programming providers on rates, terms and conditions that are reasonable and
nondiscriminatory. Where carriage demand by programming providers exceeds the
channel capacity of an open video system, two-thirds of the channels must be
made available to programmers unaffiliated with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers from
purchasing a greater than 10% ownership interest in a cable television system
located within the local exchange carrier's telephone service area, prohibits
cable operators from purchasing local exchange carriers whose service areas are
located within the cable operator's franchise area, and prohibits joint ventures
between operators of cable television systems and local exchange carriers
operating in overlapping markets. There are some statutory exceptions, including
a rural exemption that permits buyouts in which the purchased cable television
system or local exchange carrier serves a non-urban area with fewer than 35,000
inhabitants, and exemptions for the purchase of small cable television systems
located in non-urban areas. Also, the FCC may grant waivers of the buyout
provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repealed the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act were eliminated in 1996, although
the parallel FCC regulations prohibiting broadcast/cable common-ownership
remained in effect. The U.S. Court of Appeals for the District of Columbia
Circuit has recently struck down these rules. The FCC's rules also generally
prohibit cable operators from offering satellite master antenna service separate
from their franchised systems in the same franchise area, unless the cable
operator is subject to "effective competition" there.
The 1996 Telecom Act amended the definition of a "cable system"
under the Communications Act so that competitive providers of video services
will be regulated and franchised as "cable systems" only if they use public
rights-of-way. Thus, a broader class of entities providing video programming may
be exempt from regulation as cable television systems under the Communications
Act.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of subscribers which a single cable television operator can serve. In
general, no cable television operator can have an attributable interest in cable
television systems which serve more than 30% of all multichannel video
programming subscribers nationwide. Attributable interests for these purposes
include voting interests of 5% or more, unless there is another single holder of
more than 50% of the voting stock, officerships, directorships and general
partnership interests. The FCC has also adopted rules which limit the number of
channels on a cable television system which can be occupied by national video
programming services in which the entity which owns the cable television system
has an attributable interest. The limit is 40% of the first 75 activated
channels. The U.S. Court of Appeals for District of Columbia Circuit upheld the
constitutionality of these rules. A petition for certiorari was denied by the
Supreme Court. However, the U.S. Court of Appeals for District of Columbia
Circuit reversed and remanded the horizontal and vertical ownership rules for
further proceedings on non-constitutional grounds.
The 1996 Telecom Act provides that registered utility holding
companies and subsidiaries may provide telecommunications services, including
cable television, notwithstanding the Public Utilities Holding Company Act of
1935, as amended. Electric utilities must establish separate subsidiaries known
as "exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to
27
their resources, electric utilities could be formidable competitors to
traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. The prohibition on
certain types of exclusive programming arrangements is set to expire on October
5, 2002, unless the FCC determines that extension of the prohibition is
necessary to preserve and protect competition in video programming distribution.
We expect the FCC to make a determination on this issue soon.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable television operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
television operator was found to have violated the customer privacy provisions
of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and
other costs. Under the 1992 Cable Act, the privacy requirements were
strengthened to require that cable television operators take such actions as are
necessary to prevent unauthorized access to personally identifiable information.
Certain of these requirements were modified by the Electronic Communications
Privacy Act of 2001.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC 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
28
basic service tier. The 1996 Telecom Act directs the FCC to set only minimal
standards to assure compatibility between television sets, VCRs and cable
television systems, and otherwise to rely on the marketplace. Pursuant to the
1992 Cable Act, the FCC has adopted rules to assure the competitive availability
to consumers of customer premises equipment, such as converters, used to access
the services offered by cable television systems and other multichannel video
programming distributors. Pursuant to those rules, consumers are given the right
to attach compatible equipment to the facilities of their multichannel video
programming distributors so long as the equipment does not harm the network,
does not interfere with the services purchased by other customers and is not
used to receive unauthorized services. As of July 1, 2000, multichannel video
programming distributors, other than operators of direct broadcast satellite
television systems, were required to separate security from non-security
functions in the customer premises equipment which they sell or lease to their
customers and offer their customers the option of using component security
modules obtained from the multichannel video programming distributors with
set-top units purchased or leased from retail outlets. As of January 1, 2005,
multichannel video programming distributors will be prohibited from distributing
new set-top equipment integrating both security and non-security functions to
their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing
an emergency alert system. The rules require all cable television systems to
provide an audio and video emergency alert system message on at least one
programmed channel and a video interruption and an audio alert message on all
programmed channels. The audio alert message is required to state which channel
is carrying the full audio and video emergency alert system message. The FCC
rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install EAS equipment capable
of providing audio and video emergency alert system messages on all programmed
channels by December 31, 1998. Cable television systems with 5,000 or more but
fewer than 10,000 basic customers per headend will have until October 1, 2002 to
comply with that requirement. Cable television systems with fewer than 5,000
basic customers per headend will have a choice of providing either a national
level emergency alert system message on all programmed channels or installing
emergency alert system equipment capable of 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.
29
Pole Attachments
The FCC currently regulates the rates and conditions imposed by
certain public utilities for use of their poles unless state public service
commissions are able to demonstrate that they adequately regulate the rates,
terms and conditions of cable television pole attachments. A number of states
and the District of Columbia have certified to the FCC that they adequately
regulate the rates, terms and conditions for pole attachments. Illinois, Ohio,
and Kentucky, states in which we operate, have made such a certification. In the
absence of state regulation, the FCC administers such pole attachment and
conduit use rates through use of a formula which it has devised. Pursuant to the
1996 Telecom Act, the FCC has adopted a new rate formula for any attaching
party, including cable television systems, which offers telecommunications
services. This new formula will result in higher attachment rates than at
present, but they will apply only to cable television systems which elect to
offer telecommunications services. Any increases pursuant to this new formula
began in 2001, and will be phased in by equal increments over the five ensuing
years. The FCC ruled that the provision of Internet services will not, in and of
itself, trigger use of the new formula. However, the U.S. Court of Appeals for
the Eleventh Circuit held that, since Internet provision is neither a "cable
service" or a "telecommunications service," neither rate formula applies and,
therefore, public utilities are free to charge what they please. The Supreme
Court has recently reversed this decision. The FCC has also initiated a
proceeding to determine whether it should adjust certain elements of the current
rate formula. If adopted, these adjustments could increase rates for pole
attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes
matters regarding a cable television system's carriage of local sports
programming; restrictions on origination and cablecasting by cable television
operators; rules governing political broadcasts; equal employment opportunity;
deletion of syndicated programming; registration procedure and reporting
requirements; customer service; closed captioning; obscenity and indecency;
program access and exclusivity arrangements; and limitations on advertising
contained in nonbroadcast children's programming.
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.
30
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks, such as HBO, and basic cable networks, such as
USA Network, is licensed by the networks through private agreements with the
American Society of Composers and Publishers, generally known as ASCAP, and BMI,
Inc., the two major performing rights organizations in the United States. Both
the American Society of Composers and Publishers and BMI offer "through to the
viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises, and
allows franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities are immunized from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable television operator's
provision of telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. To date, none of the states in
which we currently operate has enacted state level regulation.
31
The foregoing describes all material present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at
high speeds via high capacity broadband transmission facilities and cable
modems. We compete with many other providers of Internet access services which
are known as Internet service providers ("ISPs"). ISPs include such companies as
America Online and Mindspring Enterprises as well as major telecommunications
providers, including AT&T and local exchange telephone companies. A number of
local franchising authorities have attempted to require cable companies offering
Internet access service over their broadband facilities to allow access to those
facilities on an unbundled basis to other ISPs. To date, all such efforts have
been overturned in the courts. However, many ISPs and local franchising
authorities have continued to ask the U.S. Congress and the FCC to mandate such
access, or at least to allow local authorities to impose such a requirement.
Although the FCC has thus far declined declined to impose such an access
requirement on cable companies, the issue remains under consideration. The FCC
has recently decided that cable Internet service should be classified for
regulatory purposes as an "information service" rather than either a "cable
service" or a "telecommunications service." Concurrently the FCC has initiated a
wide-ranging rulemaking proceeding in which it seeks comment on the regulatory
ramifications of this classification. Among the issues to be decided are whether
the FCC should permit local authorities to impose an access requirement, whether
local authorities should be prohibited from imposing fees on cable Internet
service revenues, and what regulatory role local authorities should be permitted
to play. The outcome of this proceeding could have a material impact on our
provision of cable Internet service.
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act, added to that act by the 1996 Telecom Act, declares it to be the policy of
the United States to promote the continued development of the Internet and other
interactive computer services and interactive media, and to preserve the vibrant
and competitive free market that presently exists for the Internet and other
interactive computer services, unfettered by federal or state regulation. One
area in which Congress did attempt to regulate content over the Internet
involved the dissemination of obscene or indecent materials. The provisions of
the 1996 Telecom Act, generally referred to as the Communications Decency Act,
were found to be unconstitutional, in part, by the United States Supreme Court
in 1997. In response, Congress passed the Child Online Protection Act. The
constitutionality of this act is currently being challenged in the courts.
Finally, disclosure of customer communications or records is governed by the
Electronic Communications Privacy Act of 2001.
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
32
when cable operators provide telecommunications service. State and local
governments must publicly disclose such required payments.
We have entered into a ten-year agreement with AT&T Broadband that will
allow AT&T Broadband to provide to customers telephone services using our
network infrastructure and AT&T Broadband's switching and long distance
transport facilities. Local telecommunications service is subject to regulation
by state utility commissions. Use of local telecommunications facilities to
originate and terminate long distance services, a service commonly referred to
as "exchange access," is subject to regulation both by the FCC and by state
utility commissions. As a provider of local exchange service, AT&T Broadband
would be subject to the requirements imposed upon local exchange carriers by the
1996 Telecom Act. These include requirements governing resale, telephone number
portability, dialing parity, access to rights-of-way and reciprocal
compensation. AT&T Broadband's ability to successfully offer local
telecommunications service will be dependent, in part, on the opening of local
telephone networks by incumbent local telephone companies as required of them by
the 1996 Telecom Act.
In January 1999, the United States Supreme Court held that the FCC has
authority under the Communications Act to establish rules to govern the pricing
of facilities and services provided by incumbent local exchange carriers
("ILECs") to open their local networks to competition. However, on July 18,
2000, the United States Court of Appeals for the Eighth Circuit vacated several
FCC rules concerning interconnection and pricing of ILEC network elements,
including a rule that mandates that ILECs set prices for unbundled network
elements ("UNEs") at the lowest cost network configuration, and another rule
that would have required the ILECs to bundle combinations of network elements at
the competing carrier's request. The U.S. Supreme Court is presently reviewing
this decision (consolidated with four other lower court challenges to the FCC's
interconnection rules). In addition, a later FCC order dealing with certain
other UNE issues remanded by the U.S. Supreme Court in its 1999 decision has
been appealed to the Eighth Circuit. In the meantime, in December 2001 the FCC
instituted a new rulemaking proceeding to reevaluate the list of available UNEs.
