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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission file numbers: 333-64449-02
333-64449-01
333-64449
Coaxial LLC
Coaxial Financing Corp.
Insight Communications of Central Ohio LLC
(Exact name of registrants as specified in their respective charters)
Delaware
Delaware
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
c/o Insight Communications Company, Inc.
126 East 56th Street
New York, NY 10022
(212) 371-2266
(Address and telephone number of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes....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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_| Not Applicable
State the aggregate market value of the common equity held by
non-affiliates of the registrants: Not Applicable
Indicate the number of shares outstanding of the registrants' common stock:
Not Applicable
Forward-Looking Statements
This annual report contains "forward-looking statements," including
statements containing the words "believes," "anticipates," "expects" and words
of similar import, which concern, among other things, the operations, economic
performance and financial condition of the System (as defined below). All
statements other than statements of historical fact included in this annual
report regarding Coaxial LLC, Coaxial Financing Corp. and Insight Communications
of Central Ohio, LLC ("Insight Ohio") or any of the transactions described in
this report, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Such forward-looking statements
are based upon a number of assumptions and estimates, which are inherently
subject to significant uncertainties and contingencies, many of which are beyond
the control of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio, and
reflect future business decisions which are subject to change. Although Coaxial
LLC, Coaxial Financing Corp. and Insight Ohio believe that the expectations
reflected in such forward-looking statements are reasonable, they can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from expectations include,
without limitation:
. the ability of Coaxial LLC and Coaxial Financing Corp. to make
scheduled payments with respect to the Senior Discount Notes (as
defined below) will depend on the financial and operating performance
of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is
required to be dedicated to the payment of principal and interest on
its indebtedness and the required distributions with respect to its
Series A Preferred Interest and its Series B Preferred Interest,
thereby reducing the funds available to Insight Ohio for its
operations and future business opportunities;
. Coaxial LLC and Coaxial Financing Corp. have no significant assets
other than the common equity of Coaxial Communications of Central
Ohio, Inc. ("Coaxial") owned by Coaxial LLC and notes issued by
Coaxial DJM LLC (an owner of 22.5% of the common equity of Coaxial)
and Coaxial DSM LLC (an owner of 10.0% of the common equity of
Coaxial) to Coaxial LLC; and
. the indenture governing the terms of the Senior Discount Notes imposes
restrictions on Coaxial LLC, Coaxial Financing Corp. and Insight Ohio
and the Senior Credit Facility of Insight Ohio imposes restrictions on
Insight Ohio.
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not intend to update
these forward-looking statements.
2
PART I
Item 1. Business
Overview
Insight Ohio owns and operates a cable television system in the Columbus,
Ohio metropolitan area (the "System"). As of December 31, 1999, the System
passed approximately 178,300 homes and served approximately 84,200 basic
customers in the eastern portion of the City of Columbus and the surrounding
suburban communities. All of the System's customers are served from a single
headend allowing for efficient capital deployment for new services. Insight
Holdings of Ohio, LLC ("IHO"), a wholly-owned subsidiary of Insight
Communications Company, L. P. ("Insight"), serves as the manager of the System.
Insight is currently the 8th largest cable television system operator in the
United States based on customers served after giving effect to previously
announced industry acquisitions.
The System
The System is located in the eastern portion of the City of Columbus and
the surrounding suburban communities. The City of Columbus is the 34th largest
designated market area ("DMA") in the United States, is the capital of Ohio and
is the home of The Ohio State University. Besides the state government and
university, the Columbus economy is well diversified with a significant presence
of prominent companies such as The Limited, Merck, Wendy's, Nationwide
Insurance, Borden and Worthington Industries. The area's strong economy provides
for a well-paid employment base with a current unemployment rate of 2.3%. The
median household income of the System's service area is approximately $47,800
per year, while the median family income is approximately $57,000 per year. As
of December 31, 1999, the System passed approximately 178,300 homes and served
approximately 84,200 basic customers from a single headend.
The System enjoys a high level of population growth in the suburban
communities east of Columbus. Since December 31, 1996, more than 17,200 homes
passed have been added to the System through new plant extensions, primarily in
new housing developments. This represents a 3.5% compound annual growth rate of
homes passed for the System for the three years ended December 31, 1999, as
compared to the industry average of 1.0% for the same period.
Portions of the System operate in a competitive environment. Customers in
those areas have access to two wired cable television providers -- Insight Ohio
and a cable subsidiary of Ameritech Corporation, the telephone local exchange
carrier in Columbus. The System also competes with direct broadcast satellite
television systems ("DBS") and multipoint multichannel distribution systems
("MMDS"). The areas of the System served by both Insight Ohio and Ameritech pass
approximately 124,700 homes, representing 70% of the System's total homes
passed. In this competitive environment, the System's basic customers decreased
from approximately 86,000 at the end of 1995, prior to Ameritech's entry into
the marketplace, to approximately 84,200 as of December 31, 1999.
As of December 31, 1999, the System had 2,720 miles of plant, including 578
miles of 490 MHz plant, 1,675 miles of 468 MHz plant and 467 miles of 870 MHz
plant. There also were 379 miles of fiber optic cable deployed in the System,
including 214 miles of new fiber optic cable. Insight Ohio is continuing to
upgrade the technical capability of the System by increasing its bandwidth to
870 MHz and activating its
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reverse plant. The increase in bandwidth allows the System to deliver new
services such as digital cable, high-speed Internet connections, two-way data
and other telecommunications services. Insight Ohio expects to have
approximately 1,500 miles of plant, or 55% of the total plant mileage, rebuilt
by the end of 2000. Such plant shall pass approximately 166,600 homes, or 93% of
all the homes passed.
The Manager
IHO, the manager of Insight Ohio, is a wholly-owned subsidiary of Insight.
Insight is currently the 8th largest cable television system operator in the
United States based on customers served after giving effect to previously
announced industry acquisitions. Insight provided cable television services to
approximately 935,000 customers and passed approximately 1.5 million homes as of
December 31, 1999. Insight has tightly grouped clusters of cable television
systems with approximately 98% of its customers concentrated in the four
contiguous states of Indiana, Kentucky, Ohio and Illinois.
Insight was co-founded in 1985 by Sidney R. Knafel, Chairman of Insight,
and Michael S. Willner, President and Chief Executive Officer of Insight, both
of whom have been active in the cable business since the early 1970's. Kim D.
Kelly joined Insight in 1990 as Executive Vice President and Chief Financial
Officer and was named Chief Operating Officer in January 1998. In addition to
many years of conventional cable television experience, Insight's management
team has been involved in the development and deployment of full service
telecommunications networks. In 1989, through an affiliated entity, Insight
Communications Company U.K., L.P., Insight entered the U.K. cable television
market, where today modern hybrid fiber-coaxial networks are widely deployed.
Messrs. Knafel and Willner remain on the board of NTL Incorporated, the publicly
traded successor to the Insight U.K related entity. NTL is currently the largest
operator of local broadband communications systems in the United Kingdom, after
giving effect to previously announced transactions.
A series of swaps, acquisitions and joint ventures were executed in 1998
and 1999 resulting in the current composition of Insight. The largest of these
transactions were two joint ventures (now combined into a single joint venture)
entered into with affiliates of AT&T Broadband for its Indiana and Kentucky
cable television systems, with Insight as the manager of the systems. As of
December 31, 1999, Insight owned and managed cable systems serving over 935,000
customers located in six states including those in its joint venture serving
approximately 322,500 customers in Indiana and 426,300 customers in Kentucky,
and approximately 84,200 customers served in Columbus, as well as another
approximately 102,000 customers served directly by Insight.
On March 15, 2000, Insight reached an agreement in principle with AT&T
Corp. for the delivery of telephone service utilizing Insight Ohio's cable
television systems under the "AT&T" brand name. The terms of the agreement in
principle provide that Insight will market, service and bill for local telephone
service. AT&T would be required to install and maintain the necessary switching
equipment, and would be the local exchange carrier of record. AT&T would pay
Insight Ohio a fee for the use of the local telephone lines, and will also
compensate Insight Ohio for installation and maintenance services at customers'
residences. In addition, AT&T would pay Insight Ohio commissions for sales
Insight makes to its customers. Insight expects to sell the AT&T-branded local
telephone service separately and as part of bundled offerings, which would also
include the sale of AT&T long-distance telephone services. The agreement in
principle is subject to the negotiation and execution of definitive agreements.
On March 23, 2000, Insight entered into a letter of intent with AT&T
Broadband, LLC to contribute to its AT&T joint venture additional cable
television systems serving approximately 537,000 customers. Through a series of
transactions, Insight Ohio will contribute to the joint venture its interests in
systems serving approximately 187,000 customers, including the System, and AT&T
Broadband will contribute systems serving approximately 350,000 customers. As a
result, the joint venture would increase its customer base of approximately
748,800 as of December 31, 1999 to approximately 1.3 million. Upon completion of
the transactions, the joint venture would remain equally owned by Insight and
AT&T Broadband, and Insight would continue to serve as the general partner and
manage and operate the joint venture systems. The transactions are subject to
the negotiation and execution of definitive agreements.
4
Insight Business Strategy
Three years ago, Insight initiated a strategic plan designed to augment its
core business of delivering multi-channel video. The strategy calls for:
o the upgrade of plant to a minimum of 750 MHz hybrid fiber-coaxial platforms
from which to deploy new value-added services such as high-speed data
access, digital video and telephony services;
o the reconfiguration of existing systems in a series of swaps to achieve
customer clusters with a strong market presence; and
o an acquisition plan focused on markets with attractive demographics and a
high ratio of customers to headends.
The System is an integral part of Insight's long-term business strategy.
The System has a strong market presence in a state capital and academic center
with a diverse, growing economy. All of the System's customers are served from a
single headend allowing for efficient capital deployment for new services.
Moreover, management anticipates that it will pass approximately 93% of the
homes in the System by the end of the fourth quarter 2000 with plant rebuilt to
870 MHz. Insight Ohio began launching its digital service on a node-by-node
basis in November 1999, including a video-on-demand and interactive
informational service, and anticipates launching its high speed Internet service
during the second quarter 2000.
System Operating Strategy
The System fits the profile of cable television systems that Insight seeks
to own and operate. The System is large enough to have a significant market
presence and all customers are serviced from one headend. In addition, Columbus
is geographically proximate to other Insight cable systems with a customer
universe having the type of demographic profile that Insight believes will
widely accept new telecommunications offerings. IHO intends to aggressively
implement Insight's upgrade strategy in Columbus.
Insight is in the process of rebuilding the System to 870 MHz, and began
servicing customers from the rebuilt network in November 1999. IHO is currently
launching digital service, on a node-by-node basis, including a video-on-demand
service and an interactive information service. As of December 31, 1999, the
System passed 12,100 homes with its digital service and served approximately
1,100 customers with such service, representing a penetration level of 11.0%.
Management expects to increase revenues as the System upgrade is completed by
increasing the deployment of its digital cable and adding new services such as
high-speed modems and other newly developing telecommunications services.
Insight Ohio has entered into an affiliation agreement with Road Runner and a
network service agreement with High Speed Access Corp. to deploy the Road Runner
service over cable modems. This service is currently in the beta testing phase
and management expects to launch this service during the second quarter 2000.
In November 1999, IHO introduced its signature interactive Digital Gateway
service with exclusive interactive programming including Local Source, an
Internet-styled information service, and a video-on-demand service by DIVA. In
addition, the System provides exclusive sports programming under the "Central
Ohio Sport!" brand, featuring sporting events from Ohio State University.
5
Overbuild
In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus. Ameritech has built its citywide franchise, both in our
service area and in the Time Warner service area on the west side of Columbus.
Insight Ohio and Time Warner service virtually distinct areas and therefore do
not compete with one another. The areas of the System served by both Insight
Ohio and Ameritech pass approximately 124,700 homes, representing 70% of the
System's total homes passed. Presently, Ameritech is constructing an additional
system in a franchise area with approximately 13,000 homes.
When the System was acquired by Insight Ohio in August 1999, it implemented
a strategy to end deep discounting as a defense against Ameritech. Management
believed that a relatively small customer loss, caused by discontinuing
discounts, would be preferable in exchange for achieving for increasing the
average monthly revenue per customer. As a result of this strategy, from June
30, 1998 to December 31, 1999, the average monthly revenue per customer
increased from $43.30 to $45.33 while the number of customers decreased from
91,100 to 84,200. Ameritech seems to have responded to this strategy by
announcing a $1.25 increase in the price of their standard cable service
effective March 1, 2000.
Technological Developments
Management believes that in order to achieve consistently high levels of
customer service, maintain a strong competitive posture and deploy important new
technologies, a state-of-the-art technical platform needs to be built. Presently
the System is comprised of 2,720 miles of plant passing approximately 178,300
homes resulting in a density of 66 homes per mile. Approximately 17% of the
plant has been rebuilt to 870 MHz. In addition, approximately 21% of the plant
has been expanded to 490 MHz and approximately 62% is built at 468 MHz. The
system is 100% addressable, with approximately 84% of the basic customers having
addressable converters.