The FCC has also initiated rulemaking proceedings to establish uniform ordering
and provisioning performance standards for resale and UNEs, and for special
access services. The outcome of these court proceedings and FCC rulemakings will
have an effect on AT&T Broadband's ability to compete in the telecommunications
marketplace.
Employees
As of December 31, 2001, after giving effect to the AT&T transactions,
we employed approximately 2,900 full-time employees and 84 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
33
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 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
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. We have reached an agreement in principle with Plaintiffs'
counsel to settle these lawsuits. Such settlement is awaiting the execution of
definitive documentation and a determination of fairness by the respective
courts where these matters were filed.
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 stayed the grant of these franchises pending a court determination
as to whether the franchises were granted on more favorable terms. The City of
Louisville has been granted summary judgment in the Knology action on the basis
that the franchise granted Knology was not more favorable than our own. We
intend to appeal such ruling.
On November 8, 2000, Knology 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
34
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. The court denied our motion to dismiss and granted Knology the
preliminary injunction effectively removing the stay of their franchise. We
believe we have substantial and meritorious defenses to the asserted federal
claims and intend to defend the action 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.
35
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, 2001. We have prepared the selected financial
information using:
. our audited financial statements for the two years ended December 31,
2001;
. 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;
. our 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;
and
. our 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).
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
in this report, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations," also included in this report.
36
Year Ended December 31,
------------------------------------------------------------
2001 2000 1999 1998(1) 1997
------------------------------------------------------------
Statement of Operations Data: (dollars in thousands)
Revenues $ 702,004 $ 379,720 $ 201,286 $ 57,411 $ 22,055
Operating costs and expenses:
Programming and other operating costs 256,902 133,214 60,624 14,658 5,344
Selling, general and administrative, including
management fees 131,370 70,470 43,162 10,432 3,804
Non-recurring high-speed data charges 3,785 -- -- -- --
Depreciation and amortization 373,030 195,669 109,110 24,788 5,498
------------------------------------------------------------
Operating income (loss) (63,083) (19,633) (11,610) 7,533 7,409
------------------------------------------------------------
Interest expense, net (187,800) (112,135) (50,900) (5,824) --
Other income (expense) (1,998) (342) (167) (91) (26)
Extraordinary loss from early extinguishment of debt (10,315) -- -- -- --
------------------------------------------------------------
Net income (loss) $ (263,196) $ (132,110) $ (62,677) $ 1,618 $ 7,383
============================================================
Other Financial Data:
EBITDA (2) $ 307,949 $ 175,694 $ 97,333 $ 32,230 $ 12,881
EBIDTA Margin 43.9% 46.3% 48.4% 56.1% 58.4%
Capital expenditures $ 319,956 $ 196,103 $ 107,901 $ 25,454 $ 17,246
Net cash provided by operating activities 161,536 60,151 102,917 41,375 13,339
Net cash used in investing activities 399,995 199,812 110,440 26,052 25,891
Net cash provided by financing activities 244,870 109,400 21,627 4,318 12,588
Balance Sheet Data (as of the end of the period):
Cash and cash equivalents $ 12,146 $ 5,735 $ 35,996 $ 19,493 $ 143
Fixed assets, net 1,133,627 681,490 596,246 129,776 45,783
Total assets 3,561,080 1,699,547 1,706,599 527,332 105,289
Total debt, including preferred interests 2,484,075 1,347,523 1,232,000 460,000 --
Partners' capital 820,622 236,437 368,547 44,195 102,134
37
As of December 31, 2001, except where noted
-------------------------------------------
Indiana Kentucky Illinois Ohio Total
Systems Systems Systems (3) System Systems
------- ------- ----------- ------ -------
Technical Data:
Network miles 8,075 9,081 8,143 2,750 28,049
Number of headends 14 10 38 1 63
Number of headends
expected upon
completion of upgrades
during 2002 (4)(5) 6 5 9 1 21
Number of headends
serving 95% of our
customers expected
upon completion of
our upgrades
(4)(5) 3 4 6 1 14
Operating Data:
Homes passed (6) 548,300 758,500 703,000 191,000 2,200,800
Basic customers (7) 320,200 447,900 429,500 86,100 1,283,700
Basic penetration (8) 58.4% 59.1% 61.1% 45.1% 58.3%
Digital ready homes (9) 272,900 430,400 373,900 67,200 1,144,400
Digital customers (10) 55,100 113,100 66,900 22,600 257,700
Digital penetration (11) 20.2% 26.3% 17.9% 33.6% 22.5%
Premium units (12) 146,500 274,800 293,500 66,700 781,500
Premium penetration (13) 45.7% 61.4% 68.3% 77.5% 60.9%
Cable modem customers (14) 20,500 27,500 28,600 11,500 88,100
___________
(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 and extraordinary items. We believe 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 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.
38
(3) Includes our Griffin, Georgia system.
(4) The upgrades of the recently acquired Illinois systems are scheduled to be
completed by the end of 2002.
(5) Includes the newly acquired Indiana systems in Bloomington, Anderson and
Cynthiana.
(6) 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.
(7) 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.
(8) Basic penetration means basic customers as a percentage of total number of
homes passed.
(9) Digital ready homes means the total number of homes passed to which
digital service is available.
(10) Customers with a digital converter box.
(11) Digital penetration means digital service units as a percentage of digital
ready homes.
(12) Premium units mean the number of subscriptions to premium services, which
are paid for on an individual unit basis.
(13) 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.
(14) Customers receiving high-speed Internet service.
39
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
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 (effective January 1, 2001), we completed a
series of transactions with Insight LP and certain cable subsidiaries of AT&T
Corp. that increased by approximately 530,000 the number of customers we serve.
We refer in this report to these transactions, including related bank financing,
as the "AT&T transactions." Specifically, we acquired:
. all of Insight LP's systems not already owned by us serving
approximately 175,000 customers, as well as systems which Insight LP
acquired from the AT&T cable subsidiaries serving approximately 105,000
customers; and
. systems from the AT&T cable subsidiaries located in Illinois serving
approximately 250,000 customers.
We acquired the systems from Insight LP and the AT&T cable
subsidiaries subject to indebtedness in the amount of $685.0 million. We remain
equally owned by Insight LP and AT&T Broadband. Insight LP continues to serve as
our general partner and manage and operate our systems.
40
Results of Operations
Substantially all of our revenues are earned from customer fees for
cable television programming services including premium, digital and
pay-per-view services and ancillary services, such as rental of converters
and remote control devices, installations and from selling advertising. In
addition, we earn revenues from commissions for products sold through home
shopping networks.
We have generated increases in revenues and 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.
We have had a history of net losses and expect to continue to
report net losses for the foreseeable future. The principal reasons for our
prior and anticipated net losses include depreciation and amortization
expenses associated with our acquisitions and capital expenditures related
to construction and upgrading of our systems, and interest costs on
borrowed money. We cannot predict what impact, if any, continued losses
will have on our ability to finance our operations in the future.
The following table is derived for the periods presented from our
consolidated financial statements that are included in this report and sets
forth certain statement of operations data for our consolidated operations:
Year ended December 31,
2001 2000 1999
----------------------------------------------
(in thousands)
Revenue $ 702,004 $ 379,720 $ 201,286
Operating costs and expenses:
Programming and other operating costs 256,902 133,214 60,624
Selling, general and administrative 110,754 59,506 37,230
Management fees 20,616 10,964 5,932
Non-recurring high-speed data service charges 3,785 - -
Depreciation and amortization 373,030 195,669 109,110
----------------------------------------------
Total operating costs and expenses 765,087 399,353 212,896
----------------------------------------------
Operating loss (63,083) (19,633) (11,610)
EBITDA 307,949 175,694 97,333
Interest expense 188,609 113,054 51,235
Net loss (263,196) (132,110) (62,677)
Net cash provided by operating activities 161,536 60,151 102,917
Net cash used in investing activities 399,995 199,812 110,440
Net cash provided by financing activities 244,870 109,400 21,627
EBITDA represents earnings before interest, taxes, depreciation and
amortization and extraordinary items. We believe that EBITDA is commonly
used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity. However, EBITDA is not intended to be a performance measure that
should be regarded as an alternative to, or more meaningful than, either
operating income or net income as an indicator of operating performance or
cash flows as a measure of liquidity, as determined in accordance with
accounting principles generally accepted in the United States. Refer to our
financial statements, including our
41
statements of cash flows, which appear elsewhere in this report. The
following calculations of EBITDA, are not necessarily comparable to
similarly titled amounts of other companies:
Year ended December 31,
2001 2000 1999
---------------------------------------------
(in thousands)
Net loss $ (263,196) $ (132,110) $ (62,677)
Adjustments:
Interest expense 188,609 113,054 51,235
Interest income (809) (919) (335)
Depreciation and amortization 373,030 195,669 109,110
Extraordinary loss from early extinguishment of debt 10,315 - -
---------------------------------------------
EBITDA 307,949 175,694 97,333
---------------------------------------------
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue increased $322.3 million or 84.9% to $702.0 million for the
year ended December 31, 2001 from $379.7 million for the year ended
December 31, 2000. The increase in revenue was primarily the result of the
cable systems acquired in the AT&T transactions, including the Ohio
Systems. The incremental revenue generated by the cable systems acquired in
the AT&T transactions approximated $283.6 million, which represents 88.0%
of the increase in consolidated revenue. Excluding the systems acquired in
the AT&T transactions, revenue increased $38.7 million or 10.2% largely due
to the sale of new services, and revenue for digital and high-speed data
increased by $27.0 million, a combined 135.5% growth rate.
Revenue by service offering were as follows for the years ended
December 31, (in thousands):
2001 2000
Revenue by % of Revenue by
Service Total Service % of Total
Offering Revenue Offering Revenue
-------- ------- -------- -------
Basic $ 474,978 67.7% $ 270,733 71.3%
Premium 57,642 8.2% 34,300 9.0%
Pay-per-view 4,102 .6% 4,636 1.2%
Digital 47,134 6.7% 11,287 3.0%
Advertising sales 46,906 6.7% 27,385 7.2%
Data services 35,825 5.1% 8,671 2.3%
Other 35,417 5.0% 22,708 6.0%
--------- ------ ---------- -------
Total $ 702,004 100.0% $ 379,720 100.0%
========= ====== ========== =======
Average monthly revenue per basic customer was $45.78 for the year
ended December 31, 2001 compared to $42.65 for the year ended December 31,
2000 primarily reflecting the continued successful rollout of new product
offerings in the Indiana, Kentucky and Ohio markets. Average monthly
revenue per basic customer for high-speed data and interactive digital
video increased to $5.41 for the year
42
ended December 31, 2001 from $2.08 for the year ended December 31, 2000.
Excluding the systems acquired in the AT&T transactions, the number of
high-speed data service customers increased to approximately 48,000 as of
December 31, 2001 from approximately 23,600 as of December 31, 2000, while
digital customers increased to approximately 168,300 as of December 31, 2001
from approximately 74,900 as of December 31, 2000.
Programming and other operating costs increased $123.7 million or
92.8% to $256.9 million for the year ended December 31, 2001 from $133.2 million
for the year ended December 31, 2000. The increase in programming and other
operating costs was primarily the result of the cable systems acquired in the
AT&T transactions. The incremental expense resulting from the acquisition of
these systems approximated $102.4 million, which represents 82.8% of the
increase in programming and other operating costs. Excluding these systems,
programming and other operating costs increased by approximately $21.3 million
or 16.0%, primarily as a result of increased programming rates and additional
programming.
Selling, general and administrative expenses increased $51.2 million
or 86.1% to $110.8 million for the year ended December 31, 2001 from $59.5
million for the year ended December 31, 2000. The increase in selling, general
and administrative expenses was primarily the result of the cable systems
acquired in the AT&T transactions. The incremental expense resulting from the
acquisition of these systems approximated $46.9 million, which represents 91.5%
of the increase in selling, general and administrative costs. Excluding these
systems, selling, general and administrative costs increased by approximately
$4.3 million or 7.3%, primarily reflecting increased marketing activity and
corporate expenses associated with new service introductions.
Non-recurring high-speed data service charges were incurred in the
year ended December 31, 2001 as a result of payments made to At Home Corporation
("@Home"), the former provider of high-speed data services for all of our
systems, except for those located in Ohio. On September 28, 2001, @Home filed
for protection under Chapter 11 of the Bankruptcy Code. For the purpose of
continuing service to existing customers and to resume the provisioning of
service to new customers, we entered into an interim agreement with @Home to
extend service through November 30, 2001. Further, in December 2001, we entered
into an additional interim service arrangement whereby we paid $10.0 million to
@Home to extend service for three months through February 28, 2002 that is being
recorded into expense ratably over the three-month period. As a result of these
interim arrangements we incurred approximately $2.8 million in excess of our
original agreed-to cost for such services rendered during the year ended
December 31, 2001. Additionally, we have recorded an allowance for bad debt of
$1.0 million for a net receivable from @Home in connection with monies @Home
collected from our high-speed data customers on our behalf prior to September
28, 2001. These additional costs are included in non-recurring high-speed data
service charges in our statement of operations.
Management fees are directly related to revenue as these fees are
calculated as approximately 3% of gross revenues.
Depreciation and amortization expense increased $177.4 million or
90.6% to $373.0 million for the year ended December 31, 2001 from $195.7 million
for the year ended December 31, 2000. The increase in depreciation and
amortization expense was primarily the result of the cable systems acquired in
the AT&T transactions. The incremental expense resulting from the acquisition of
these systems approximated $144.4 million, which represents 81.4% of the
increase in depreciation and amortization expense. Excluding these systems,
depreciation and amortization expense increased by approximately $33.0 million
or 16.9%, primarily due to capital expenditures made to rebuild our existing
cable
43
equipment, roll-out new product offerings and add telephony capabilities to our
network.
EBITDA increased $132.3 million or 75.3% to $307.9 million for the
year ended December 31, 2001 from $175.7 million for the year ended December 31,
2000. This increase was primarily due to the result of the cable systems
acquired in the AT&T transactions.
Interest expense increased $75.6 million or 66.8% to $188.6 million
for the year ended December 31, 2001 from $113.1 million for the year ended
December 31, 2000. The increase in interest expense was primarily the result of
higher outstanding debt resulting from the cable systems acquired in the AT&T
transactions and funding of capital expenditures during the past year offset by
lower average interest rates.
For the year ended December 31, 2001, the net loss was $263.2 million
primarily for the reasons set forth above.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue increased $178.4 million or 88.6% to $379.7 million for the
year ended December 31, 2000 from $201.3 million for the year ended December 31,
1999. The increase in revenue was primarily the result of the acquisition of the
Kentucky cable systems. The incremental revenue earned from the Kentucky systems
approximated $173.4 million, or 97.2% of the revenue increase. Revenue by
service offering were as follows for the years ended December 31, (in
thousands):
2000 1999
Revenue by Revenue by
Service % of Total Service % of Total
Offering Revenue Offering Revenue
-------- ------- -------- -------
Basic $ 270,733 71.3% $ 143,426 71.3%
Premium 34,300 9.0% 18,983 9.4%
Pay-per-view 4,636 1.2% 2,827 1.4%
Digital 11,287 3.0% 6,239 3.1%
Advertising sales 27,385 7.2% 15,340 7.6%
Data services 8,671 2.3% 1,263 0.6%
Other 22,708 6.0% 13,208 6.6%
---------- --------- --------- ---------
Total $ 379,720 100.0% $ 201,286 100.0%
========== ========= ========= =========
Average monthly revenue per basic customer was $42.65 for the year
ended December 31, 2000 compared to $39.08 for the year ended December 31, 1999
primarily reflecting rate increases as we continued to activate nodes in rebuilt
areas resulting in an increase in average monthly basic revenue per customer of
$2.56. Average monthly basic revenue per customer averaged $30.41 during the
year ended December 31, 2000 compared to $27.85 during the comparable period of
1999. In addition, monthly revenue for new services including high-speed data
and interactive digital video caused revenue per customer to increase by $0.73.
Programming and other operating costs increased $72.6 million or
119.7% to $133.2 million for the year ended December 31, 2000 from $60.6 million
for the year ended December 31, 1999. The
44
incremental expense resulting from the Kentucky systems approximated $62.2
million accounting for 85.7% of the expense increase. Excluding these systems,
programming and other operating costs increased by approximately $10.4 million
or 17.2%, primarily as a result of increased programming rates and additional
programming.
Selling, general and administrative expenses increased $22.3 million
or 59.8% to $59.5 million for the year ended December 31, 2000 from $37.2
million for the year ended December 31, 1999. The incremental expense resulting
from the Kentucky systems approximated $25.5 million accounting for the
increase. Excluding these systems, selling, general and administrative costs
decreased by approximately $3.2 million, primarily reflecting concerted cost
cutting efforts.
Management fees are directly related to revenue as these fees are
calculated as approximately 3% of gross revenues.
Depreciation and amortization expense increased $86.6 million or 79.3%
to $195.7 million for the year ended December 31, 2000 from $109.1 million for
the year ended December 31, 1999. This increase resulted from the Kentucky
systems 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.
EBITDA increased $78.4 million or 80.5% to $175.7 million for the year
ended December 31, 2000 as compared to $97.3 million for the year ended December
31, 1999 primarily as a result of a full year of results from the Kentucky
systems reflected in 2000.
Interest expense increased $61.8 million or 120.7% to $113.1 million
for the year ended December 31, 2000 from $51.2 million for the year ended
December 31, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the Kentucky acquisition.
For the year ended December 31, 2000, the net loss was $132.1 million
primarily for the reasons set forth above.
Liquidity and Capital Resources
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, issuances of private equity and public debt.
Cash provided by operations for the year ended December 31, 2001 and
2000 was $161.5 million and $60.2 million. The increase was primarily
attributable to the AT&T Illinois Systems the timing of cash receipts and
payments related to working capital accounts.
Cash used in investing activities for the year ended December 31, 2001
and 2000 was $400.0 million and $199.8 million. The increase was primarily
attributable to the purchase of cable television systems, net of cash acquired
and increased capital expenditures relating to our recent system rebuilds.
45
Cash provided by financing activities for the year ended December 31,
2001 and 2000 was $244.9 million and $109.4 million. The increase was primarily
attributable to net borrowings from credit facilities partially offset by
repayment of debt associated with the purchase of cable television systems.
For the year ended December 31, 2001 and December 31, 2000, we spent
$320.0 million and $196.1 million in capital expenditures largely to support our
plant rebuild including interactive technology and telephone services, digital
converter and modem purchases and, to a lesser extent, network extensions.
For the year ending December 31, 2002, it is anticipated that we will
spend approximately $300.0 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 AT&T transactions with Insight
LP and the AT&T Cable Subsidiaries. As a result of the AT&T transactions,
additional cable television systems serving approximately 530,000 customers were
contributed to us. In conjunction with the AT&T 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 $663.0 million to
repay the Indiana and Kentucky credit facilities and $685.0 million to finance
the AT&T transactions. In connection with the financing of the AT&T
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 Midwest Holdings' subsidiaries to enable Insight Midwest to pay interest on
its 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 compliance with
certain financial ratios and contains customary events of default. As of
December 31, 2001, we were in compliance with this credit facility's covenant
requirements. Given current operating conditions and projected results of
operations, we anticipate continued compliance under this credit facility
agreement for the foreseeable future.
We acquired all of the common equity interests of Insight Ohio as part
of the AT&T transactions. Insight Ohio is an unrestricted subsidiary under the
indentures governing our notes, and is prohibited by the terms of its
indebtedness from making distributions to us. Insight Ohio has a $25.0
46
million reducing revolving credit facility that supports the Ohio system. The
facility requires principal payments commencing in March 2003 through September
2004. As of December 31, 2001, $25.0 million was outstanding under this credit
facility. Given current operating conditions and projected results of
operations, we anticipate continued compliance under this credit facility
agreement for the foreseeable future.
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. The ability of Coaxial to make
scheduled payments with respect to the 10% senior notes and 12 7/8% senior
discount notes will depend on the financial and operating performance of Insight
Ohio. The distributions on the Series A and B Preferred Interests equal the
interest payments on the senior notes and senior discount notes.
We have a substantial amount of debt. Our high level of debt could
have important consequences for you. We believe that the Midwest Holdings Credit
Facility, cash on-hand and our cash flows from operations are sufficient to
support our current operating plan. We intend to draw upon the $170.0 million of
unused availability under the Midwest Holdings Credit Facility as discussed
above to fund any shortfall resulting from the inability of our cash from
operations to fund our capital expenditures, meet our debt service requirements
or otherwise fund our operations.