Insight Ohio plans to enhance the technical platform of the System by
upgrading the plant passing 93% of the homes passed in the System by the end of
2000. The capability for high-speed data transmission, video-on-demand,
interactive digital cable, additional analog channels and telephony is intended
to be provided by further deployment of fiber optics, an increase in the
bandwidth to 870 MHz, activation of the reverse plant to allow two-way
communications and the installation of digital equipment.
All of the System's basic customers currently have access to addressable
technology and approximately 84% have addressable converters in their homes.
Addressable technology enables the System to electronically control the cable
television services being delivered to the customer's home. As a result, the
System can electronically upgrade or downgrade services to a customer
immediately, from its customer service center, without the delay or expense
associated with dispatching a technician to the customer's home. Addressable
technology also reduces premium service theft, is an effective enforcement tool
in the collection of delinquent payments and enables the System to offer
pay-per-view services, including movies and special events.
Management believes that active use of fiber optic technology as an
alternative to coaxial cable is expected to play a major role in expanding
channel capacity and improving the performance of the System. Fiber optic
strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal amplification typically required
for coaxial cable. The System will continue to deploy fiber optic cable further
reducing amplifier cascades while improving picture quality and system
reliability.
6
Recently, high-speed cable modems and set-top boxes using digital
compression technology have become commercially viable. These developments allow
for the introduction of high-speed data services and Internet access and will
increase the programming services available to customers. Digital compression
technology provides for a significant expansion of channel capacity with up to
12 digital channels to be carried in the bandwidth of one analog channel. The
upgrade of the System has given the System the ability to launch its Digital
Gateway service which includes the following:
o A digital converter box;
o An interactive navigational program guide for all analog and digital
channels;
o A local, interactive Internet-style service;
o A significant multiplexing of premium channels for customers who separately
subscribe to premium channels, such as HBO and Showtime;
o Pay-per-view video-on-demand; and
o A digital 40-channel audio music service.
Insight Ohio began launching its Digital Gateway service in the System on a
node-by-node basis in November 1999, including DIVA's video-on-demand service
and the Local Source interactive information service. Insight Ohio plans to
launch the Road Runner high-speed Internet service during the second quarter
2000.
Marketing, Programming and Rates
Marketing
The System's marketing programs and campaigns are based upon offering a
variety of cable services creatively packaged and tailored to appeal to its
different markets and to segments within its markets. The System surveys its
customer base to ensure that it is meeting the demands of its customers and
stays abreast of its competition in order to effectively counter competitors'
promotional campaigns. The System uses a coordinated array of marketing tactics
to attract and retain customers and to increase premium service penetration,
including door-to-door and direct mail solicitation, telemarketing, media
advertising, local promotional events typically sponsored by programming
services and cross-channel promotion of new services. The rebuild of the plant
allows Insight Ohio to deploy its suite of services including interactive
digital, high speed data and during the first quarter of 2001, telephony. In
November 1999, Insight Ohio began to launch its interactive digital,
video-on-demand and Local Source informational product on a node-by-node basis.
Insight Ohio plans to launch its Road Runner high-speed Internet service during
the second quarter 2000. Using a skilled team of marketing professionals, the
System has competed by supporting an innovative variety of marketing activities.
Programming
Insight has various contracts to obtain basic and premium programming for
the System from program suppliers whose compensation is typically based on a
fixed fee per customer. Through strategic alliances with other major MSOs or
through its own purchasing power, Insight has obtained programming for the
System at a low cost. Some program suppliers provide volume discount pricing
structures or offer marketing and launch support to the System. The System's
successful marketing of multiple premium service packages emphasizing customer
value enables the System to take advantage of such cost incentives. The System's
overall programming costs are expected to increase in the future due to
additional programming being provided to its customers, inflationary increases
and other factors affecting the cable television industry. The System also has
7
various retransmission consent arrangements with commercial broadcast stations
which generally have been renewed through 2003. None of these consents require
payment of fees for carriage.
The System offers a "basic service tier," consisting primarily of local
television channels (network and independent stations) available over-the-air,
and local public, governmental and educational access channels. The System also
offers, for a monthly fee, an expanded basic tier of various
satellite-delivered, non-broadcast channels (such as CNN, ESPN, MTV, TNT, and
USA). In addition to these services, the System provides premium services such
as HBO, Cinemax, Showtime, The Movie Channel and Starz!, which have unique
appeal to various segments of the viewing audience. These services are
satellite-delivered channels consisting principally of feature films, original
programming, live sports events, concerts and other special entertainment
features, usually presented without commercial interruption. Such premium
programming services are offered by the System both on a per-channel basis and
as part of premium service packages designed to enhance customer value and to
enable the System to take advantage of programming agreements offering cost
incentives based on premium service unit growth. Customers may subscribe to one
or more premium service units. A "premium service unit" is a single premium
service for which a customer must pay an additional monthly fee in order to
receive the service.
Management is upgrading the System to digital using fiber optic technology,
which has allowed the System to expand the number of multiplexed premium screens
(additional channels such as Showtime 2 and HBO Family) providing greater value
for the customer. Moreover, the upgrade has given the System the ability to
offer its Digital Gateway service including interactive television and multiple
packaging options through the addition of niche programming services. Management
believes that these additional features and options will increase basic and
premium penetration as well as revenue per basic customer. The System also
provides video-on-demand, a digital service consisting principally of feature
films, adult movies, concerts and other special events, presented without
commercial interruption. Such services are offered by the System on a "per
viewing" basis, with customers only paying for programs which they select for
viewing.
Rates
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of December 31, 1999, the
System's stated monthly basic service rate for residential customers was $11.47,
the System's monthly expanded basic service rates for residential customers
ranged from $14.93 to $18.65, and per-channel premium service rates (not
including special promotions) ranged from $5.95 to $12.95 per service.
A one-time installation fee, which the System may wholly or partially waive
during a promotional period, is charged to new customers. The System charges
monthly fees for converters and remote control devices. The System also charges
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. MDU accounts may be offered a bulk rate in exchange
for single-point billing and basic service to all units.
On February 11, 1997, a Petition for Determination of Effective Competition
filed by the prior owner of the System challenging the certification of the City
of Columbus was granted by the FCC. This petition effectively revoked the City
of Columbus' right to regulate the System's basic cable and equipment rates.
8
Employees
As of December 31, 1999, the System employed 191 full-time equivalent
employees, none of whom is represented by a union or covered by a collective
bargaining obligation. Management believes that its relations with its employees
are good. Approximately 50% of the full-time employees have tenure of five years
or longer. Although the Columbus area has relatively low unemployment and
competition in hiring is intense, Management believes that it will continue to
be successful in attracting and retaining highly qualified employees and
maintaining good working relationships with its current employees.
Customer Service and Community Relations
The System is dedicated to quality customer service. Plans to make
significant system improvements are designed in part to strengthen customer
service through greater system reliability and the introduction of new services.
Management seeks a high level of customer satisfaction by also employing a
well-trained staff of customer service representatives and experienced field
technicians.
The System is dedicated to fostering strong community relations in the
communities served by the System. The System supports local charities and
community causes through staged events and promotional campaigns, including
Children's Hospital Miracle Network Telethon, the Penny-A-Day for Children
Program and Red Cross Blood Drive donations. The System also installs and
provides free cable television service and Internet access to public schools,
government buildings and not-for-profit hospitals in its franchise areas. The
System has teamed up with its neighboring cable operator Time Warner to develop
a local sports package called "Central Ohio Sport!" which features Ohio State
University sporting events on an exclusive basis to cable customers.
Management believes that its relations with the communities in which the System
operates are generally excellent.
Franchises
Cable television systems are generally operated under non-exclusive
franchises granted by local governmental authorities. These franchises typically
contain many conditions, such as:
o time limitations on commencement and completion of construction;
o conditions of service, including number of channels, types of programming
and the provision of free service to schools and certain other public
institutions; and
o the maintenance of insurance and indemnity bonds.
The provisions of local franchises are subject to federal regulation under
the Communications Act of 1934, as amended (the "Communications Act").
The System provides cable television service to residents of 42
governmental jurisdictions. Within each of these governmental jurisdictions, the
System operates under authority granted by the local community or the State of
Ohio. Actual franchise agreements are maintained with the 28 jurisdictions that
possess the legal basis to grant such franchises consistent with federal and
state law. These franchises, which are non-exclusive, provide for the payment of
fees to the issuing authority. In the System, such franchise fees are passed
through directly to the customers. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the Cable Communication
Policy Act of 1984 (the "1984 Cable Act" and, together with the 1992 Cable Act,
the "Cable Acts") prohibit franchising authorities from imposing franchise fees
in excess of
9
5% of gross revenue and also permit the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances.
The majority of the System's basic customers are in governmental
jurisdictions that require a franchise. The table below groups all of the
System's governmental jurisdictions by date of expiration of the authority to
operate and presents the approximate number and percentage of basic customers
for each group as of December 31, 1999.
Percentage of Percentage of
Number of Total Total Basic
Franchises Franchises Customers
---------- ---------- ---------
Year of Franchise Expiration
- ----------------------------
2000 through 2001................................. 6 14% 14%
2002 and thereafter............................... 36 86% 86%
-- --- ---
Total....................................... 42 100% 100%
== ==== ====
The Cable Acts provide, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by such
franchise. In addition, the Cable Acts established comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications.
Management believes that it generally has good relationships with its
franchising communities. The System has never had a franchise revoked or failed
to have a franchise renewed. In addition, all of the franchises of the System
eligible for renewal have been renewed or extended at or prior to their stated
expirations, and no franchise community has refused to consent to a franchise
transfer to the System.
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. Recently enacted legislation permits direct broadcast satellite
companies to retransmit local television signals, eliminating one of the
objections of consumers about switching to satellites.
The 1996 Telecom Act makes it easier for local exchange telephone companies
and others to provide a wide variety of video services competitive with services
provided by cable systems. Various local exchange telephone companies currently
are providing video services within and outside their telephone service areas
through a variety of distribution methods, including the deployment of broadband
cable networks and the use
10
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.
The major source of competition for the System is the wireline overbuild by
Ameritech. Ameritech has overbuilt approximately 124,700 homes passed in the
System's service area, or approximately 70% of the total homes in the service
territory as of December 31, 1999.
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. The System passes approximately 440
MDU complexes within its service territory and currently has entry agreements,
either exclusive or non-exclusive, with complexes totaling approximately 62,300
MDUs. The System currently provides programming to just over 31,500 of these
MDUs, or 51% of the total MDUs passed. The ability of the System to compete for
customers in residential and commercial developments served by SMATV operators
is uncertain.
Direct broadcast television systems use digital video compression
technology to increase the channel capacity of their systems. Direct broadcast
satellite television system programming is currently available to individual
households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar Communications Corporation, and medium-power service is being
provided by PrimeStar, Inc. DIRECTV recently acquired PrimeStar's medium-power
direct broadcast satellite business and United States Satellite Broadcasting.
These and other recently announced transactions have resulted in DIRECTV and
EchoStar obtaining additional high-power channel capacity of direct broadcast
satellite television systems through the acquisition of other direct broadcast
satellite television system facilities and channel capacity. DIRECTV and
EchoStar have thereby significantly increased the number of channels on which
they can provide programming to customers. Direct broadcast satellite television
systems have some advantages over cable systems that were not rebuilt, such as
greater channel capacity and digital picture quality. In addition, legislation
has recently been enacted which permits direct broadcast satellite television
systems to deliver television stations in their local markets. The disadvantages
of direct broadcast satellite television systems currently include expensive
up-front customer equipment and installation costs and a lack
11
of local programming and service. Management estimates that there were
approximately 7,400 DBS customers in the System's service areas as of December
31, 1999.
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 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 enough 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.
Cable operators also compete with wireless program distribution services
such as analog and digital multichannel, multipoint distribution service, which
use microwave frequencies to transmit video programming over-the-air to
customers. There are operators of multipoint multichannel distribution systems
who are authorized to provide or are providing broadcast and satellite
programming to customers in areas served by our cable systems.
Additionally, the FCC adopted regulations allocating frequencies in the 28
GHz band for a new service called local multipoint distribution service that can
be used to provide video services similar to multipoint multichannel
distribution systems. The FCC held spectrum auctions for local multipoint
distribution service licenses in 1998 and 1999.
As we expand our offerings to include local telephone services, we 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 local telephone
service areas.
Other new technologies may become competitive with services that cable
communications systems can offer. Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect of ongoing or future
developments on the cable communications industry or on our operations.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
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Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a number of rulemakings to implement the legislation, some of
which have yet to be completed.