47
The following summarizes our contractual obligations as of December
31, 2001, including periods in which the related payments are due (in
thousands):
2003 2005
2002 to 2004 to 2006 Thereafter TOTAL
---------------------------------------------------------------
Long-term debt $ - $ 85,000 $ 188,000 $ 2,032,000 $ 2,305,000
Capital leases 738 1,476 1,576 3,996 7,786
Operating leases 2,448 3,476 1,549 1,347 8,820
Preferred interests 14,000 35,193 175,387 66,659 291,239
---------------------------------------------------------------
Total cash obligations $ 17,186 $ 125,145 $ 366,512 $ 2,104,002 $ 2,612,845
===============================================================
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations,"
which is effective for fiscal years beginning after December 15, 2001 and
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for fiscal years beginning after December
15, 2001 and changes the accounting for goodwill from an amortization method to
an impairment only approach. In addition, the standard includes provisions, upon
adoption, for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. For
existing goodwill and other intangibles, we will adopt this pronouncement on
January 1, 2002. As a result of this adoption, $2.29 billion of goodwill, which
was to be amortized ratably through 2016, will cease. We adopted the
non-amortization provision for goodwill contained within this pronouncement as
of January 1, 2002. Application of the non-amortization provisions of SFAS No.
142 would have resulted in a decrease in net loss of $189.0 million for the year
ended December 31, 2001.
SFAS No. 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the fiscal
year. However, we have six months from the date of adoption to complete the
first step. The second step of the goodwill impairment test measures the amount
of the impairment loss, measured as of the beginning of the year of adoption, if
any, and must be completed by the end of our fiscal year. Intangible assets
deemed to have an indefinite life will be tested for impairment using a one-step
process that compares the fair value to the carrying amount of the asset as of
the beginning of the fiscal year, and pursuant to the requirements of SFAS No.
142 will be completed during the first quarter of 2002. Any loss resulting from
the first step impairment test will be reflected as a cumulative effect of a
change in accounting principle in the first quarter of 2002. We have not yet
determined what effect these impairment tests will have on our consolidated
financial position, results of operations and cash flows.
48
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 supersedes FASB Statement
No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. We are currently assessing the impact of SFAS
No. 144 on our consolidated financial position, results of operations and cash
flows.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our most
critical accounting policies have a significant impact on the results we report
in our consolidated financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements:
Fair Value of Assets Acquired and Liabilities Assumed in Purchase
Combinations
The purchase combinations carried out by us require management to
estimate the fair value of the assets acquired and liabilities assumed in the
combinations. These estimates of fair value are based on our business plan for
the entities acquired including planned redundancies, restructuring, use of
assets acquired and assumptions as to the ultimate resolution of obligations
assumed for which no future benefit will be received. We also utilize appraisal
reports issued by independent appraisers. Should actual use of assets or
resolution of obligations differ from our estimates, revisions to the estimated
fair values would be required. If a change in estimate occurs after one year of
the acquisition, the change would be recorded in our statement of operations.
Goodwill and Other Identifiable Intangibles
We assess the impairment of goodwill and other identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Some factors we consider important which
could trigger an impairment review include the following:
. Significant underperformance relative to expected historical or projected
future operating results;
. Significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
. Significant negative industry or economic trends.
When we determine that the carrying value of goodwill and other
identified intangibles may not be recoverable based upon the existence of one or
more of the above indicators of impairment, we measure
49
any impairment based on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the risk inherent in
our current business model. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002 we will cease to amortize goodwill and
franchise costs arising from acquisitions completed prior to July 1, 2001. In
lieu of amortization, we are required to perform an initial impairment review of
our goodwill in 2002 and an annual impairment review thereafter. If we determine
through the impairment review process that goodwill has been impaired, we would
record the impairment charge in our statement of operations.
Fixed Assets
Fixed assets include costs capitalized for labor and overhead incurred
in connection with the installation of cable systems and is stated at cost.
Depreciation for buildings, cable system equipment, furniture, fixtures and
office equipment is calculated using the straight-line method over estimated
useful lives ranging from 3 to 30 years. Building improvements are amortized
using the straight-line method over shorter of the remaining terms of the leases
or the estimated lives of the improvements.
In 2000 we changed the estimated useful lives of fixed assets that
relate 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.
Risk Factors
We have substantial debt and have significant interest payment
requirements, which may adversely affect our ability to obtain financing in the
future to finance our operations and our ability to react to changes in our
business.
We have a substantial amount of debt. The following table shows
certain important credit statistics about us.
As of
December 31, 2001
-----------------
(dollars in thousands)
Total debt, including preferred interests .............. $2,484,075
Partners' Capital ...................................... 820,622
Debt to equity ratio ................................... 3.0x
Our high level of combined debt could have important consequences for you,
including the following:
. Our ability to obtain additional financing in the future for capital
expenditures, acquisitions, working capital or other purposes may be
limited;
. 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;
50
. Some of our debt has a variable rate of interest, which exposes us to
the risk of increased interest rates; and
. Our indebtedness may limit our ability to withstand competitive
pressures and reduce our flexibility in responding to changing
business and economic conditions.
We depend upon our operating subsidiaries for cash to fund our obligations.
Our subsidiaries conduct all of our consolidated operations and own
substantially all of our consolidated assets. The only source of the cash we
need to pay our obligations is the cash that our subsidiaries generate from
their operations and their borrowings. The ability of our operating subsidiaries
to generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
Accordingly, we cannot assure you that our subsidiaries will generate cash flow
from operations in amounts sufficient to enable us to pay our indebtedness.
Our ability to access the cash flow of our subsidiaries may be contingent
upon our ability to refinance the debt of our subsidiaries.
Our subsidiaries' ability to make payments to us will depend upon
their operating results. 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 interest on our obligations. The terms of its indebtedness
prohibit Insight Ohio from making distributions to us.
Furthermore, borrowings under the Midwest Holdings credit facility are
secured and will mature prior to our outstanding notes. Accordingly, 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.
The Midwest Holdings' credit facility requires us to comply with various
financial and operating restrictions which could limit our ability to compete as
well as our ability to expand.
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.
Such restriction could limit our ability to compete as well as our
ability to expand. The ability
51
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 a net loss before extraordinary items and
accruals of preferred interests of $263.2 million for the year ended December
31, 2001 and $235.9 million for the year ended December 31, 2000, on a pro forma
basis after giving effect to the AT&T transactions.
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.
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 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 2001, 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 41% of the total operating expenses for our systems for the year
ended December 31, 2001.
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 2001 and 2000 was 5.2% and 1.8% respectively, while satellite
penetration as of December 2001 averaged 17.5% nationwide, up from 17.1% in
December 2000. 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 telephone services.
52
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, 2001, approximately
8.7% 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 77,100 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 the City of Louisville, Kentucky, where we
operate a system, although these companies have not constructed cable systems
TotaLink of Kentucky, LLC is also in discussions with the Jefferson County local
franchising authority to obtain a franchise to provide cable television in the
same area as our system. In addition, WideOpenWest has overbuilt our Columbus,
Ohio system and passes approximately 130,000 homes also passed by us. In our
Illinois systems, the city of Springfield is considering a municipal overbuild.
We cannot predict what effect competition from these or future competitors will
have on our business and operations.
We will face competition from providers of alternatives to our Internet and
telephone 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 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 telephone services, our AT&T
branded telephone 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 telephone service areas.
We expect that the most significant competitors for our Internet
access and telephone service offerings will be the existing local exchange
telephone companies as well as resellers using the local exchange telephone
companies' communications networks. These competitors are currently the
predominant providers of Internet and telephone services in our markets.
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
53
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 proposed rulemaking 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. 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.
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 counter-parties to our swap and collar
agreements are major financial institutions. As of December 31, 2001, our
interest rate swap and collar agreements expire in varying amounts through July
2003.
The fair market value and carrying value of our 9 3/4% senior notes
and 10 1/2% senior notes was $750.0 million and $693.4 million as of December
31, 2001. The fair market value of our credit facility borrowings approximates
its carrying value as the credit facility borrowings bear interest at floating
rates of interest. As of December 31, 2001, the estimated fair value (cost if
terminated) of our interest rate swap and collar agreements was approximately
$(22.8) million, which represents the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted market prices and is
reflected in our financial statements as other non-current liabilities. Changes
in the fair value of derivative financial instruments are either recognized in
income or in partners' capital as a component of other comprehensive loss
depending on whether the derivative financial instruments qualify for hedge
accounting.
As of December 31, 2001, we had entered into interest rate swaps that
approximated $500.0 million, or 31.2%, of our borrowings under all of our credit
facilities. A hypothetical 100 basis point increase in interest rates along the
entire interest rate yield curve would increase our annual interest expense by
approximately $11.1 million.
Item 8. Financial Statements and Supplementary Data
Reference is made to our consolidated financial statements beginning
on page F-1 of this report.
54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
55
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 ........... 71 Chairman of the Board of Insight Capital and
Insight Communications and Chairman of the
Advisory Committee
Michael S. Willner ......... 49 President and Chief Executive Officer of
Insight Capital and Insight Communications
and Member of the Advisory Committee
Kim D. Kelly. .............. 45 Executive Vice President and Chief Operating
and Financial Officer of Insight Capital and
Insight Communications and Member of the
Advisory Committee
Gregory M. Braden .......... 48 Member of the Advisory Committee
David Jefferson ............ 50 Member of the Advisory Committee
Dinesh C. Jain ............. 38 Senior Vice President and Chief Financial
Officer
Elliot Brecher ............. 36 Senior Vice President, General Counsel and
Secretary of Insight Communications
Greg Capranica ............. 44 Senior Vice President, Operations, Illinois
Region of Insight Communications
E. Scott Cooley ............ 41 Senior Vice President, Employee Relations and
Development of Insight Communications
Charles E. Dietz ........... 54 Senior Vice President, Engineering of Insight
Communications
Gregory B. Graff ........... 41 Senior Vice President, Operations, Western
Kentucky Region of Insight Communications
Pamela Euler Halling. ...... 54 Senior Vice President, Marketing and
Programming of Insight Communications
Daniel Mannino. ............ 42 Senior Vice President and Controller of
Insight Communications
Judy Poole. ................ 55 Senior Vice President, Human Resources of
Insight Communications
Colleen Quinn .............. 49 Senior Vice President, Corporate Relations of
Insight Communications
Mary Rhodes ................ 52 Senior Vice President, Customer Service of
Insight Communications
David Servies .............. 42 Senior Vice President, Operations, Indiana
Region of Insight Communications
James A. Stewart. .......... 50 Senior Vice President, Operations, Eastern
Kentucky and National Regions of Insight
Communications
56
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., 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 Chairman of the National Cable & Telecommunications
Association's Board of Directors and Executive Committee. He also serves on the
boards of C-SPAN, CableLabs and the Walter Kaitz Foundation. Mr. Willner is a
graduate of Boston University's College of Communication and serves on the
school's Executive Committee.