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
expands the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except direct broadcast satellite television systems. Satisfaction of this test
deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable Act
required the FCC to adopt a formula for franchising authorities to assure that
basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers, other than per-channel or per-program services, in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring basic customers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of compliance; required the FCC to adopt
regulations to establish, on the basis of actual costs, the price for
installation of cable service, remote controls, converter boxes and additional
outlets; and allowed the FCC to impose restrictions on the retiering and
rearrangement of cable services under certain limited circumstances. The 1996
Telecom Act limited the class of complainants regarding cable programming
service tier rates to franchising authorities only, after first receiving two
rate complaints from
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local customers, 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 and the FCC, respectively,
are empowered to order a reduction of existing rates which exceed the maximum
permitted level for basic services and associated equipment, and refunds can be
required. The FCC adopted a benchmark price cap system for measuring the
reasonableness of existing basic service rates. Alternatively, cable operators
have the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment, converter boxes and remote control devices,
for example, and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable
television operator adds or deletes channels. There is also a streamlined
cost-of-service methodology available to justify a rate increase on the basic
tier for "significant" system rebuilds or upgrades.
As a further alternative, in 1995 the FCC adopted a simplified
cost-of-service methodology which can be used by "small cable systems" owned by
"small cable companies." 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 which exceed those produced by the
cost-of-service rules applicable to larger cable television operators. Once the
initial rates are set they can be adjusted periodically for inflation and
external cost changes as described above. When an eligible "small system" grows
larger than 15,000 basic customers, it can maintain its then current rates but
it cannot increase its rates in the normal course until an increase would be
warranted under the rules applicable to systems that have more than 15,000
customers. When a "small cable company" grows larger than 400,000 basic
customers, the qualified systems it then owns will not lose their small system
eligibility. If a small cable company sells a qualified system, or if the
company itself is sold, the qualified systems retain that status even if the
acquiring company is not a small cable company. The System was "small cable
company" prior to the October 30, 1998 completion of the AT&T Broadband joint
venture relating to Insight's Indiana systems, but it no longer enjoys this
status.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
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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:
(a) a 50 mile radius from the station's city of license; or (b) 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 Insight, although this result
may change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
has initiated a rulemaking proceeding on the carriage of television signals in
high definition and digital formats. The outcome of this proceeding could have a
material effect on the number of services that a cable operator will be required
to carry.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis. FCC
regulations also enable television stations that have obtained exclusive
distribution rights for syndicated programming in their market to require a
cable television system to delete or "black out" such programming from other
television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
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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 rebuilding facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
Similarly, if a franchising authority's consent is required for the purchase or
sale of a cable television system or franchises, such authority may attempt to
impose burdensome or onerous franchise requirements in connection with a request
for such consent. Historically, franchises have been renewed for cable
television operators that have provided satisfactory services and have complied
with the terms of their franchises. At this time, we are not aware of any
current or past material failure on our part to comply with our franchise
agreements. We believe that we have generally complied with the terms of our
franchises and have provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a cable
television operator seeks to enforce its renewal rights which could make it
easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it fails to respond to a written notice from the cable
television operator of its failure or inability to cure. Courts may not reverse
a denial of renewal based on procedural violations found to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable
television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers providing video programming directly to customers within their local
exchange telephone service areas. Consequently, the 1996 Telecom Act permits
telephone companies to compete directly with operations of cable television
systems. Under the 1996 Telecom Act and FCC rules adopted to implement the 1996
Telecom Act, local exchange carriers may provide video service as broadcasters,
common carriers, or cable operators. In addition, local exchange carriers and
others may also provide video service through "open video systems," a regulatory
regime that may give them more flexibility than traditional cable television
systems. Open video system operators, including local exchange carriers, can,
however, be required to obtain a local cable franchise, and they can be
16
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 any ownership interest in a cable television system exceeding 10%
located within the local exchange carriers 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 makes several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repeals the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act have been eliminated, although the
FCC's regulations prohibiting broadcast/cable common-ownership currently remain
in effect. The FCC's rules also generally prohibit cable operators from offering
satellite master antenna service separate from their franchised systems in the
same franchise area, unless the cable operator is subject to "effective
competition" there.
The 1996 Telecom Act amends 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
cable television systems which a single cable television operator can own. In
general, no cable television operator can have an attributable interest in cable
television systems which serve more than 30% of all multi-channel video
programming distributors nationwide. Attributable interests for these purposes
include voting interests of 5% or more, non-voting interests of 33% or more of
the total assets (debt plus equity), officerships, directorships and general
partnership interests The FCC has stayed the effectiveness of its horizontal
ownership rules pending the outcome of the appeal from the U.S. District Court
decision holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable television system which can be occupied by national video programming
services in which the entity which owns the cable television system has an
attributable interest. The limit is 40% of the first 75 activated channels.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
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Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators over competitors
and requires such programmers to sell their programming to other multichannel
video distributors. This provision limits the ability of vertically integrated
cable programmers to offer exclusive programming arrangements to cable
companies.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable television operators can collect and disclose data about individual system
customers. The statute also requires that the system operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable television
operator was found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements were strengthened to require
that cable television operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after receipt
of all information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable television system
signal leakage. Periodic testing by cable television operators for compliance
with the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to periodically update its technical standards to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable television system's
use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable television systems and
consumer electronics equipment. These regulations, among other things, generally
prohibit cable television operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable television systems, and 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
18
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, are required to
separate security from non-security functions in the customer premises equipment
which they sell or lease to their customers and offer their customers the option
of using component security modules obtained from the multichannel video
programming distributors with set-top units purchased or leased from retail
outlets. As of January 1, 2005, multichannel video programming distributors will
be prohibited from distributing new set-top equipment integrating both security
and non-security functions to their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
emergency alert system. The rules require all cable television systems to
provide an audio and video emergency alert system message on at least one
programmed channel and a video interruption and an audio alert message on all
programmed channels. The audio alert message is required to state which channel
is carrying the full audio and video emergency alert system message. The FCC
rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install emergency alert system
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 recently
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 new order may limit the extent to which multiple dwelling unit
owners may enforce certain aspects of multiple dwelling unit agreements which
otherwise would prohibit, for example, placement of direct broadcast satellite
television systems television receiving antennae in multiple dwelling unit
areas, such as apartment balconies or patios, under the exclusive occupancy of a
renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they adequately regulate the rates,
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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 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
will not begin until 2001, and will be phased in by equal increments over the
five ensuing years. The FCC recently ruled that the provision of Internet
services will not, in and of itself, trigger use of the new formula. The FCC has
also initiated a proceeding to determine whether it should adjust certain
elements of the current rate formula. If adopted, these adjustments could
increase rates for pole attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; 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.
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable television operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to
over-the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable television operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks, such as HBO, and basic cable networks, such as
USA Network, is licensed by the networks through private agreements with the
American Society of Composers and Publishers, generally known as ASCAP, and BMI,
Inc., the two major performing rights organizations in the United States. Both
the American Society of Composers and Publishers and BMI offer "through to the
viewer" licenses to the cable networks which cover
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the retransmission of the cable networks' programming by cable television
systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises, and
allows franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities are immunized from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable television operator's
provision of telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. To date, none of the states in
which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal, state
and local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at high
speeds via high capacity broadband transmission facilities and cable modems. We
compete with many other providers of Internet access services which are known as
Internet service providers. Internet service providers include such companies as
America Online and Mindspring Enterprises as well as major telecommunications
providers, including AT&T and local exchange telephone companies. Recently,
several Internet service providers asked the FCC as well
21
as local authorities to require cable companies offering Internet access
services over their broadband facilities to allow access to those facilities on
an unbundled basis to other Internet service providers. In a recent report on
the deployment of advanced telecommunications capability under Section 706 of
the 1996 Telecom Act, the FCC declined to convene a proceeding to consider
whether to impose such an access requirement on cable companies. However, the
FCC indicated that it would continue to monitor the issue of broadband
deployment. Also, the FCC denied requests by certain Internet service providers
that it condition its approval of the merger of AT&T and TCI, now known as AT&T
Broadband, LLC, on a requirement that those companies allow access by Internet
service providers to their broadband facilities. Several local jurisdictions
also are reviewing this issue. Recently, a U.S. District Court in Oregon upheld
a requirement, imposed by a local franchising authority in the context of a
franchise transfer, that the cable operator, if it chooses to provide Internet
service, must provide open access to its system for other Internet service
providers. That decision has been appealed. In the wake of this opinion, several
other communities have begun to consider whether to impose a similar
requirement.
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 by the United States Supreme Court in 1997.
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 service, public safety and welfare, service quality and consumer
protection. State and local governments also retain their authority to manage
the public rights-of-way and may require reasonable, competitively neutral
compensation for management of the public rights-of-way when cable operators
provide telecommunications service.
We may in the future allow our cable infrastructure to be used for the
provision of local telecommunications services to residential and business
consumers. 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, we 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. Our ability to
successfully offer local telecommunications service will be dependent, in part,
on the opening of local telephone networks by incumbent local telephone
companies as required of them by the 1996 Telecom Act. In January 1999, the
United States Supreme Court reversed and vacated in part an earlier decision of
a federal court of appeals striking down portions of the FCC's 1996 rules
governing local telecommunications competition. The Supreme Court held that the
FCC has authority under the Communications Act to establish rules to govern the
pricing of facilities and services provided by incumbent local exchange carriers
to open their local networks to competition. Also, as a result of that Supreme
Court
22
decision, the FCC must determine what network elements of incumbent local
exchange carriers must be made available to other providers and under what
circumstances those elements must be made available. How the FCC resolves those
questions will impact our ability to provide local telecommunications service in
competition with incumbent local exchange telephone companies.
Item 2. Properties
The System's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headend and distribution systems and customer house drop equipment for
its cable television systems. The signal receiving apparatus includes a tower,
antenna, ancillary electronic equipment and earth stations for reception of
satellite signals. The headend, consisting of associated electronic equipment
necessary for the reception, amplification and modulation of signals, is located
near the receiving devices. Most basic customers of the System utilize
converters that can be addressed by sending coded signals from the headend
facility over the cable network. The System's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
The System owns parcels of real property for signal reception sites (one
antenna tower and one headend). The System also leases one small office and one
hub location. Management believes that its properties, both owned and leased,
are in suitable condition adequate for the System's operations.
The System's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The physical
components of the System require periodic upgrading to improve system
performance and capacity.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which any of the
Registrants is a party or to which any of their properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the holders of the Senior
Discount Notes during the three months ended December 31, 1999.
23
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no public trading market for the equity of Coaxial LLC, Coaxial
Financing Corp. and Insight Ohio. There are one, one and two holders of the
equity of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio, respectively.
24
Item 6. Selected Financial Data
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998. As
such, these entities were not in existence for the historical periods presented
in the following tables. The historical information of Coaxial Communications of
Central Ohio, Inc. for the years ended December 31, 1997, 1996 and 1995 is shown
as it represents the predecessor entity which has been consolidated by Coaxial
LLC as of and for the years ended December 31, 1999 and 1998. The following
tables present selected historical financial data for Coaxial LLC as of and for
the five years ended December 31, 1999 and selected historical financial data
for Insight Ohio and Coaxial Financing Corp. as of and for the years ended
December 31, 1999 and 1998. The financial information of the Central Ohio Cable
System Operating Unit is presented as it represents the predecessor to Insight
Ohio. These tables should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this Report.
Coaxial LLC
(dollars in thousands, except subscriber data)
Year ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Statement of Operations Data:
Revenues .............................................. $ 46,747 $ 47,956 $ 48,229 $ 50,418 $ 46,831
Operating expenses:
Service and administrative ......................... 26,184 27,832 27,391 25,236 21,920
Severance and transaction structure costs........... -- 4,822 -- -- --
Management fee...................................... 1,435 493 -- -- --
Home office......................................... -- 1,370 1,498 1,697 1,695
Depreciation and amortization....................... 7,403 5,311 5,256 5,350 4,837
--------- --------- --------- --------- ---------
Total operating expenses ..................... 35,022 39,828 34,145 32,283 28,452
Operating income ...................................... $ 11,725 $ 8,128 $ 14,084 $ 18,135 $ 18,379
Interest expense, net .............................. 6,412 2,678 1,230 426 1,033
Other expense (income) ............................. (92) 421 271 248 251
--------- --------- --------- --------- ---------
Net income before
Extraordinary item ................................. $ 5,405 $ 5,029 $ 12,583 $ 17,461 $ 17,095
Extraordinary item - loss on debt retirement........ -- (847) -- -- --
--------- --------- --------- --------- ---------
Net income ............................................ $ 5,405 $ 4,182 $ 12,583 $ 17,461 $ 17,095
========= ========= ========= ========= =========
Financial Ratios and Other Data:
System Cash Flow (1) .................................. $ 20,563 $ 20,124 $ 20,838 $ 25,182 $ 24,911
System Cash Flow margin ............................... 43.9% 42.0% 43.2% 49.9% 53.2%
Operating Cash Flow (2) ............................... 19,128 18,261 19,340 23,485 23,216
Capital expenditures .................................. 26,656 7,369 5,570 5,998 5,724
Net cash provided by operating activities ............. 19,043 13,052 18,622 24,369 21,895
Net cash used in investing activities ................. 26,754 3,470 15,242 19,551 19,914
Net cash used in financing activities ................. 116 1,446 3,712 4,582 1,623
Operating Data: (at end of period, except
average and annualized data)
Homes passed (3) ...................................... 178,310 171,753 166,306 161,018 156,613
Basic subscribers (4) ................................. 84,236 87,637 91,873 88,056 86,041
Basic penetration (5) ................................. 47.2% 51.0% 55.2% 54.7% 54.9%
Premium service units (6) ............................. 98,202 90,032 80,013 68,720 74,087
Premium penetration (7) ............................... 116.6% 102.7% 87.1% 78.0% 86.1%
Average monthly revenue per basic subscriber (8)....... $ 45.33 $ 44.52 $ 44.67 $ 48.27 $ 46.40
System Cash Flow per basic subscriber (9) ............. $ 239.28 $ 224.21 $ 231.62 $ 289.28 $ 296.20
Balance Sheet Data: (at the end of the period)
Total assets .......................................... $ 70,861 $ 56,532 $ 109,655 $ 102,099 $ 87,946
Total debt ............................................ 81,108 67,204 47,236 50,442 40,375
Total liabilities ..................................... 96,949 77,233 55,328 59,767 50,927
Total member's equity (deficit) ....................... (26,088) (20,701) 54,327 42,332 37,019
25
Coaxial Financing Corp.
(dollars in thousands)
December 31, 1999 December 31, 1998
----------------- -----------------
Balance Sheet Data:
Total assets $ 1 $ 1
Total debt (to be paid by Coaxial LLC) -- --
Total liabilities -- --
Total shareholders' equity 1 1
26
Insight Communications of Central Ohio, LLC
(dollars in thousands, except subscriber data)
Insight Communications of
Central Ohio, LLC Central Ohio Cable System Operating Unit
----------------- ----------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues $ 46,747 $ 47,956 $ 48,229 $ 50,418 $ 46,831
Operating expenses:
Service and administrative 26,184 27,831 27,391 25,236 21,920
Severance and transaction structure costs -- 4,822 -- -- --
Management fee 1,435 493 -- -- --
Home office -- 1,371 1,498 1,697 1,695
Depreciation and amortization 7,148 5,311 5,238 5,334 4,823
-------- -------- -------- -------- --------
Total operating expenses 34,767 39,828 34,127 32,267 28,438
-------- -------- -------- -------- --------
Operating income 11,980 8,128 14,102 18,151 18,393
Interest expense (income), net 297 (59) (70) (29) (38)
Other expense (92) 422 271 248 251
-------- -------- -------- -------- --------
Net income $ 11,775 $ 7,765 $ 13,901 $ 17,932 $ 18,180
======== ======== ======== ======== ========
Financial Ratios and Other Data:
System Cash Flow (1) $ 20,563 $ 20,125 $ 20,838 $ 25,182 $ 24,911
System Cash Flow margin 43.9% 42.0% 43.2% 49.9% 53.2%
Operating Cash Flow (2) 19,128 18,261 19,340 23,485 23,216
Capital expenditures 26,656 7,369 5,529 5,992 5,702
Net cash provided by operating activities 22,425 14,399 19,454 21,975 22,192
Net cash used in investing activities 26,754 6,679 5,554 5,711 5,955
Net cash used in financing activities 1,498 1,585 14,232 16,028 15,879
Operating Data: (at end of period, except
average and annualized data)
Homes passed (3) 178,310 171,753 166,306 161,018 156,613
Basic subscribers (4) 84,236 87,637 91,873 88,056 86,041
Basic penetration (5) 47.2% 51.0% 55.2% 54.7% 54.9%
Premium service units (6) 98,202 90,032 80,013 68,720 74,087
Premium penetration (7) 116.6% 102.7% 87.1% 78.0% 86.1%
Average monthly revenue per basic subscriber (8) $ 45.33 $ 44.52 $ 44.67 $ 48.27 $ 46.40
System Cash Flow per basic subscriber (9) $ 239.28 $ 224.22 $ 231.62 $ 289.28 $ 296.18
Balance Sheet Data: (at end of the period)
Total assets $ 56,964 $ 41,967 $ 33,553 $ 34,062 $ 33,226
Total debt 11,117 228 407 615 651
Total liabilities 30,899 15,248 7,982 8,425 9,728
Total preferred interests 175,556 171,438 -- -- --
Total liabilities and preferred interests 206,455 186,686 -- -- --
Total member's deficit (149,491) (144,719) -- -- --
Net assets to be contributed -- -- 25,571 25,637 23,499
27
Notes To Selected Financial and Operating Data
(1) Represents Operating Cash Flow (as defined below in Note 2) plus home office
expense for periods prior to the acquisition of the System, and Operating Cash
Flow plus management fees for periods after or which give effect to the
acquisition of the System. Management believes that System Cash Flow is a
meaningful measure of performance because it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, System Cash
Flow is not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net income
as an indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles. System Cash Flow, as computed by management, is not necessarily
comparable to similarly titled amounts of other companies. See the financial
statements, including the Statements of Cash Flows, included elsewhere in this
Report.
(2) Represents earnings before depreciation, amortization, severance and
transaction structure costs, interest expense, other expenses, and extraordinary
item. Management believes that Operating Cash Flow is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, Operating Cash Flow is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
Operating Cash Flow, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including the Statements of Cash Flows included elsewhere in this Report.
(3) Refers to estimates by management of the approximate number of dwelling
units in a particular community that can be connected to the System.
(4) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an equivalent
basic unit basis in which the total monthly bill for the account is divided by
the basic monthly charge for a single outlet in the area.
(5) Calculated as basic subscribers as a percentage of homes passed.
(6) Includes only single channel services offered for a monthly fee per channel
and does not include tiers of channels offered as a package for a single monthly
fee. A subscriber may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(7) Calculated as premium service units as a percentage of basic subscribers.
(8) Represents revenues of the System during the respective period divided by
the months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for such respective
period.
(9) Represents Annualized System Cash Flow during the respective period divided
by the average number of basic subscribers (beginning of period plus end of
period divided by two) for such respective period.
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Private Offering of Senior Discount Notes and Senior Notes and Acquisition of
System by Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a
private offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their 12 7/8% Senior Discount Notes due in 2008
(the "Senior Discount Notes"), in connection with the Financing Plan discussed
under "Liquidity and Capital Resources," which included the contribution of
Coaxial's cable television system (the "System") to Insight Ohio. On February
16, 1999, Coaxial LLC and Coaxial Financing Corp. consummated an exchange of
registered Senior Discount Notes for their privately issued Senior Discount
Notes. Coaxial LLC and Coaxial Financing Corp. have only nominal assets except
for Coaxial LLC's ownership of 67.5% of the common stock of Coaxial and notes of
Coaxial DJM LLC and Coaxial DSM LLC (the other two owners of Coaxial), which
notes are secured by the remaining 32.5% of the common stock of Coaxial. The
Senior Discount Notes are guaranteed on a conditional basis by Insight Ohio.
As part of the Financing Plan, Coaxial and Phoenix Associates, an
affiliated general partnership, completed a private offering (the "Senior Notes
Offering") of $140,000,000 aggregate principal amount of their 10% Senior Notes
due in 2006 (the "Senior Notes"). On February 16, 1999, Coaxial and Phoenix
Associates consummated an exchange of registered Senior Notes for their
privately issued Senior Notes. The Senior Notes are also guaranteed on a
conditional basis by Insight Ohio. The conditional guarantee of the Senior
Discount Notes is subordinated to the conditional guarantee of the Senior Notes.
As a result of the Financing Plan, Coaxial has only nominal assets except for
its ownership of 25% of the non-voting common membership interests in Insight
Ohio and 100% of the voting Series A Preferred Interest and the Series B
Preferred Interest of Insight Ohio (together the "Preferred Interests"). IHO, a
wholly-owned subsidiary of Insight Communications Company L.P. ("Insight") holds
the remaining 75% non-voting common membership interests in Insight Ohio.
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series B Preferred Interest
will be used to pay dividends to the Individual LLCs, which dividends will be
used to pay interest and principal on the Senior Discount Notes and the
distributions from the Series A Preferred Interest will be used to pay interest
and principal on the Senior Notes. Distributions by Insight Ohio will be subject
to certain financial covenants and other conditions set forth in its Senior
Credit Facility.
Coaxial LLC and Coaxial Financing Corp. do not conduct any business and are
dependent upon the cash flow of Insight Ohio to meet their obligations under the
Senior Discount Notes. Coaxial and Phoenix do not conduct any business and are
dependent upon the cash flow of Insight Ohio to meet their obligations under the
Senior Notes. IHO serves as the manager of the System.
The following discussion relates to the historical operations of Coaxial
LLC for the years ended December 31, 1999 and 1998 compared to the historical
operations of Coaxial for the year ended December 31, 1997. On August 21, 1998,
all of the assets and liabilities comprising the System (predecessor company to
Insight Ohio) were contributed to Insight Ohio. Subsequent to the consummation
of the Financing Plan, (i) Insight Ohio is deemed to be a subsidiary of Coaxial
and, as such, the financial statements of Insight Ohio
29
are consolidated into the financial statements of Coaxial and (ii) Coaxial was
deemed to be a subsidiary of Coaxial LLC and, as such, the financial statements
of Coaxial are consolidated into the financial statements of Coaxial LLC.
Financial results related to historical information reflect the operation and
management of the System by Coaxial through August 21, 1998 and by IHO for the
period from August 21, 1998 to December 31, 1998 and for the year ended December
31, 1999. The historical operating results of Coaxial LLC presented below
reflect the actual results of the System in addition to certain financing
activities unrelated to the operation of the System. These financing activities
relate primarily to the offering of the Senior Discount Notes and Senior Notes
discussed above as well as certain borrowings and repayments of debt with
affiliated companies. These activities resulted in related financing and
interest costs. The historical results of Coaxial LLC presented below appear
elsewhere in this report under the heading "Coaxial LLC."
Overview
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, other revenues are derived from installation and reconnection fees
charged to basic customers to commence or discontinue service, pay-per-view
charges, late payment fees, advertising revenues and commissions related to the
sale of goods by home shopping services.
System operating expenses consist of service and administrative expenses,
home office expenses and depreciation and amortization. Service and
administrative expenses include direct costs, such as fees paid to programming
suppliers, expenses related to copyright fees, bad debt expense and use fees.
Programming fees have historically increased at rates in excess of inflation due
to increases in the number of programming services offered by the System and
improvements in the quality of programming. Service and administrative expenses
also include costs attributable to the operation of the System, including wages
and salaries and other expenses related to plant operating activities, customer
service operations, marketing, billing, advertising sales and video production.
Prior to August 21, 1998, service and administrative expenses also included
costs attributable to finance and accounting, human resources and other
administrative functions. Upon consummation of the Financing Plan, such expenses
were replaced by the management fee arrangement with IHO.
The System relies on IHO for all of its strategic, managerial, financial
and operational oversight and advice. Insight also centrally purchases
programming and equipment and provides the associated discount to the System. In
exchange for all such services provided to the System and subject to certain
restrictions contained in the covenants with respect to Insight Ohio's Senior
Credit Facility, the Senior Discount Notes and the Senior Notes, IHO is entitled
to receive management fees of 3.0% of gross operating revenues of the System.
Such management fee is payable only after distributions have been made in
respect of the Preferred Interests and only to the extent that such payment
would be permitted by an exception to the restricted payments covenants of the
Senior Discount Notes and the Senior Notes as well as Insight Ohio's Senior
Credit Facility. Such management fee is included in service and administrative
expenses.
30
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 were $46.7 million, compared
to $48.0 million for the year ended December 31, 1998. For the year ended
December 31, 1999, customers served averaged 85,937, as compared with 89,755 in
1998. Effective August 21, 1998, the date of the contribution of assets to
Insight Ohio, Insight Ohio no longer included franchise fees in revenue due to a
change in financial reporting which caused 1998 revenue to be higher by
approximately $770,000. On a pro forma basis, excluding franchise fees, revenue
for the year ended December 31, 1999 was 0.9% lower than the previous year
despite a 4.3% decrease in customers served on average as Insight Ohio ended
previous management's program of deeply discounting its rates.
On a pro forma basis excluding franchise fees, average revenue per customer
for the year ended December 31, 1999 totaled $45.33 versus $43.81 for the year
ended December 31, 1998. Average revenue per customer for Insight Ohio's basic
and classic service increased from $25.88 for the year ended December 31, 1998
to $26.54 for the year ended December 31, 1999 on a pro forma basis excluding
franchise fees. This increase is primarily attributable to the discontinuance of
prior management's discounting structure.
Effective November 1, 1999, the System began activating nodes in rebuilt
areas, increasing the rate for classic service by $1.75 from $14.93 to $16.68.