Kim D. Kelly, a director of Insight Communications, has been Executive Vice
President of Insight Communications since 1990. Ms. Kelly has also been Chief
Operating Officer of Insight Communications since January 1998 and was Chief
Financial Officer from 1990 until January 2002. 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 is
Chairperson of the Cable Advertising Bureau's Board of Directors. She also
serves as a member of the National Cable & Telecommunications Association
Subcommittees for Telecommunications Policy, Diversity Initiatives and
Accounting. Ms. Kelly also serves as a director of Bank of New York Hamilton
Funds, and serves on the boards of Cable in the Classroom, The Cable Center and
the Cable & Telecommunications Association for Marketing Educational Foundation.
Ms. Kelly is a graduate of George Washington University.
Gregory M. Braden is Executive Vice President - Strategy and Corporate
Business Development of AT&T Broadband since January 1, 2002. Previously, he
served as Executive Vice President - Broadband Services and Chief Technology
Officer of AT&T Broadband. Prior to AT&T, Mr. Braden was Vice President -
Telephony Operations at MediaOne as well as being employed with US WEST for more
than 19 years in a number of operations, marketing, sales, human resources,
strategic planning and general management positions. Mr. Braden holds a bachelor
of science from the University of Oregon and a master's of business
administration from the University of Washington.
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.
Dinesh C. Jain has served as Senior Vice President and Chief Financial
Officer since January 2002. Previously, Mr. Jain was employed for more than the
past five years as a Managing Director of NTL, one of Europe's leading cable and
telecommunications companies. His background in the cable industry includes a
nine-year period with OCOM Corporation and International CableTel, working in
various key general management positions. His roles have included Deputy
Managing Director, NTL Consumer Group, as well as Managing Director of Cable and
Wireless Consumer Division.
Elliot Brecher has served as Senior Vice President and General Counsel of
Insight
57
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.
Gregory Capranica joined Insight in early 2001 as District Vice President
in Springfield, Illinois, and was quickly promoted to Senior Vice President,
Operations, Illinois Region. A 20-year veteran in various capacities of the
cable industry, Mr. Capranica was most recently General Manager for the Chicago
Suburbs division of AT&T Broadband. Prior to his tenure at AT&T Broadband, Mr.
Capranica held management level positions for Times Mirror Cable and Cox
Communications.
E. Scott Cooley joined Insight Communications in 1998 as Senior Vice
President, Operations with 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.
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
58
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.
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.
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 Gregory M. Braden 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.
59
The following table sets forth information with respect to the beneficial
ownership of Insight Midwest's partnership interests:
Percent of
Name and Address of Beneficial Owner Type of Interest Partnership Interest
Insight Communications Company, L.P. (1) General Partner 50%
810 Seventh Avenue, New York, NY 10019
TCI of Indiana Holdings, LLC (2) Limited Partner 50%
Terrace Tower II, 5619 DTC Parkway, Englewood, CO 80111
______________________
(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. In October 1999, our manager
purchased $10.2 million aggregate principal amount of Source Media's 12% senior
secured notes due 2004 for a purchase price of approximately $4.1 million.
On March 3, 2000, SourceSuite's Virtual Modem business was sold 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.
SourceSuite continues to own and operate its programming assets, LocalSource and
SourceGuide, and is party to preferred content and programming services
agreements with Liberate.
Our manager is currently providing SourceSuite's interactive services
to customers in some of its systems. For the years ended December 31, 2001 and
2000, fees for such services totaled $1.2 million and $77,000.
On March 14, 2002, our manager purchased the remaining 50% equity
interest in SourceSuite that it did not already own by means of submitting a bid
at the public foreclosure sale of certain Source Media assets related to the
SourceSuite operations. The public foreclosure sale was conducted pursuant to
Article 9 of the Uniform Commercial Code by The Bank of New York Trust Company
of Florida, N.A., as trustee and collateral agent with respect to the 12% notes.
Our manager paid for the 50% interest by tendering its Source Media 12% notes.
Source Media has announced that it has terminated operations effective March 15,
2002.
60
Our manager, Insight LP, receives a management fee for each
twelve-month period equal to 5% (amended from 3% prior to April 1, 2001) of
substantially all revenue arising out of or in connection with the
operations of our systems. For the years ended December 31, 2001, 2000 and 1999,
Insight LP received management fees of $18.9 million, $11.0 million and $5.9
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 LP purchased the non-voting common
equity interest held by 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.
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.
61
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, 2001 and 2000 F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Changes in Partners' Capital for
the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
Insight Capital, Inc.
Report of Independent Auditors--Ernst & Young LLP F-21
Balance Sheets as of December 31, 2001 and 2000 F-22
Statements of Operations for the years ended December 31, 2001 and 2000,
and for the period from September 23, 1999 through December 31, 1999 F-23
Statements of Changes in Shareholders' Deficit for the years ended
December 31, 2001 and 2000 and for the period from September 23, 1999
through December 31, 1999 F-24
Statements of Cash Flows for the years ended December 31, 2001 and 2000
and for the period from September 23, 1999 through December 31, 1999 F-25
Notes to Balance Sheets F-26
62
(b) Reports on Form 8-K:
We did not file any reports on Form 8-K during the fourth quarter
of the year ended December 31, 2001.
(c) Exhibits
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)
63
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 Revolving Credit Agreement dated as of October 7, 1998 among
Insight Communications of Central Ohio, LLC, several banks and
financial institutions or entities, and Canadian Imperial Bank
of Commerce as administrative agent (9)
10.14 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
____________________________
(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.
64
(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.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSIGHT MIDWEST, L.P.
By: Insight Communications Company,
L.P., its general partner
By: Insight Communications Company,
Inc., its general partner
Date: March 27, 2002 By: /s/ Michael S. Willner
----------------------------------
Michael S. Willner, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board March 27, 2002
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive Officer and Director March 27, 2002
- -------------------------
Michael S. Willner (Principal Executive Officer )
/s/ Kim D. Kelly Executive Vice President, Chief Operating Officer March 27, 2002
- ----------------
Kim D. Kelly and Director
/s/ Dinesh C. Jain Senior Vice President and Chief Financial Officer March 27, 2002
- -------------------
Dinesh C. Jain (Principal Financial Officer)
/s/ Daniel Mannino Senior Vice President and Controller March 27, 2002
- ---------------------
Daniel Mannino (Principal Accounting Officer)
/s/ Thomas L. Kempner Director March 27, 2002
- ----------------------
Thomas L. Kempner
/s/ James S. Marcus Director March 27, 2002
- -------------------
James S. Marcus
/s/ Prakash A. Melwani Director March 27, 2002
- -----------------------
Prakash A. Melwani
/s/ Daniel S. O'Connell Director March 27, 2002
- ------------------------
Daniel S. O'Connell
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INSIGHT CAPITAL, INC.
Date: March 27, 2002 By: /s/ Michael S. Willner
----------------------------
Michael S. Willner, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board March 27, 2002
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive Officer and Director March 27, 2002
- ----------------------
Michael S. Willner (Principal executive officer) March 27, 2002
/s/ Kim D. Kelly Executive Vice President, Chief Operating
- ----------------
Kim D. Kelly Officer and Director March 27, 2002
/s/ Dinesh C. Jain Senior Vice President and Controller Officer March 27, 2002
- ------------------
Dinesh C. Jain (Principal Financial Officer)
/s/ Daniel Mannino Senior Vice President and Controller March 27, 2002
- ---------------------
Daniel Mannino (Principal Accounting Officer)
67
Report of Independent Auditors
The Partners of
Insight Midwest, LP
We have audited the accompanying consolidated balance sheets of Insight Midwest,
LP (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations and partners' capital, and cash flows for
each of the three years in the period ended December 31, 2001. 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 the Company as of
December 31, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-1
INSIGHT MIDWEST, LP
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
2001 2000
------------------- --------------------
Assets
Cash and cash equivalents $ 12,146 $ 5,735
Trade accounts receivable, net of allowance for doubtful accounts of
$2,818 and $979 as of December 31, 2001 and 2000 22,918 13,686
Launch funds receivable 12,980 13,077
Prepaid expenses and other assets 20,647 8,922
------------------- --------------------
Total current assets 68,691 41,420
Fixed assets, net 1,133,627 681,490
Intangible assets, net 2,334,886 950,299
Deferred financing costs, net of accumulated amortization of $3,885
and $2,962 as of December 31, 2001 and 2000 23,876 26,338
------------------- --------------------
Total assets $ 3,561,080 $ 1,699,547
=================== ====================
Liabilities and partners' capital
Accounts payable $ 66,712 $ 38,575
Accrued expenses and other liabilities 21,225 9,014
Accrued property taxes 11,030 11,564
Accrued programming costs 24,287 17,649
Deferred revenue 8,673 3,284
Interest payable 21,940 19,919
Preferred interest distribution payable 5,250 -
Due to affiliates 22,040 4,047
------------------- --------------------
Total current liabilities 181,157 104,052
Deferred revenue 12,262 11,535
Debt 2,298,362 1,347,523
Other non-current liabilities 62,964 -
------------------- --------------------
Total liabilities 2,554,745 1,463,110
Commitments and contingencies
Preferred interests 185,713 -
Partners' capital:
Partners' accumulated capital 843,377 236,437
Accumulated other comprehensive loss (22,755) -
------------------- --------------------
Total partners' capital 820,622 236,437
------------------- --------------------
Total liabilities and partners' capital $ 3,561,080 $ 1,699,547
=================== ====================
See accompanying notes
F-2
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999
---------------- ------------------ -----------------
Revenue $ 702,004 $ 379,720 $ 201,286
Operating costs and expenses:
Programming and other operating costs 256,902 133,214 60,624
Selling, general and administrative 110,754 59,506 37,230
Management fees 20,616 10,964 5,932
Non-recurring high-speed data service charges 3,785 - -
Depreciation and amortization 373,030 195,669 109,110
---------------- ------------------ -----------------
Total operating costs and expenses 765,087 399,353 212,896
---------------- ------------------ -----------------
Operating loss (63,083) (19,633) (11,610)
Other income (expense):
Interest expense (188,609) (113,054) (51,235)
Interest income 809 919 335
Other (1,998) (342) (167)
---------------- ------------------ -----------------
Total other expense, net (189,798) (112,477) (51,067)
Net loss before extraordinary item (252,881) (132,110) (62,677)
Extraordinary loss from early extinguishment of debt
(Note 5) (10,315) - -
---------------- ------------------ -----------------
Net loss (263,196) (132,110) (62,677)
Accrual of preferred interests (19,432) - -
---------------- ------------------ -----------------
Net loss attributable to common interests $ (282,628) $ (132,110) $ (62,677)
================ ================== =================
See accompanying notes
F-3
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(in thousands)
Accumulated
Partners' Other
Accumulated Comprehensive Partners'
Capital Loss Capital
---------------------------------------------------
Balance at January 1, 1999 $ 44,195 $ 44,195
Net loss (62,677) (62,677)
Capital contributions 387,029 387,029
---------------------------------------------------
Balance at December 31, 1999 368,547 - 368,547
Net loss (132,110) (132,110)
---------------------------------------------------
Balance at December 31, 2000 236,437 - 236,437
Net loss (263,196) (263,196)
Transition adjustment loss on adoption of
SFAS No. 133 $ (1,884) (1,884)
Unrealized loss on interest rate swaps (20,871) (20,871)
--------------
Total comprehensive loss (285,951)
--------------
Contribution of capital associated with AT&T transactions 889,568 889,568
(Note 1)
Accrual of preferred interests (19,432) (19,432)
---------------------------------------------------
Balance at December 31, 2001 $ 843,377 $ (22,755) $ 820,622
===================================================
See accompanying notes
F-4
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Operating activities:
Net loss $ (263,196) $ (132,110) $ (62,677)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 373,030 195,669 109,110
Extraordinary loss from early extinguishment of debt 10,315 - -
Provision for losses on trade accounts receivable 12,093 6,717 1,239
Amortization of note discount 739 123 -
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Trade accounts receivable (13,336) (9,625) (6,272)
Launch fund receivable 3,113 (12,216) (861)
Prepaid expenses and other assets (10,492) 2,058 3,746
Accounts payable 21,821 3,496 (17,781)
Accrued expenses and other liabilities 27,449 6,039 76,413
----------- ----------- -----------
Net cash provided by operating activities 161,536 60,151 102,917
----------- ----------- -----------
Investing activities:
Purchase of fixed assets (319,956) (196,103) (107,901)
Purchase of intangible assets (2,997) (3,709) (2,539)
Purchase of cable television systems, net of cash acquired (77,042) - -
----------- ----------- -----------
Net cash used in investing activities (399,995) (199,812) (110,440)
----------- ----------- -----------
Financing activities:
Distributions of preferred interests (14,000) - -
Proceeds from borrowings under credit facilities 1,580,000 110,400 21,000
Repayment of credit facilities (654,900) (487,500) (191,661)
Proceeds from issuance of notes - 492,500 200,000
Repayment of debt associated with cable system
transactions (654,454) - -
Principal payments on capital lease and other
non-current liabilities (574) - -
Debt issuance costs (11,202) (6,000) (7,712)
----------- ----------- -----------
Net cash provided by financing activities 244,870 109,400 21,627
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 6,411 (30,261) 14,104
Cash and cash equivalents, beginning of year 5,735 35,996 21,892
----------- ----------- -----------
Cash and cash equivalents, end of year $ 12,146 $ 5,735 $ 35,996
=========== =========== ===========
See accompanying notes
F-5
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
In September 1999, we were formed to serve as the holding company and a
financing vehicle for our cable television system joint venture with an indirect
subsidiary of AT&T Broadband, LLC ("AT&T Broadband"). As of January 1, 2001, we
were comprised of systems located in Indiana, Kentucky, Illinois, Ohio and
Georgia. We are equally owned by Insight Communications Company L.P. ("Insight
LP"), which is a wholly owned subsidiary of Insight Communications Company Inc.