As of December 31, 1999, there were approximately 10,800 customers receiving
this enhanced service which offers six more channels on the classic service
tier. In addition, customers in rebuilt areas have the opportunity to receive
new products including Insight's digital gateway service, video on demand and
high speed data access. As of December 31, 1999, Insight has realized revenues
of approximately $24.00 per digital home and approximately $34.00 per high speed
data customer in other markets where these products have been launched during
the past year.
Service and administrative expenses, excluding management fees and home
office expenses decreased to $26.2 million for the year ended December 31, 1999,
compared to $27.8 million in 1998, a decrease of $1.6 million or 5.8%.
Programming expenses decreased by 6.5%, from $12.1 million in 1998 to $11.3
million in 1999, primarily reflecting savings realized through Insight's
purchasing discounts and fewer customers served. In particular, programming fees
were approximately 2.2% less on a per customer basis due to discounts available
to Insight Ohio. Personnel expenses decreased by approximately 14.8% or $1.0
million due to the elimination of duplicative administrative personnel. In
addition, franchise fees of approximately $770,000 were included in service and
administrative expenses for the year ended December 31, 1998. Effective August
21, 1998, Insight Ohio no longer included franchise fees in expense due to a
change in financial reporting.
Severance and transaction structure costs of $4.8 million were incurred for
the year ended December 31, 1998 as a result of the Financing Plan and the
related contribution of the System to Insight Ohio. These costs consisted of
severance costs of $960,000 and professional fees of $3.8 million.
Until August 21, 1998, the System was charged home office expenses that
include costs incurred by the owners of Coaxial and their direct employees
relating to the System including salaries, benefits, legal fees, travel and
entertainment, accounting fees and other office expenses. Through August 21,
1998, such expenses totaled $1.4 million. Upon consummation of the Financing
Plan, IHO commenced management services to the System for which it received a
management fee totaling $493,000 for the period from August 21 through December
31, 1998 and $1.4 million for the year ended December 31, 1999.
31
Depreciation and amortization increased by approximately $2.1 million or
39.4% from $5.3 million for the year ended December 31, 1998 to $7.4 million for
the year ended December 31, 1999 reflecting capital expenditures associated with
the System's rebuild.
Net interest expense increased by approximately $3.7 million to $6.4
million for the year ended December 31, 1999 primarily resulting from higher
interest expense associated with the accretion of the discount on the Senior
Discount Notes as well as a net decrease in interest income from related parties
during 1999 as compared to 1998.
In 1998, an extraordinary loss of approximately $847,000 was recognized due
to the refinancing of Coaxial's bank debt that existed prior to August 21, 1998.
Net income increased to $5.4 million for the year ended December 31, 1999
from net income of $4.2 million for the year ended December 31, 1998 for the
reasons set forth above.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were $48.0 million, compared
to $48.2 million for the year ended December 31, 1997. For the year ended
December 31, 1998, subscribers served averaged 89,755, as compared with 89,965
in 1997. Revenues were depressed by the former owner's program of deeply
discounting its service by more than 55% of the System's rate card. The program
was initiated in late July 1997 and continued through June 1998. Therefore, the
full impact of the approximately 16,000 subscribers billed at promotional rates
is not fully evident until fiscal 1999. The revenue decrease was partially
offset by a 22.9% increase in advertising revenue, which includes production
revenue.
Service and administrative expenses, including home office and management
fees, increased to $29.7 million for the year ended December 31, 1998, compared
to $28.9 million in 1997, an increase of $800,000, or 2.8%. Programming expenses
increased by 15.4%, from $10.4 million in 1997 to $12.0 million in 1998,
reflecting additional channels provided in the competitive areas, an increase in
customers and annual increases in programming rates offset by savings realized
through Insight's purchasing discounts. The System was charged home office
expenses that include costs incurred by the owners of Coaxial and their direct
employees relating to the System including salaries, benefits, legal fees,
travel and entertainment, accounting fees and other office expenses. For the
year ended December 31, 1998, such expenses totaled $1.4 million, an increase of
$100,000, or 7.7%, from 1997. Upon consummation of the Financing Plan, IHO
commenced management services to the System for which it receives a management
fee. Service and administrative expenses, which accounted for 66.1% of total
revenue for the period ended August 21, accounted for only 54.5% of total
revenue from August 21 through the end of year reflecting Coaxial's new cost
structure. In particular, programming fees were approximately 6.0% less on a per
customer basis due to discounts available to Coaxial. In addition, on an
annualized basis, personnel expenses were less by approximately 16.7% due to the
elimination of duplicative administrative personnel.
Severance and transaction structure costs of $4.8 million were incurred for
the year ended December 31, 1998 as a result of the Financing Plan and the
related contribution of the System to Insight Ohio. These costs consisted of
severance costs of $960,000 and professional fees of $3.8 million.
Depreciation and amortization remained flat at $5.3 million for the years
1998 and 1997.
32
Net interest expense increased approximately $1.4 million to $2.7 million
for the year ended December 31, 1998 due primarily to interest on the Senior
Discount Notes from August 21, 1998 through December 31, 1998.
In 1998, an extraordinary loss of $847,000 was recognized due to the
refinancing of Coaxial's bank debt that existed prior to August 21, 1998.
Net income decreased to $4.2 million for the year ended December 31, 1998
from net income of $12.6 million for the year ended December 31, 1997 for the
reasons set forth above.
Liquidity and Capital Resources
The cable television business is a capital intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. Capital expenditures relating to Coaxial LLC totaled
$26.7 million for the year ended December 31, 1999 and $7.4 million for the year
ended December 31, 1998. These expenditures were primarily for serving new
homes, the rebuild of cable plant, equipment purchases, the upgrade and
replacement of service vehicles and routine replacement of cable plant and
related equipment. Prior to August 21, 1998, the capital expenditures were
financed through borrowings under a senior credit facility among Coaxial,
Phoenix, certain of their affiliates, The Chase Manhattan Bank, as agent, and
certain lenders (the "Chase Credit Facility") and cash flows from operations.
Subsequent to August 21, 1998, the capital expenditures were financed by cash
received from certain proceeds of the Senior Notes and Senior Discount Notes
offerings, amounts contributed by IHO upon consummation of the contribution and
borrowings under Insight Ohio's Senior Credit Facility and cash flows from
operations.
IHO continues to further enhance the technical platform of the System by
upgrading the plant serving the majority of customers. The capability for
high-speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Capital expenditures are expected to approximate $34.6 million during the
year 2000 to support not only ongoing plant extensions, new customer additions
and capital replacement, but also to fund the plant upgrade to 870 MHz and to
activate plant for 2-way transmission, which is necessary to facilitate the
deployment of interactive services. It costs approximately $1,500/mile to
activate 2-way or reverse plant.
IHO expects to complete the upgrade of the plant with 2-way activation by
the end of 2000. IHO had originally planned to rebuild the plant to 750 MHz, but
upon further review, decided to expand the plant capacity to 870 MHz. In
addition, IHO decided to enlarge the upgrade by approximately 400 miles. The
combination of these changes will result in incremental capital costs of
approximately $8.0 million.
The Senior Discount Notes Offering was part of the Financing Plan
implemented to facilitate the organization of Insight Ohio, the acquisition of
the System by Insight Ohio and to provide for the System's liquidity and
operational and financial flexibility. Pursuant to the Financing Plan:
o Coaxial contributed to Insight Ohio substantially all of the assets
comprising the System for which Coaxial received a 25% non-voting common
membership interest in Insight Ohio as well as the voting Preferred
Interests in Insight Ohio, which provide for distributions to Coaxial that
will be used to pay interest and
33
principal on the Senior Notes and to pay dividends to the Individual LLCs
that will be used to pay interest and principal on the Senior Discount
Notes;
o IHO contributed $10.0 million in cash to Insight Ohio for which it received
a 75% non-voting common membership interest in Insight Ohio;
o Coaxial LLC and Coaxial Financing Corp. effected the Senior Discount Notes
Offering;
o Coaxial and Phoenix effected the Senior Notes Offering; and
o a portion of the existing bank indebtedness of Coaxial and Phoenix and
certain of their affiliates was repaid and the balance was purchased by
CIBC Oppenheimer Corp. ("CIBC") and restructured in accordance with an
agreement among the parties.
The gross proceeds received by Coaxial LLC and Coaxial Financing Corp. from
the Senior Discount Notes Offering were approximately $30.0 million. Proceeds
from such private offering were used for the repayment of outstanding
indebtedness (approximately $28.9 million). CIBC purchased certain outstanding
indebtedness (approximately $136.4 million) of Coaxial and Phoenix and
restructured that debt in accordance with the Financing Plan. CIBC funded such
purchase with proceeds from the Senior Notes Offering. The remaining proceeds
from the Senior Discount Notes Offering and the Senior Notes Offering and the
$10.0 million cash contribution from IHO were used for working capital
(approximately $2.9 million), deferred compensation and severance payments
(approximately $3.0 million) and fees and expenses (approximately $8.8 million).
Insight Ohio entered into a senior credit facility (the "Senior Credit
Facility") on October 7, 1998 with Canadian Imperial Bank of Commerce (which is
an affiliate of CIBC), as agent ("Canadian Imperial Bank"), for the purpose of
financing its future capital expenditures and for working capital and general
purposes, including the planned upgrade of the System's technical capability, as
discussed above. The Senior Credit Facility is a six-year $25 million reducing
revolving credit facility. As of December 31, 1999, $11.0 million was borrowed
under the Senior Credit Facility and $14.0 million remained available for
borrowing.
Coaxial LLC and Coaxial Financing Corp. expect to make interest payments on
the Senior Discount Notes from funds distributed to Coaxial in respect of the
Series B Preferred Interest in Insight Ohio to the extent permitted under the
terms of its Senior Credit Facility. Insight Ohio accrues preferred dividends in
respect of the Series B Preferred Interest. Coaxial and Phoenix expect to make
interest payments on the Senior Notes from funds distributed to Coaxial in
respect of the Series A Preferred Interest in Insight Ohio to the extent
permitted under the terms of its Senior Credit Facility. Insight Ohio accrues
preferred dividends in respect of the Series A Preferred Interest.
Insight Ohio's obligations under the Senior Credit Facility are secured by
substantially all the tangible and intangible assets of Insight Ohio. Loans
under the Senior Credit Facility bear interest, at Insight Ohio's option, at
Canadian Imperial Bank's prime rate or at a Eurodollar rate. In addition to the
index rates, Insight Ohio pays an additional margin percentage tied to its ratio
of total debt to adjusted annualized operating cash flow, in the case of prime
rate loans, 0.75% or, if under a 5:1 ratio, 0.25%; and in the case of Eurodollar
loans, 2.0% or, if under a 5:1 ratio, 1.5%.
34
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Discount Notes and the Senior Notes in the event of a payment default under the
Senior Credit Facility, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including with respect to total leverage, interest
coverage and pro forma debt service coverage. At December 31, 1999, Insight Ohio
exceeded the annual capital expenditure limit stated in the Senior Credit
Facility. Insight Ohio's lender waived this limitation through December 31,
1999. Management does not expect that such covenants will materially impact the
ability of Insight Ohio to operate its business.
The Senior Notes and Senior Discount Notes Indentures (the "Indentures")
impose (i) restrictions, that, among other things, limit the amount of
additional indebtedness that may be incurred by Coaxial LLC and Coaxial
Financing Corp. and their subsidiaries (including Insight Ohio) and (ii)
limitations on, among other things, investments, loans and other payments,
certain transactions with affiliates and certain mergers and acquisitions.
The ability of Insight Ohio to comply with the covenants and restrictions
of the Indentures and the Senior Credit Facility can be affected by events
beyond its control, and there can be no assurance that Insight Ohio will achieve
operating results that would permit compliance with such provisions. The breach
of certain provisions of the Senior Credit Facility would, under certain
circumstances, result in defaults thereunder, permitting the lenders thereunder
to prevent distributions with respect to the Preferred Interests and to
accelerate the indebtedness thereunder. If Insight Ohio were unable to repay the
amounts due in respect of the Senior Credit Facility, the lenders thereunder
could foreclose upon the assets pledged to secure such repayment. Any of such
events would adversely affect the ability of Coaxial LLC and Coaxial Financing
Corp. to service the Senior Discount Notes or the ability of Insight Ohio to
comply with the redemption provisions of the Series B Preferred Interest.
Cash provided by operations for the year ended December 31, 1999 was $19.0
million compared to $13.1 million for the same period in 1998. This increase in
Coaxial's net cash flow from operations is the result of an increase in net
income primarily due to the $4.8 million paid for severance and transaction
structure costs in 1998 combined with positive changes in working capital
accounts.
Cash used in investing activities for the years ended December 31, 1999 and
1998 was $26.8 million and $3.5 million, respectively. For the years ended
December 31, 1999 and 1998, Coaxial had capital expenditures of $26.6 million
and $7.4 million, respectively, to upgrade the system, to build plant expansions
and purchase equipment needed to service customers.