("Insight Inc.") and AT&T Broadband.
Insight LP continues to serve as our general partner and manages and operates
our systems. We currently own and operate cable television systems in Indiana,
Kentucky, Illinois, Ohio and Georgia which pass approximately 2.2 million homes
and serve approximately 1.3 million customers.
Indiana Systems
On October 31, 1998, Insight LP and AT&T Broadband 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 AT&T Broadband on October 31, 1998 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, Insight Indiana and we will continue
for a twelve-year term through October 1, 2011, unless extended by Insight LP
and AT&T Broadband.
In connection with this joint venture restructuring, the historical carrying
values of the Indiana Systems contributed by AT&T Broadband 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 AT&T
Broadband in relation to their fair values as increases in fixed assets of $58.0
million and franchise costs of $181.6 million. Neither Insight LP nor AT&T
Broadband is contractually required to contribute additional capital to us and,
because we are a limited partnership, neither Insight LP nor AT&T Broadband is
liable for the obligations of Insight Indiana.
F-6
1. Organization and Basis of Presentation (continued)
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 was allocated to the cable television assets acquired in relation to their
fair values as increases in fixed assets and franchise costs.
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, LP, our subsidiary. The Kentucky Systems and each of the
other Kentucky partnerships also have twelve-year terms through October 1, 2011,
unless extended by Insight and AT&T Broadband.
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.
Illinois Systems
Effective January 1, 2001, we completed a series of transactions with Insight LP
and AT&T Broadband for the acquisition of additional cable television systems,
primarily located in the state of Illinois, valued at approximately $2.2 billion
(the "AT&T transactions"), inclusive of systems valued at approximately $775.8
million, contributed by Insight LP. The AT&T transactions were financed through
a credit facility established on January 5, 2001, the Midwest Holdings Credit
Facility (Note 5). 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 located in Ohio ("Insight Ohio") and systems which Insight LP
purchased from AT&T Broadband. At the same time, we acquired from AT&T
Broadband systems serving approximately 250,000 customers.
Concurrently with the completion of Insight LP's purchase of systems from AT&T
Broadband, Insight LP contributed such systems, along with all of its wholly
owned systems serving
F-7
1. Organization and Basis of Presentation (continued)
approximately 175,000 customers, to us. The total value of such contributed
systems was $1.2 billion. We recorded the respective assets and liabilities,
including debt assumed, of the contributed systems' at their respective carrying
values with the net difference recorded as an addition to partners' capital.
Concurrently, AT&T Broadband contributed directly to us certain Illinois systems
serving approximately 250,000 customers. The total value of such contributed
systems was $983.3 million. We recorded 100% of the assets and liabilities of
the systems contributed at fair value with an addition to partners' capital of
$659.9 million equal to the total fair value of the net assets contributed. The
fair value of $983.3 million was allocated to the cable television assets
acquired in relation to their fair values as increases in fixed assets of $116.1
million and franchise costs of $867.2 million. Franchise costs arising from this
acquisition are being amortized over a period of 15 years.
Both Insight LP and AT&T Broadband contributed their respective systems to us
subject to an amount of indebtedness such that we remain equally owned by
Insight LP and AT&T Broadband. The total debt assumed by us of $654.5 million
was financed with the proceeds from the Midwest Holdings Credit Facility (Note
5).
Ohio Systems
On August 21, 1998, Insight Ohio was acquired by Insight LP through a
Contribution Agreement with Coaxial Communications of Central Ohio, Inc.
("Coaxial") the previous owners of Insight Ohio's cable television systems. In
connection with this transaction, Coaxial received two separate series of voting
preferred equity (Series A Preferred Interest--$140 million and Series B
Preferred Interest--$30 million) of Insight Ohio (collectively the "Voting
Preferred Interests").
The Voting Preferred Interests provides for cash distributions to Coaxial and
certain of its affiliates as follows; Series A--10% and Series B--12 7/8%.
Insight Ohio cannot redeem the Voting Preferred Interests without the permission
of Coaxial; however, Insight Ohio will be required to redeem the Series A
Preferred Interests in August 2006 and the Series B Preferred Interest in August
2008. Coaxial has pledged the Series A Preferred Interest as security for $140.0
million of 10% Senior Notes due in 2006 issued by Coaxial and its affiliate
("Senior Notes"). Coaxial's majority shareholder has pledged Coaxial's stock as
security for $55.9 million of aggregate principal amount at maturity of 12 7/8%
Senior Discount Notes due in 2008 issued by Coaxial's majority shareholder and
its affiliate ("Senior Discount Notes"). The Senior Notes and Senior Discount
Notes are conditionally guaranteed by Insight Ohio.
Although the financial results of Insight Ohio for 2001 have been consolidated
as a result of the AT&T transactions, for financing purposes, Insight Ohio is an
unrestricted subsidiary of ours and is prohibited by the terms of its
indebtedness from making distributions to us. Insight Ohio's conditional
guarantee of its Senior Notes and the Senior Discount Notes remains in place.
F-8
2. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include our accounts and those of our
wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition
Revenue includes fees received for service, connections and providing
advertising spots. Service fees are recorded in the month the services are
provided to customers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues. Advertising fees are recorded
in the month advertising spots are aired.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
We consider all highly liquid investments with original maturities of three
months or less to be cash equivalents.
Fixed Assets
Fixed assets include costs capitalized for labor and overhead incurred in
connection with the installation of cable systems and is stated at cost (Note
4). Depreciation for buildings, cable system equipment, furniture, fixtures and
office equipment is calculated using the straight-line method over estimated
useful lives ranging from 3 to 30 years. Building improvements are amortized
using the straight-line method over shorter of the remaining terms of the leases
or the estimated lives of the improvements.
The carrying value of fixed assets is reviewed if facts and circumstances
suggest that they may be impaired. If this review indicates that the carrying
value of the fixed assets will not be recovered from 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 impairment of
fixed assets existed as of December 31, 2001 or 2000.
Effective January 1, 2000, we changed the estimated useful lives of fixed assets
that relate to our recent rebuild program. The changes in estimated useful lives
were made to reflect our evaluation of the
F-9
2. Significant Accounting Policies (continued)
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, 2001, 2000 and 1999 was
$179.1 million, $110.9 million and $61.2 million.
Intangible Assets
Intangible assets consist of franchise costs and goodwill (Note 4). Costs
incurred in negotiating and renewing franchise agreements are capitalized and
amortized over the life of the franchise agreements. Franchise costs 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. We believe these
intangible assets have indefinite lives and will not be subject to amortization
effective January 1, 2002, in connection with our adoption of SFAS No. 142,
discussed below.
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 impairment
of intangible assets existed as of December 31, 2001 or 2000.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal and bank facility
fees, incurred in negotiating and securing 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.
Comprehensive Loss
We record the effective portion of certain derivatives' net unrealized gains and
losses as components of comprehensive loss. Comprehensive loss is presented in
the accompanying consolidated statements of changes in partners' capital. The
cumulative amount of comprehensive loss is presented in the accompanying
consolidated balance sheets as accumulated other comprehensive loss.
F-10
2. Significant Accounting Policies (continued)
Marketing and Promotional
Marketing and promotional costs are expensed as incurred. Marketing and
promotional expenses for the years ended December 31, 2001, 2000 and 1999 were
$13.1 million, $9.9 million and $3.0 million.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which is effective for fiscal years beginning
after December 15, 2001 and requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001
and changes the accounting for goodwill from an amortization method to an
impairment only approach. In addition, the standard includes provisions, upon
adoption, for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. For
existing goodwill and other intangibles, we will adopt this pronouncement on
January 1, 2002. As a result of this adoption, $2.29 billion of goodwill, which
was to be amortized ratably through 2016, will cease. We adopted the
non-amortization provision for goodwill contained within this pronouncement as
of January 1, 2002. Application of the non-amortization provisions of SFAS No.
142 would have resulted in a decrease in net loss of $189.0 million for the year
ended December 31, 2001.
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, we have six months from the date of adoption to complete the first
step. The second step of the goodwill impairment test measures the amount of the
impairment loss, measured as of the beginning of the year of adoption, if any,
and must be completed by the end of our fiscal year. Intangible assets deemed to
have an indefinite life will be tested for impairment using a one-step process
that compares the fair value to the carrying amount of the asset as of the
beginning of the fiscal year, and pursuant to the requirements of SFAS No. 142
will be completed during the first quarter of 2002. Any loss resulting from the
first step impairment test will be reflected as a cumulative effect of a change
in accounting principle in the first quarter of 2002. We have not yet determined
what effect these impairment tests will have on our consolidated financial
position, results of operations and cash flows.
F-11
2. Significant Accounting Policies (continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. We are currently assessing the impact of SFAS
No. 144 on our consolidated financial position, results of operations and cash
flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. Pro Forma Results of Operations
Our unaudited pro forma results of operations for the years ended December 31,
2001 and 2000, assuming the acquisition of the Illinois systems and the
Greenwood, Indiana system occurred as of January 1, 2000 were as follows (in
thousands):
Year Ended December 31,
2001 2000
------------- -------------
Revenue $ 702,212 $ 655,331
Loss before extraordinary item and accrual
of preferred interests 253,033 224,092
Net Loss 263,348 224,092
Our actual results of operations for the year ended December 31, 2000 and
unaudited pro forma results of operations for the year ended December 31, 1999,
assuming the acquisitions of the Kentucky Systems and each of the other 1999
acquisitions and exchanges described in Note 1 occurred as of January 1, 1999
were as follows (in thousands):
Year Ended December 31,
2000 1999
------------- -------------
Revenue $ 379,720 $ 360,483
Net Loss 132,110 142,436
F-12
4. Long-Lived Assets
Fixed assets consisted of:
December 31, December 31,
2001 2000
--------------------------------
(in thousands)
Land, buildings and improvements $ 31,233 $ 15,809
Cable system equipment 1,555,244 857,674
Furniture, fixtures and office equipment 13,893 6,844
--------------------------------
1,600,370 880,327
Less accumulated depreciation and amortization (466,743) (198,837)
--------------------------------
Total fixed assets, net $ 1,133,627 $ 681,490
================================
Intangible assets consisted of:
December 31, December 31,
2001 2000
--------------------------------
(in thousands)
Franchise costs $ 2,685,398 $ 1,086,647
Goodwill 17,992 1,190
--------------------------------
2,703,390 1,087,837
Less accumulated amortization (368,504) (137,538)
--------------------------------
Total intangible assets, net $ 2,334,886 $ 950,299
================================
5. Debt
Debt consisted of:
December 31, December 31,
2001 2000
--------------------------------
(in thousands)
Insight Ohio Credit Facility $ 25,000 $ --
Insight Indiana Credit Facility -- 298,600
Insight Kentucky Credit Facility -- 356,300
Insight Midwest Holdings Credit Facility 1,580,000 --
Insight Midwest 9 3/4% Senior Notes 200,000 200,000
Insight Midwest 10 1/2% Senior Notes 500,000 500,000
--------------------------------
2,305,000 1,354,900
Less unamortized discount on notes (6,638) (7,377)
--------------------------------
Total debt $ 2,298,362 $ 1,347,523
================================
F-13
5. Debt (continued)
Insight Ohio Credit Facility
Insight Ohio's credit facility (the "Insight Ohio Credit Facility") provides for
revolving credit loans of up to $25.0 million. The Insight Ohio Credit Facility
has a six-year maturity from the date of borrowings, with reductions to the
amount of the commitment commencing after three years. Our obligations under the
Insight Ohio Credit Facility are secured by substantially all the assets of
Insight Ohio. The Insight Ohio Credit Facility requires Insight Ohio to meet
certain financial and other debt covenants. Loans under the Insight Ohio Credit
Facility bear interest, at our option, at the prime rate or at a Eurodollar
rate. In addition to the index rates, we pay an additional margin percentage
tied to Insight Ohio's ratio of total debt to adjusted annualized operating cash
flow. The weighted average interest rates in effect as of December 31, 2001 and
2000 were 4.3% and 8.8%.
Insight Midwest Holdings Credit Facility
On January 5, 2001, through our wholly owned subsidiary ("Insight Midwest
Holdings"), which holds all of our cable television systems other than the Ohio
System, we entered into a credit facility (the "Midwest Holdings Credit
Facility") to finance the AT&T transactions and to repay the outstanding
indebtedness under the Indiana and Kentucky Credit Facilities. 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 Insight Midwest Holdings and its
subsidiaries.
The Midwest Holdings Credit Facility requires Insight Midwest Holdings to meet
certain financial and other debt covenants. Borrowings under this credit
facility bear interest, based on our election, of an Alternative Base Rate
(equal to the greater of the Prime Rate or the Federal Funds Effective Rate plus
0.5%) or Adjusted LIBOR (equal to LIBOR multiplied by the Statutory Reserve
Rate) plus an additional margin yield tied to Insight Midwest Holdings' leverage
ratio of between 0.5% and 2.75%. As of December 31, 2001, the weighted average
interest rate on this credit facility was 5.1%.
As a result of the repayment of the Indiana and Kentucky Credit Facilities on
January 5, 2001, we recorded an extraordinary charge of $10.3 million related to
the write-off of unamortized deferred financing costs related to these credit
facilities.
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.
F-14
5. Debt (continued)
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 that 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 commenced on May 1, 2001, are payable semi-annually on May 1 and
November 1.
The 9 3/4% and 10 1/2% Senior Notes are redeemable on or after October 1, 2004
and November 1, 2005. In addition, we can redeem up to 35% of the 9 3/4% and 10
1/2% Senior Notes prior to October 1, 2002 and November 1, 2005, with the net
proceeds from certain sales of our equity. Each holder of the Senior Notes may
require us to redeem all or part of that holder's notes upon certain changes of
control. The Senior Notes are general unsecured obligations and are subordinate
to all other liabilities of us, the amounts of which were $2.05 billion and
$769.7 million as of December 31, 2001 and 2000. The Insight Midwest Senior
Notes contain certain financial and other debt covenants.
In May 2000 and September 2001, Insight Midwest and Insight Capital, Inc.
completed exchange offers pursuant to which the 9 3/4% Senior Notes and 10 1/2%
Senior Notes were exchanged for identical notes registered under the Securities
Act of 1933.
Debt Principal Payments
As of December 31, 2001, annual principal payments required on our debt were as
follows (in thousands):
2002 $ -
2003 5,000
2004 80,000
2005 81,250
2006 106,750
Thereafter 2,032,000
---------------
Total $ 2,305,000
===============
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.
F-15
5. Debt (continued)
As of December 31, 2001 and 2000, we had entered into various interest rate swap
and collar agreements effectively fixing interest rates between 4.7% and 6.3%,
plus the applicable margin, on $500.0 million and $701.0 million notional value
of debt. The agreements outstanding as of December 31, 2001, expire between
February 2002 and July 2003. As of December 31, 2001, we had $1.8 million of
accrued interest related to these agreements.
In June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS No. 137
and No. 138, became 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 requires us
to recognize all derivatives on the balance sheet at fair value.
On January 1, 2001, our derivative financial instruments, which were obtained to
manage our exposure to interest rate risk, included interest rate swap and
collar agreements, which qualified as cash flow hedges. On January 1, 2001, we
recorded as a component of other comprehensive loss a $1.9 million transition
adjustment loss representing the cumulative effect of adopting SFAS No. 133.
Changes in the fair value of such cash flow hedges are recognized in as a
component of comprehensive loss. For the year ended December 31, 2001, the
decrease in the fair value was $20.9 million.
6. Supplemental Cash Flow Information
The following amounts were paid in cash during the years ended December 31:
2001 2000 1999
----------------------------------------------------
(in thousands)
Interest $ 196,747 $ 116,726 $ 37,904
Income taxes 116 - -
During the year ended December 31, 2001, we entered into an investing activity
in which our joint venture partners contributed cable systems to us valued at
$2.2 billion resulting in a non-cash increase in long-lived assets, debt, other
liabilities and partners' capital.
7. 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.
F-16
7. Financial Instruments (continued)
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 our 9 3/4% and 10 1/2% Senior Notes as of December 31, 2001 and 2000 was
$210.0 million and $540.0 million and $198.5 million and $515.0 million.
Interest rate swap agreements: As of January 1, 2001, interest rate swap
agreements are recorded in our financial statements at fair value. Prior to
January 1, 2001, interest rate swap agreements were not recorded in our
financial statements. The fair value (cost) of such swap agreements was $(22.8)
million and $(1.9) million as of December 31, 2001 and 2000.
8. Related Party Transactions
Programming
We purchase substantially all of our pay television and other programming from
affiliates of AT&T Broadband. Charges for such programming were $116.0 million,
$57.4 million and $29.6 million for the years ended December 31, 2001, 2000 and
1999. As of December 31, 2001 and 2000, $10.3 million and $9.8 million of
accrued programming costs were due to affiliates of AT&T Broadband. We believe
that the programming rates charged by the affiliates of AT&T Broadband are lower
than those available from independent parties.
Telephony Agreements
In July 2000, to facilitate delivery of telephone services, we entered into a
ten-year agreement with AT&T Broadband that allows Insight Midwest to deliver to
our customer's local telephone service under the AT&T Digital Phone brand. Under
the terms of the agreement, Insight Midwest leases for a fee certain capacity on
our network to AT&T Broadband. Insight Midwest provides certain services and
support for which it receives additional payments. We began providing telephony
services to a limited number of our customers in 2001. For the year ended
December 31, 2001, revenue related to telephony services was $170,000. The
capital required to deploy telephone services over our networks is shared, with
AT&T Broadband responsible for switching and transport facilities. AT&T also
pays us for installations, marketing and billing support that amounted to $1.4
million for the year ended December 31, 2001.
F-17
8. Related Party Transactions (continued)
Advertising Services
In October 1999, to facilitate the administration of our advertising services in
our Kentucky Systems, we entered into an agreement expiring on January 1, 2004
with TCI Media Services LLC ("TCI Media Services"), a subsidiary of AT&T Corp.,
which provides for TCI Media Services to perform all of our Kentucky advertising
sale and related administrative services. For the years ended December 31, 2001,
2000 and 1999, we received advertising revenues from TCI Media Services derived
from our Kentucky Systems of $12.4 million, $12.8 million and $3.2 million. As
of December 31, 2001 and 2000, we had $6.9 million and $6.8 million recorded as
a receivable due from TCI Media Services included in prepaid and other current
assets. We pay TCI Media Services a fixed and variable fee based on advertising
sales cash flow growth for providing this service. As of December 31, 2001 and
2000, we had $666,000 and $435,000 recorded as payables to TCI Media Services
related to such services.