Cash used in financing activities for the year ended December 31, 1999 was
approximately $100,000 as capital distributions of $11.0 million were offset by
borrowings under the Senior Credit Facility of the same amount. Cash used in
financing activities for the year ended December 31, 1998 was $1.4 million. Cash
used in financing activities for the year ended December 31, 1998 resulted
primarily from the issuance of the Senior Discount Notes, the Senior Notes and
the $10 million contribution by IHO which was subsequently offset by
approximately $7.6 million of capital distributions and funds loaned to Coaxial
DSM LLC and Coaxial DJM LLC.
Due to the increased rebuild costs, management has determined that amounts
available under the Senior Credit Facility and cash flows from operations may
not be sufficient to finance the operating and capital
35
requirements of the System, debt service requirements and distributions on the
Preferred Interests over the next year. As such, IHO has provided a commitment
letter to Insight Ohio to fund any operating shortfall through the year 2000.
Inflation and Changing Prices
Coaxial's costs and expenses are subject to inflation and price
fluctuations. Although changes in costs can be passed through to customers, such
changes may be constrained by competition. Management does not expect inflation
to have a material effect on Coaxial's future results of operations.
Year 2000
We have not experienced any problems with our computer systems or software
products failing or malfunctioning because they were unable to distinguish 21st
century dates, which are generally known as Year 2000 problems. We are also not
aware of any material Year 2000 problems with our suppliers or vendors. While we
have not had any problems to the date of this report, our one remaining
worst-case business interruption would be a failure by our billing systems
service provider which could result in a loss of customer records and disrupt
our ability to bill customers for a protracted period of time.
During 1999 we performed Year 2000 testing on our existing hardware and
software components and replaced all non-compliant components with new products
which were Year 2000 compliant. As of March 23, 2000, we have not incurred
material Year 2000 costs. Although no assurances can be given, we currently
expect that the total projected costs associated with our Year 2000 program will
be less than $35,000.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Coaxial LLC,
Coaxial Financing Corp. and Insight Ohio do not anticipate the adoption of this
statement to have a material impact on their respective financial statements.
36
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not engage in
trading market risk sensitive instruments and do not purchase hedging
instruments or "other than trading" instruments that are likely to expose any of
them to market risk, whether interest rate, foreign currency exchange, commodity
price or equity price risk. Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio have not entered into forward or future contracts, purchased options or
entered into swaps.
Item 8. Financial Statements and Supplementary Data
Reference is made to pages F-1 through F-52 comprising a portion of this
Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Subsequent to the Financing Plan in August 1998, Arthur Andersen LLP
resigned as independent auditor for Coaxial LLC, Coaxial Financing Corp. and
Insight Ohio.
Arthur Andersen LLP's reports on each of Coaxial LLC's, Coaxial Financing
Corp.'s and Insight Ohio's balance sheet as of July 31, 1998 (collectively, the
"Prior Fiscal Years"), did not contain an adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty, audit
scope or accounting principles.
There were no disagreements ("Disagreements") between Coaxial, Phoenix or
Insight Ohio and Arthur Andersen during either (i) the Prior Fiscal Years, or
(ii) the period from January 1, 1998, until the resignation of Arthur Andersen
(the "Interim Period") on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
Disagreement, if not resolved to the satisfaction of Arthur Andersen, would have
caused Arthur Andersen to make reference to the subject matter of the
Disagreement in connection with its reports for the Prior Fiscal Years.
There were no "Reportable Events," as such term is defined in Item
304(a)(1)(v) of Regulation S-K, during either (a) the Prior Fiscal Years, or (b)
the Interim Period.
Arthur Andersen's resignation was unanimously approved by the Board of
Directors or its equivalent of Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio.
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio each engaged Ernst &
Young LLP as its independent auditor for its fiscal year ended December 31,
1998. Coaxial LLC, Coaxial Financing Corp. and Insight Ohio did not consult
Ernst & Young with respect to either (a) the Prior Fiscal Years, (b) the Interim
Period with respect to either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on Coaxial LLC's, Coaxial Financing Corp.'s and
Insight Ohio's financial statements, or (c) any matter that was either the
subject of a Disagreement or a Reportable Event.
37
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the
executive officers of the Individual LLCs, Coaxial, Insight Ohio, IHO and
Insight. Insight is wholly-owned by Insight Communications Company, Inc.
("Insight Parent"). Insight is the parent of IHO which serves as manager of the
Individual LLCs and Insight Ohio and Insight Parent thereby effectively controls
the management and affairs of the Individual LLCs, Coaxial and Insight Ohio. The
executive officers of Insight Parent are compensated by Insight Parent. Insight
Ohio pays management fees to IHO. Sidney Knafel, Michael Willner and Kim Kelly
serve as the directors of Coaxial. The table also includes the members of the
Management Committee of Insight Ohio, which manage the business of Insight Ohio
and in doing so have delegated broad authority to IHO as manager of the System.
None of the executive officers of Coaxial, Coaxial LLC and Coaxial Financing
Corp. are compensated for their services as such. Coaxial Financing Corp. only
has nominal assets and will not conduct any business.
Name Age Position
---- --- --------
Sidney R. Knafel 69 Chairman of the Individual LLCs, Coaxial, Insight Ohio, IHO and
Insight; Member of the Management Committee of Insight Ohio
Michael S. Willner 48 President and Chief Executive Officer of the Individual LLCs, Coaxial,
Insight Ohio, IHO and Insight; Member of the Management Committee of
Insight Ohio
Kim D. Kelly 43 Executive Vice President and Chief Operating and Financial Officer of
the Individual LLCs, Coaxial, Insight Ohio, IHO and Insight; Member of
the Management Committee of Insight Ohio
Dennis J. McGillicuddy 58 Member of the Management Committee of Insight Ohio
Sidney R. Knafel has been our Chairman of the Board 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, CoreComm Limited, General American Investors Company, Inc., IGENE
Biotechnology, Inc. and Source Media, Inc., as well as several private
companies. Mr. Knafel is a graduate of Harvard College and Harvard Business
School.
Michael S. Willner, our Chief Executive Officer, co-founded and has served
as our President since 1985. Previously, Mr. Willner served as Executive Vice
President and Chief Operating Officer of Vision Cable from 1979 through 1985,
Vice President of Marketing for Vision Cable from 1977 to 1979 and General
Manager of Vision Cable's Bergen County, New Jersey cable television system from
1975 to 1977. Currently, Mr. Willner is a director of NTL Incorporated. He is
also a director of Source Media, Inc. He serves on the board of C-SPAN and the
National Cable Television Association where he is a member of the Executive
Committee and serves as Treasurer. Mr. Willner is a graduate of Boston
University's College of Communication and serves on the school's Executive
Committee.
38
Kim D. Kelly has been our Executive Vice President and Chief Financial
Officer since 1990. Ms. Kelly has also been our Chief Operating Officer since
January 1998. Prior thereto, she served from 1982 to 1990 with Marine Midland
Bank, becoming its Senior Vice President in 1988, with primary responsibility
for media lending activities. Ms. Kelly serves as a member of the National Cable
Television Association Subcommittee for Telecommunications Policy, as well as
the National Cable Television Association Subcommittee for Accounting. She also
serves as a director of Bank of New York Hamilton Funds and Source Media, Inc.
and serves on the boards of Cable in the Classroom, and Cable Advertising Bureau
Ms. Kelly is a graduate of George Washington University.
Dennis J. McGillicuddy co-founded Coaxial in 1968 and served as Chairman of
the Board of Directors of Coaxial until the consummation of the System
Acquisition. Mr. McGillicuddy also serves as Chairman of CCX, Inc., a
manufacturer of building products, and is a director of Benz Research and
Development Corp. Mr. McGillicuddy served as a member of the Board of CCX, Inc.
at the time a petition under Federal bankruptcy laws was filed by CCX in 1994.
All executive officers serve at the discretion of the Board of Directors.
Management and Management Committee
The Operating Agreement of Insight Ohio provides for the establishment of a
four-member Management Committee. The Management Committee is responsible for
the management of the business of Insight Ohio. IHO, through its effective
control of Coaxial, is entitled to designate three of the members of the
Management Committee. The remaining member is designated by the principals of
the Individual LLCs. The Management Committee has delegated broad authority to
IHO in its capacity as manager of Insight Ohio.
Item 11. Executive Compensation
Coaxial LLC and Coaxial Financing Corp. do not make any payments in respect
of compensation to any of their executive management personnel. Rather,
executive management personnel of Coaxial LLC and Coaxial Financing Corp.
receive compensation from Insight Parent. Accordingly, IHO utilizes its
management fees from Insight Ohio to pay for all of its operating expenses for
managing the day-to-day affairs of the System.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The outstanding shares of common stock of Coaxial are owned by the
Individual LLCs as described in the table below. All of the outstanding shares
of common stock of Coaxial Financing Corp. and all of the outstanding
partnership interests of Phoenix are wholly-owned directly or indirectly by the
individuals indicated in the footnotes to the table in the same ownership
percentages as the respective Individual LLCs' ownership in Coaxial. IHO is the
manager of each of the Individual LLCs and thereby effectively controls the
business of each of such Individual LLCs and Coaxial. Accordingly, IHO and
members of its executive management may be deemed to beneficially own (as
defined by Rule 13d-3 under the Exchange Act) all of the outstanding shares of
common stock of Coaxial.
39
Name and Address of Beneficial Owner Percentage Ownership
------------------------------------ --------------------
Coaxial LLC (1)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242................................... 67.5%
Coaxial DJM LLC (2)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242................................... 22.5%
Coaxial DSM LLC (3)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242................................... 10.0%
- -------------------
(1) Wholly-owned by Barry Silverstein.
(2) Wholly-owned by Dennis J. McGillicuddy.
(3) Wholly-owned by D. Stevens McVoy.
Item 13. Certain Relationships and Related Transactions
IHO Management Fees
In accordance with the Operating Agreement of Insight Ohio, IHO is entitled
to be paid management fees for managing the day-to-day operations of Insight
Ohio. Pursuant to the Operating Agreement, subject to certain covenants in the
Indentures, IHO is entitled to receive management fees of 3.0% of gross revenues
of Insight Ohio. Fees under this management agreement were approximately
$1,435,000 for the year ended December 31, 1999. IHO is also entitled to
reimbursement from Insight Ohio for all direct, out-of-pocket expenses incurred
by or on behalf of IHO that directly relate to its management of the business
and operations of Insight Ohio, including any such expenses incurred in
connection with the management of Coaxial LLC and Coaxial Financing Corp.
However, IHO is not entitled to reimbursement from Insight Ohio for corporate
overhead (including employee bonuses and health, welfare, retirement, and other
employee benefits and overhead expenses of its corporate office management,
development, internal accounting, and finance management personnel).
Coaxial and Phoenix
All of the outstanding shares of Coaxial's capital stock and all of the
outstanding partnership interests in Phoenix are held indirectly by the same
three individuals, Barry Silverstein, Dennis J. McGillicuddy and D. Stevens
McVoy. Coaxial and Phoenix were co-obligors (along with certain other
affiliates) with respect to the Chase Credit Facility. Coaxial and Phoenix
continue to be co-obligors with respect to the Senior Notes.
40
Coaxial
MetroComm AxS L.P. ("MetroComm")
MetroComm provides competitive telephone service in the Columbus market.
Until June 1999, MetroComm was 50% owned by Time Warner AxS of Columbus L.P. and
50% owned by MetroComm Inc. (which is owned by Barry Silverstein, Dennis
McGillicuddy and D. Stevens McVoy, who are the sole members of each of their
respective Individual LLCs, and Dan Coy, the chief executive officer of
MetroComm), at which time the owners of MetroComm, Inc. exchanged their
interests therein for interests in Time Warner Telecom, Inc. giving affiliates
of Time Warner Telecom, Inc. 100% ownership of MetroComm. MetroComm contracted
with Coaxial to build the necessary fiber plant needed by MetroComm to service
its customers that were in Coaxial's service area. Coaxial then leased the fiber
plant to MetroComm at a contracted price. MetroComm bought-out its lease with
Coaxial as of June 29, 1998 for approximately $347,000, which was the remaining
balance under the five year lease. The fiber plant continues to be used by
MetroComm under a new 30-year Indefeasible Right of Use Agreement whereby
Coaxial licenses to MetroComm exclusive use of all capacity on specified fiber
optic facilities in exchange for payment to Coaxial of certain maintenance and
other costs. The amount paid by MetroComm to Coaxial for such maintenance and
other costs during the 1999 was approximately $29,000. The agreement also
provides that that MetroComm will reimburse Coaxial for the costs of
constructing any additional fiber optic facilities for use by MetroComm. The
amount paid by MetroComm to Coaxial for such construction and related costs
during 1999 was approximately $425,210. The terms of the agreement are typical
of arrangements of competitive telephone service providers that are owned by
cable operators. Such terms may not be comparable to what they would be if the
agreement were between Coaxial and an unrelated third party.
Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC
Upon the closing of the Senior Discount Notes offering, Coaxial LLC (which
owns 67.5% of the common equity of Coaxial) loaned 22.5% of the gross proceeds
of the Senior Discount Notes offering (approximately $6.75 million) to Coaxial
DJM LLC (which owns 22.5% of the common equity of Coaxial) and 10% of such
proceeds (approximately $3.0 million) to Coaxial DSM LLC (which owns 10% of the
common equity of Coaxial) in order to allow for distributions to their
respective holders (Barry Silverstein, Dennis J. McGillicuddy and D. Stevens
McVoy, respectively) for purposes of repaying the amounts outstanding under the
Chase Credit Facility. Such loans are evidenced by the LLC Mirror Notes. Each of
the LLC Mirror Notes incorporates the terms of the Senior Discount Notes with
respect to payments and otherwise. Accordingly, Coaxial LLC will rely on the
provisions of the LLC Mirror Notes in requiring payments from Coaxial DJM LLC
and Coaxial DSM LLC in order to make corresponding payments on the Senior
Discount Notes. The LLC Mirror Note issued by Coaxial DJM LLC is in the amount
of $12,570,525 (i.e., 22.5% of the principal amount at maturity of the Senior
Discount Notes) and is secured by 22.5% of the outstanding common equity of
Coaxial. The LLC Mirror Note issued by Coaxial DSM LLC is in the amount of
$5,586,900 (i.e., 10% of the principal amount at maturity of the Senior Discount
Notes) and is secured by 10% of the outstanding common equity of Coaxial.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
Page
----
Coaxial LLC Report of Independent Auditors - Ernst & Young LLP..................................................F-1
Financial Statements:
Coaxial LLC Consolidated Balance Sheets as of December 31, 1999 and 1998...............................F-2
Coaxial LLC Consolidated Statements of Operations and Changes in Member's (Deficit) Equity for
the years ended December 31, 1999 and 1998.............................................................F-3
Coaxial LLC Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998.............................................................................F-4
Coaxial LLC Notes to Consolidated Financial Statements.................................................F-5
Coaxial Financing Corp. Report of Independent Auditors - Ernst & Young LLP.....................................F-13
Financial Statements:
Coaxial Financing Corp. Balance Sheets as of December 31, 1999 and 1998...............................F-14
Coaxial Financing Corp. Notes to Balance Sheets.......................................................F-15
Coaxial Communications of Central Ohio, Inc. Report of Independent Public Accountants -
Arthur Andersen LLP............................................................................................F-16
Coaxial Communications of Central Ohio, Inc. Report of Independent Auditors -
Ernst & Young LLP..............................................................................................F-17
Financial Statements:
Coaxial Communications of Central Ohio, Inc. Consolidated Balance Sheets as of December 31, 1999
and 1998..............................................................................................F-18
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Operations and Changes
in Stockholders' (Deficit) Equity for the years ended December 31, 1999, 1998, and 1997...............F-19
42
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998, and 1997.........................................................F-20
Coaxial Communications of Central Ohio, Inc. Notes to Consolidated Financial Statements...............F-21
Phoenix Associates Report of Independent Public Accountants - Arthur Andersen LLP..............................F-27
Phoenix Associates Report of Independent Auditors - Ernst & Young LLP..........................................F-28
Financial Statements:
Phoenix Associates Balance Sheets as of December 31, 1999 and 1998....................................F-29
Phoenix Associates Statements of Operations and Changes in Partners' Deficit for the years
ended December 31, 1999, 1998, and 1997...............................................................F-30
Phoenix Associates Statements of Cash Flows for the years ended December 31, 1999, 1998, and
1997..................................................................................................F-31
Phoenix Associates Notes to Financial Statements......................................................F-32
Insight Communications of Central Ohio, LLC Report of Independent Auditors -
Ernst & Young LLP..............................................................................................F-35
Financial Statements:
Insight Communications of Central Ohio, LLC Balance Sheets as of December 31, 1999 and 1998...........F-36
Insight Communications of Central Ohio, LLC Statements of Operations and Changes in Members'
Deficit for the years ended December 31, 1999 and 1998................................................F-37
Insight Communications of Central Ohio, LLC Statements of Cash Flows for the years ended
December 31, 1999 and 1998............................................................................F-38
Insight Communications of Central Ohio, LLC Notes to Financial Statements.............................F-39
Coaxial Communications of Central Ohio, Inc. Report of Independent Public Accountants -
Arthur Andersen LLP............................................................................................F-44
Financial Statements:
43
Central Ohio Cable System Operating Unit Statement of Net Assets to be Contributed at December
31, 1997..............................................................................................F-45
Central Ohio Cable System Operating Unit Statement of Operations related to Net Assets to be
Contributed for the year ended December 31, 1997......................................................F-46
Central Ohio Cable System Operating Unit Statement of Cash Flows for the year ended December
31, 1997..............................................................................................F-47
Central Ohio Cable System Operating Unit Notes to Financial Statements................................F-48
The following consolidated financial statement schedule of Coaxial LLC is
included in item 14(d):
Report of Independent Auditors - Ernst & Young LLP
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K:
None.
(c) Exhibits
2.1 Contribution Agreement by and between Insight Holdings of Ohio, LLC, as
assignee of Insight Communications Company, L.P., and Coaxial
Communications of Central Ohio, Inc. dated as of June 30, 1998 (the
"Contribution Agreement")*
2.2 Amendment to Contribution Agreement dated as of July 15, 1998*
2.3 Second Amendment to Contribution Agreement dated as of August 21, 1998*
3.1 Certificate of Incorporation of Coaxial Financing Corp., filed July 24,
1998*
3.2 By-Laws of Coaxial Financing Corp.*
3.3 Certificate of Formation of Insight Communications of Central Ohio, LLC
filed July 23, 1998*
3.4 Operating Agreement of Insight Communications of Central Ohio, LLC dated
August 21, 1998*
3.5 Certificate of Formation of Coaxial LLC filed July 24, 1998*
3.6 Operating Agreement of Coaxial LLC dated August 21, 1998*
3.7 Certificate of Formation of Coaxial DSM LLC filed July 24, 1998*
44
3.8 Operating Agreement of Coaxial DSM LLC dated August 21, 1998*
3.9 Certificate of Formation of Coaxial DJM LLC filed July 24, 1998*
3.10 Operating Agreement of Coaxial DJM LLC dated August 21, 1998*
4.1 Purchase Agreement among Coaxial LLC, Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC and CIBC Oppenheimer Corp. dated August
21, 1998*
4.2 Senior Discount Notes Registration Rights Agreement among Coaxial LLC,
Coaxial Financing Corp., Insight Communications of Central Ohio, LLC and
CIBC Oppenheimer Corp. dated August 21, 1998*
4.3 Indenture among Coaxial LLC, Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC and Bank of Montreal Trust Company
dated August 21, 1998*
4.4 Securities Pledge Agreement between Coaxial Communications of Central Ohio,
Inc. and Bank of Montreal Trust Company dated August 21, 1998*
4.5 Securities Pledge Agreement between Coaxial LLC and Bank of Montreal Trust
Company dated August 21, 1998*
4.6 Securities Pledge Agreement between Coaxial DSM LLC and Coaxial LLC dated
August 21, 1998*
4.7 Securities Pledge Agreement between Coaxial DJM LLC and Coaxial LLC dated
August 21, 1998*
4.8 Mirror Note of Coaxial DJM LLC payable to the order of Coaxial LLC dated
August 21, 1998*
4.9 Mirror Note of Coaxial DSM LLC payable to the order of Coaxial LLC dated
August 21, 1998*
10.1 Close Corporation Agreement of Coaxial Communications of Central Ohio, Inc.
dated August 21, 1998 among Coaxial LLC, Coaxial DSM LLC, Coaxial DJM LLC
and Coaxial Communications of Central Ohio, Inc.*
10.2 Management Agreement of Coaxial LLC dated August 21, 1998 among Insight
Holdings of Ohio, LLC, Coaxial LLC and Barry Silverstein*
10.3 Management Agreement of Coaxial DSM LLC dated August 21, 1998 among Insight
Holdings of Ohio, LLC, Coaxial DSM LLC and D. Stevens McVoy*
10.4 Management Agreement of Coaxial DJM LLC dated August 21, 1998 among Insight
Holdings of Ohio, LLC, Coaxial DJM LLC and Dennis J. McGillicuddy*
45
10.5 Management Agreement between Coaxial Communications of Central Ohio, Inc.
and Insight Communications of Central Ohio, LLC dated August 21, 1998*
10.6 Assignment Agreement dated as of August 21, 1998 among CIBC Oppenheimer
Corp., the lenders who were a party to the Chase Credit Facility, The Chase
Manhattan Bank, as agent for such lenders, Coaxial Communications of
Central Ohio, Inc., Phoenix Associates, Coaxial Associates of Columbus I,
Coaxial Associates of Columbus II and Coaxial Associates of Southern Ohio,
Inc.*
10.7 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*
16.1 Letter from Arthur Andersen LLP*
27.1 Financial Data Schedule for Coaxial LLC
27.2 Financial Data Schedule for Coaxial Financing Corp.
27.3 Financial Data Schedule for Insight Communications of Central Ohio, LLC
- -----------------
* Denotes document filed as an exhibit to Registrants' Registration Statement
on Form S-4 (File Nos. 333-64449-02, 333-64449-01 and 333-64449) and
incorporated herein by reference.
46
Report of Independent Auditors
The Member
Coaxial LLC
We have audited the accompanying consolidated balance sheets of Coaxial LLC as
of December 31, 1999 and 1998 and the related consolidated statements of
operations and member's equity (deficit) and cash flows for the years then
ended. 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 Coaxial LLC at
December 31, 1999 and 1998 and the consolidated results of their operations and
their cash flows for years then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 29, 2000
F-1
COAXIAL LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 882 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $383 and $306 in 1999 and 1998, respectively 790 1,186
Other accounts receivables less allowance for doubtful accounts
of $175 and $145 in 1999 and 1998, respectively 3,136 1,520
Prepaid expenses and other current assets 155 166
--------- ---------
Total current assets 4,963 11,581
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Land and Land improvements 260 260
CATV systems 96,734 71,032
Equipment 8,027 7,102
Furniture 362 333
Leasehold improvements 71 71
--------- ---------
105,454 78,798
Less accumulated depreciation and amortization (53,999) (46,898)
--------- ---------
Total property and equipment, net 51,455 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,404 7,385
Deferred financing costs and other 3,004 2,712
--------- ---------
10,408 10,097
Less accumulated amortization (7,738) (7,436)
--------- ---------
Total intangible assets, net 2,670 2,661
Note Receivable Coaxial DJM LLC 6,750 6,750
Note Receivable Coaxial DSM LLC 3,000 3,000
Due from related parties 2,023 640
--------- ---------
Total other assets 14,443 13,051
Total assets $ 70,861 $ 56,532
========= =========
LIABILITIES AND MEMBER'S DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 74 $ 123
Accounts payable 4,963 3,230
Accrued interest 1,519 1,250
Accrued liabilities 5,061 2,536
Accrued programming 1,890 1,868
--------- ---------
Total current liabilities 13,507 9,007
NOTES PAYABLE:
Senior Discount Notes 35,556 31,511
Senior Notes 34,435 34,435
Senior Credit Facility 11,000 --
--------- ---------
Total notes payable 80,991 65,946
Capital Lease Obligations 43 105
Other liabilities 2,408 1,146
Due to related parties -- 1,029
--------- ---------
Total liabilities 96,949 77,233
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT (26,088) (20,701)
--------- ---------
Total liabilities and member's deficit $ 70,861 $ 56,532
========= =========
See accompanying notes
F-2
COAXIAL LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND
CHANGES IN MEMBER'S (DEFICIT) EQUITY
(dollars in thousands)
For the years ended December 31,
1999 1998
--------- ---------
REVENUES $ 46,747 $ 47,956
OPERATING EXPENSES:
Service and administrative 27,619 29,695
Severance and transaction structure costs -- 4,822
Depreciation and amortization 7,403 5,311
--------- ---------
Total operating expenses 35,022 39,828
--------- ---------
OPERATING INCOME 11,725 8,128
OTHER INCOME (EXPENSE) 92 (421)
INTEREST INCOME (EXPENSE):
Interest income-related parties 1,374 3,338
Interest income 208 35
Interest expense-related parties -- (1,019)
Interest expense (7,994) (5,032)
--------- ---------
Total interest expense, net (6,412) (2,678)
--------- ---------
Net income before extraordinary loss 5,405 5,029
Extraordinary loss on extinguishment of debt -- 847
--------- ---------
NET INCOME 5,405 4,182
Member's (deficit) equity, beginning of year (20,701) 54,327
Member distributions (11,006) (101,773)
Member contributions 214 22,563
--------- ---------
Member's deficit, end of year $ (26,088) $ (20,701)
========= =========
See accompanying notes
F-3
COAXIAL LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the years ended December 31,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,405 $ 4,182
Adjustments to reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 7,403 5,532
Extraordinary loss on refinancing of debt -- 847
Accretion of original issue discount on Senior Discount Notes 4,046 1,511
Changes in certain assets and liabilities:
Subscriber receivables 396 (524)
Other accounts receivable, prepaid expenses and other
current assets (1,605) (423)
Accounts payable and accrued liabilities 5,542 1,927
Accrued interest 268 --
Due to related parties (2,412) --
-------- --------
Net cash provided by operating activities $ 19,043 $ 13,052
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and equipment -- 11
Increase in other intangibles (98) --
Capital expenditures for property and equipment (26,656) (7,370)
Due from related parties -- 3,888
-------- --------
Net cash used in investing activities $(26,754) $ (3,471)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note Receivable, Coaxial DSM LLC -- (3,000)
Note Receivable, Coaxial DJM LLC -- (6,750)
Proceeds from issuance of notes payable -- 64,435
Principal payments on notes payable -- (26,808)
Deferred financing costs (212) (2,712)
Payments on capital lease obligations (112) (179)
Capital contributions 214 12,000
Due to related parties -- (19,483)
Capital distributions (11,006) (18,949)
Borrowings under senior credit facility 11,000 --
-------- --------
Net cash used in financing activities $ (116) $ (1,446)
-------- --------
NET (DECREASE) INCREASE IN CASH (7,827) 8,135
CASH, beginning of year 8,709 574
-------- --------
CASH, end of year $ 882 $ 8,709
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 3,680 $ 3,924
See accompanying notes
F-4
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization and Purpose
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67 1/2% the common stock of Coaxial
Communications of Central Ohio, Inc. ("Coaxial"). The Company has an individual
as its sole member.