SourceSuite
On November 17, 1999, Insight Inc. 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. We
are currently providing SourceSuite's interactive services to customers in some
of our systems. For the year ended December 31, 2001 and 2000, fees for such
services totaled $1.2 million and $77,000.
Due To Affiliates
As of December 31, 2001 and 2000, we had amounts owed to Insight LP, our
manager, primarily comprised of incurred but unpaid management fees.
9. 401(k) Plan
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 100% of the employee's contribution excluding any such
contributions in excess of 5% of the employee's wages. Effective April 1, 2001,
50% of our matching contribution to the Plan is in the form of Insight Inc.'s
common stock. During 2001, 2000 and 1999, we matched contributions of $2.2
million, $661,000 and $302,000.
F-18
10. Commitments and Contingencies
Programming Contracts
We enter into long-term contracts with third parties who provide us with
programming for distribution over our cable television systems. These
programming contracts are a significant part of our business and represent a
substantial portion of our operating costs. Since future fees under such
contracts are based on numerous variables, including number and type of
customers, we have not recorded any liabilities with respect to such contracts.
Lease Agreements
We lease and sublease equipment and office space under various operating and
capital lease arrangements expiring through December 31, 2015. Future minimum
rental payments required under such operating and capital leases as of December
31, 2001 were as follows:
Capital Operating
Lease Leases
-----------------------
(in thousands)
2002 $ 738 $ 2,448
2003 738 1,981
2004 738 1,495
2005 738 916
2006 838 633
Thereafter 3,996 1,347
-------- ---------
Total 7,786 $ 8,820
=========
Less: Amount representing interest at 8.75% (2,626)
--------
Present value of net minimum lease payments 5,160
Less: Current portion of obligations under capital leases (296)
--------
Obligations under capital leases, excluding current portion $ 4,864
========
Rental expense on operating leases for the years ended December 31, 2001, 2000
and 1999 was $3.8 million, $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. We have reached an agreement in principle with the plaintiffs to settle
these lawsuits. Such
F-19
10. Commitments and Contingencies (continued)
settlement is awaiting the execution of definitive documentation and a
determination of fairness by the respective courts where these matters were
filed.
We have filed a state court action against the City of Louisville for its grant
of more favorable franchises to Knology, Inc. and TotaLink of Kentucky, LLC. Our
commencement of this action automatically suspended these franchises pending a
court determination. In November 2000, Knology Inc. filed a federal court action
against us seeking unspecified money damages and other relief for alleged
violations of federal laws arising out of our having filed, pursuant to the
provisions of our own franchise from the City, the state court action. In March
2001, the federal court preliminarily set aside the state court suspension of
Knology Inc.'s franchise. We believe we have substantial and meritorious
defenses to the asserted federal claims and intend to defend it vigorously.
Consequently, we have not recorded any loss reserves in the accompanying
financial statements.
We are subject to 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.
11. At Home Corporation
On September 28, 2001, At Home Corporation ("@Home"), the former provider of
high-speed data services for all of our systems except for those located in
Ohio, filed for protection under Chapter 11 of the Bankruptcy Code. For the
purpose of continuing service to existing customers and to resume the
provisioning of service to new customers, we entered into an interim agreement
with @Home to extend service through November 30, 2001. Further, in December
2001, we entered into an additional interim service arrangement whereby we paid
$10.0 million to @Home to extend service for three months through February 28,
2002 that is being recorded into expense ratably over the three-month period.
As a result of these interim arrangements we incurred approximately $2.8 million
in excess of our original agreed-to cost for such services rendered during the
year ended December 31, 2001. Additionally, we have recorded an allowance for
bad debt of $1.0 million for a net receivable from @Home in connection with
monies @Home collected from our high-speed data customers on our behalf prior to
September 28, 2001. These additional costs are included in non-recurring
high-speed data service charges in our statement of operations.
In December 2001, we entered into a four-year agreement with AT&T Corporation to
provide high-speed data service to all our affected systems. We transferred all
our affected systems to our own regional network that resides on AT&T
Corporation's platform. Such high-speed data services commenced progressively on
a system-by-system basis beginning in February 2002, with all affected systems
being served as of March 1, 2002.
F-20
Report of Independent Auditors
The Shareholders
Insight Capital, Inc.
We have audited the accompanying balance sheets as of December 31, 2001 and 2000
and the related statements of operations and changes in shareholders' deficit
and cash flows of Insight Capital, Inc. (the "Company") for the years ended
December 31, 2001 and 2000 and the period from September 23, 1999 (date of
inception) through December 31, 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 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.
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000 and the results of their operations and cash flows for the years
ended December 31, 2001 and 2000 and the period from September 23, 1999 through
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-21
INSIGHT CAPITAL, INC.
BALANCE SHEETS
(in thousands)
December 31, December 31,
2001 2000
------------ ------------
Assets
Cash $ 1 $ 1
Deferred financing costs, net 12,004 13,468
------------ ------------
Total assets $ 12,005 $ 13,469
============ ============
Liabilities and shareholders' deficit
Accrued interest $ 13,625 $ 13,625
------------ ------------
Total current liabilities 13,625 13,625
Senior notes 693,362 692,623
------------ ------------
Total liabilities 706,987 706,248
Shareholders' deficit:
Common stock; $.01 par value; 1,000 shares authorized,
issued and outstanding - -
Paid-in-capital 1 1
In-substance allocation of proceeds related to senior notes
to be paid by Insight Midwest (586,430) (658,430)
Accumulated deficit (108,553) (34,350)
------------ ------------
Total shareholders' deficit (694,982) (692,779)
------------ ------------
Total liabilities and shareholders' deficit $ 12,005 $ 13,469
============ ============
See accompanying notes
F-22
INSIGHT CAPITAL, INC.
STATEMENTS OF OPERATIONS
(in thousands)
Period from
September 23,
1999
(inception)
Year Ended Year Ended through
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Expenses:
Amortization $ (1,464) $ (909) $ (193)
Interest (72,739) (28,373) (4,875)
------------ ------------ ------------
Net loss $ (74,203) $ (29,282) $ (5,068)
============ ============ ============
See accompanying notes
F-23
INSIGHT CAPITAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(in thousands)
In-substance
contributions
Additional (allocations) Total
paid-in- related to Accumulated shareholders'
capital senior notes deficit deficit
---------- ------------ ----------- -------------
Issuance of common stock (at inception) $ 1 - $ - $ 1
Borrowings under senior notes by Insight
Midwest, net - (191,634) - (191,634)
Net loss - - (5,068) (5,068)
---------- ------------ ----------- -------------
Balance, December 31, 1999 1 (191,634) (5,068) (196,701)
Borrowings under senior notes by Insight
Midwest, net - (486,296) - (486,296)
Interest payments made by Insight Midwest
on senior notes - 19,500 - 19,500
Net loss - - (29,282) (29,282)
---------- ------------- ----------- -------------
Balance, December 31, 2000 1 (658,430) (34,350) (692,779)
Interest payments made by Insight Midwest
on senior notes - 72,000 - 72,000
Net loss - - (74,203) (74,203)
---------- ------------ ----------- -------------
Balance, December 31, 2001 $ 1 (586,430) $ (108,553) $ (694,982)
========== ============ =========== =============
See accompanying notes
F-24
INSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Period from
September 23,
1999
(inception)
through
Year Ended December 31, December 31,
2001 2000 1999
---------- ---------- -----------
Cash flows from operating activities:
Net loss $74,203) $(29,282) $(5,068)
Accretion of discount on notes 739 123 -
Adjustments to reconcile net loss to net cash provided by operating
activities:
Amortization of deferred financing costs 1,464 909 193
Interest expense paid by affiliate 72,000 28,250 4,875
---------- ---------- -----------
Net cash provided by operating activities - - -
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock - - 1
---------- ---------- -----------
Net cash provided by financing activities - - 1
---------- ---------- -----------
Net increase in cash - - 1
Cash, beginning of period 1 1 -
---------- ---------- -----------
Cash, end of period $ 1 $ 1 $ 1
========== ========== ===========
See accompanying notes
F-25
INSIGHT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
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 3, 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. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees associated with the issuance of the senior notes, which are
amortized over the life of the senior notes.
Fair Value of Financial Instruments
The fair value of the 9 3/4% Senior Notes as of December 31, 2001 and 2000 was
$210.0 million and $198.5 million, respectively. The fair value of the 10 1/2%
Senior Notes as of December 31, 2001 and 2000 was $540.0 million and $515.0
million, respectively.
In-Substance Allocation of Note Proceeds
Since both Insight Midwest and the Company are severally and jointly liable, the
senior notes, deferred financing costs and associated interest expense are
reflected in the Company's financial statements as well as a charge to the
equity section representing an in-substance allocation of the proceeds from the
senior notes. The Company has accrued interest on the outstanding balance. When
Insight Midwest makes interest payments, the Company reduces accrued interest
payable and records an in-substance contribution to equity.
Income Taxes
The Company has prepared its income tax provision using the liability method in
accordance with Financial Accounting Standards Board Statement No.109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse. As of
December 31, 2001 and 2000 the Company had no deferred tax assets or liabilities
and no tax provision to record.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires 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.
F-26
3. 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.
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
commenced on May 1, 2001, are payable semi-annually on May 1 and November 1.
In May 2000 and September 2001, the Company and Insight Midwest completed
exchange offers pursuant to which the 9 3/4% Senior Notes and 10 1/2% Senior
Notes were exchanged for identical notes registered under the Securities Act of
1933.
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. Although the Company is a co-issuer of the Senior Notes, it
has no substantial assets or any operations and will not have access to
additional sources of cash flow to make any payments on such debt. All future
funding on the Senior Notes, including principal and interest payments, are
dependent upon the operating results of Insight Midwest.
The Senior Notes are general unsecured obligations and are subordinate to all
Insight Midwest's liabilities, the amounts of which were $2.05 billion and
$769.7 million as of December 31, 2001 and 2000, respectively. The Senior Notes
contain certain financial and other debt covenants.
Debt consisted of:
December 31, December 31,
2001 2000
----------------------------
(in thousands)
Insight Midwest 9 3/4% Senior Notes 200,000 200,000
Insight Midwest 10 1/2% Senior Notes 500,000 500,000
----------------------------
700,000 700,000
Less unamortized discount on notes (6,638) (7,377)
----------------------------
Total debt $ 693,362 $ 692,623
============================
F-27