Coaxial, an Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio ("Insight Ohio"), operates a cable television
system (the "System") which provides basic and expanded cable television
services to homes in Columbus, Ohio and surrounding areas. Insight Ohio operates
in one business segment. In connection with the contribution of Coaxial's cable
system to Insight Ohio described below, the issuance of senior notes and senior
discount notes described in Note 6, during 1998, the three individuals who
previously owned the outstanding stock of Coaxial contributed their stock to
three separate limited liability companies including the Company. Accordingly,
effective August 21, 1998, the Company owns 67 1/2% of the outstanding stock of
Coaxial. The Company has accounted for the aforementioned contribution in a
manner similar to a pooling-of-interests, which is in accordance with
Interpretation No. 39 to APB Opinion No. 16 "Business Combinations".
Accordingly, the accompanying financial statements reflect the contribution of
Coaxial as if it had occured as of January 1, 1998.
Other related entities owned or controlled by the majority shareholder of the
Company include Phoenix Associates ("Phoenix"), Coaxial Financing Corp.
("Coaxial Financing"), Coaxial DJM LLC, Coaxial DSM LLC, Coaxial Communications
of Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of Columbus I
("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"), Paxton Cable
Television, Inc. ("Paxton Cable") and Paxton Communications, Inc. ("Paxton
Communications").
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of this
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns a
$140 million Series A preferred equity interest and a $30 million Series B
preferred equity interest of Insight Ohio (the "Series A Preferred Interest" and
Series B Preferred Interest", respectively). These voting preferred equity
interests provide for distributions to Coaxial, Phoenix and the Company in
amounts equal to the payments required on the senior notes and senior discount
notes described in Note 6. IHO serves as the manager of Insight Ohio.
As a result of the transaction described above, Coaxial incurred severance costs
and transaction structure costs totaling $4,822,078 in 1998, which have been
reflected in the accompanying statements of operations.
The Company and Coaxial Financing are co-issuers of senior discount notes
described in Note 6(c). Coaxial and Phoenix are co-issuers of senior notes
described in Note 6(b). The ability of Coaxial Financing, the Company, Coaxial,
and Phoenix to make scheduled payments with respect to the senior notes and
senior discount notes is dependent on the financial and operating performance of
Insight Ohio. The required distributions on the Series A Preferred Interest and
Series B Preferred Interest to Coaxial are designed to provide the cash flow
necessary to service the debt service requirements on the senior notes and
senior discount notes.
F-5
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
Coaxial and Insight Ohio. All intercompany balances have been eliminated in
consolidation. At December 31, 1999 and 1998, Coaxial had a shareholders'
deficiency and Insight Ohio had a members' deficiency. Accordingly, the
accompanying financial statements do not include any minority interest
liabilities.
Cash
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
Fair Value of Financial Instruments
The carrying amounts of current asset and liabilities approximate their fair
market value because of the immediate or short term maturity of these financial
instruments. At December 31, 1998, the carrying value of the notes receivable
from Coaxial DJM LLC and Coaxial DSM LLC and the senior notes and senior
discount notes approximate their fair value. At December 31, 1999, the carrying
value of the notes receivable from Coaxial DJM LLC and Coaxial DSM LLC
approximate their fair value. At December 31, 1999, the carrying value and fair
value of the senior notes was $34,435 and $33,746, respectively and the carrying
value and the fair value of the senior discount notes was $35,556 and $35,756,
respectively.
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements. Such
amounts were not significant at December 31, 1999 and 1998.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1999 and 1998,
the Company had no significant concentrations of credit risk.
F-6
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in the statement of operations.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets as follows:
Cable television ("CATV") systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
Depreciation expense for the years ended December 31, 1999 and 1998 was
approximately $7,096,000 and $5,268,000, respectively.
At December 31, 1999 and 1998, the Company had net assets held under capital
leases of $116,541 and $228,458, respectively.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate primarily to legal fees and bank facility fees
incurred to negotiate and secure long term financing (see Note 6). These costs
are being amortized on a straight-line basis over the life of the applicable
loans. In connection with the issuance of the senior notes and senior discount
notes (see Note 6), the Company repaid the outstanding indebtedness under its
prior debt facility. Accordingly, the accompanying statement of operations for
the year ended December 31, 1998 includes an extraordinary loss of $846,641 on
early extinguishment of such debt.
F-7
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $1,309,000 and
$2,152,000 for the years ended December 31, 1999 and 1998, respectively.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133, as amended SFAS No. 137, is
effective for all fiscal years beginning after June 15, 2000. The Company does
not anticipate the adoption of this Statement to have a material impact on its
financial statements.
3. Income Taxes
The Company is a limited liability company. Therefore, its sole member reports
the income or loss on his income tax return. As a result, the Company does not
provide for Federal or State income taxes in its accounts. In the event that the
limited liability company election is terminated, deferred taxes related to book
and tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
member is limited to his respective investment.
4. 401(k) Plan
The Company sponsors various 401(k) Plans (the "Plans") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employee's wages. Company
contributions to the Plans approximated $120,000 and $145,000 for the years
ended December 31, 1999 and 1998, respectively.
5. Related Party Transactions
Effective August 21, 1998, Insight Ohio entered into a management agreement with
IHO which allows IHO to manage the operations of Insight Ohio. The management
fee is 3% of gross operating revenues. Fees under this management agreement were
approximately $1,435,000 for the year ended December 31, 1999 and $493,000 for
the period from August 21, 1998 to December 31, 1998. Prior to August 21, 1998,
service and administrative expenses included administrative expenses and
management fees for services provided by Coaxial. Such expenses were
approximately $1,371,000 for the period from January 1, 1998 to August 21, 1998.
The Company had a receivable from a related party at December 31, 1997 of
$98,584 relating to the leasing of fiber optic facilities. On June 29, 1998, the
related party bought out the lease for approximately $347,000.
F-8
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Related Party Transactions (continued)
At December 31, 1997, Coaxial had advanced funds to related entities totaling
$76,261,666, and received advances from related entities totaling $17,088,121,
for working capital and debt service requirements. During August 1998, in
connection with the contribution of the System to Insight Ohio and the issuance
of the senior notes and senior discount notes described in Note 6, these amounts
were settled. Coaxial recognized interest income and interest expense from these
related party transactions of $2,846,304 and $1,019,300, respectively, during
the year ended December 31, 1998.
In connection with the issuance of the senior discount notes described in Note
6(c), the Company loaned $9,750,000 of the proceeds to two related entities. The
terms of the notes receivable mirror the terms of the senior discount notes.
Other related party transactions are described in Note 6.
6. Notes Payable
Notes payable at December 31, 1999 and 1998 consisted of:
1999 1998
----------- -----------
Senior Credit Facility (a) $11,000,000 $ --
Senior Notes (b) 34,435,092 34,435,092
Senior Discount Notes (c) 35,555,923 31,510,665
----------- -----------
Total notes payable $80,991,015 $65,945,757
=========== ===========
F-9
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Notes Payable (continued)
(a) Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the
upgrade of the System's cable plant and for the introduction of new video
services. The Senior Credit Facility has a six-year maturity, with
reductions to the amount of the commitment commencing after three years.
The amount available for borrowing is reduced by any outstanding letter of
credit obligations. Insight Ohio's obligations under the Senior Credit
Facility are secured by substantially all the tangible and intangible
assets of Insight Ohio. Loans under the Senior Credit Facility bear
interest, at Insight Ohio's option, at the prime rate or at a Eurodollar
rate. In addition to the index rates, Insight Ohio pays an additional
margin percentage tied to its ratio of total debt to adjusted annualized
operating cash flow. At December 31, 1999, the weighted average interest
rate in effect was 7.9%.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including, in the event of a payment default under the Senior Credit
Facility, distributions on the Series A Preferred Interest and Series B
Interest that are required to pay the Senior Notes and the Senior Discount
Notes create liens on assets, make investments, make acquisitions, engage
in mergers or consolidations, engage in certain transactions with
subsidiaries and affiliates and otherwise restrict certain activities. In
addition, the Senior Credit Facility requires compliance with certain
financial ratios, including with respect to total leverage, interest
coverage and pro forma debt service coverage. At December 31, 1999, Insight
Ohio exceeded the annual capital expenditure limit stated in the Senior
Credit Facility. Insight Ohio's lender has waived this limitation through
December 31,1999. Management does not expect that these covenants will
materially impact the ability of Insight Ohio to operate its business.
As of December 31, 1999, $11,000,000 was borrowed under the Senior Credit
Facility. Interest expense including fees paid to the lender was
approximately $500,000 for the year ended December 31, 1999.
(b) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest is payable in cash semi-annually on each February 15 and
August 15. Interest payments commenced on February 15, 1999. The Senior
Notes are secured by the outstanding Series A Preferred Interest in Insight
Ohio. The Series A Preferred Interest has a liquidation preference of $140
million and pays distributions in an amount equal to the payments on the
Senior Notes. The Series A Preferred Interest is owned by Coaxial and is
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions
made by Insight Ohio on the Series A Preferred Interest to make payments on
the Senior Notes. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to: incur additional indebtedness; pay
dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interest or Series B Preferred
Interest for any purpose other than required payments of interest and
principal on the Senior Notes or Senior Discount Notes, respectively; and
swap assets. Coaxial, as joint and several issuer with Phoenix of the
Senior Notes, provides the funding that will allow Phoenix to repay its
share of the notes payable, as Phoenix has no operations.
In connection with the issuance of the Senior Notes, Coaxial incurred
financing fees of $1,225,833 that are being amortized over the life of the
Senior Notes. Amortization expense for deferred financing costs was
$152,688 and $51,945 for the years ended December 31, 1999 and 1998,
respectively. Interest expense on Coaxial's portion of the Senior Notes was
$3,444,000 and $1,249,889 for the years ended December 31, 1999 and 1998,
respectively.
F-10
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Notes Payable (continued)
(c) On August 21, 1998, the Company and Coaxial Financing issued senior
discount notes ("Senior Discount Notes") due 2008. The Senior Discount
Notes have a face amount of $55,869,000 and approximately $30,000,000 of
gross proceeds were received upon issuance. Approximately $19,500,000 of
the gross proceeds were contributed by the sole member of the Company to
certain related entities to repay indebtedness. Approximately $9,750,000
was loaned to two related entities (Coaxial DJM LLC and Coaxial DSM LLC) by
the Company, which then contributed that amount to certain other related
entities to repay indebtedness. The debt discount of $25,868,000 is being
amortized over five years through August 15, 2003. Thereafter, interest on
the Senior Discount Notes accrues at 12 7/8% and is payable semi-annually.
All of the Senior Discount Notes were allocated to the Company.
In connection with the issuance of the Senior Discount Notes, the Company
incurred financing fees of approximately $1,400,000 that are being
amortized over the life of the Senior Discount Notes. Amortization expense
related to the deferred financing costs was approximately $102,000 and
$37,000 for the years ended December 31, 1999 and 1998, respectively.
Interest expense attributable to amortization of the debt discount incurred
on the Senior Discount Notes was approximately $4,045,000 and $1,510,000
for the years ended December 31, 1999 and 1998, respectively.
The Senior Discount Notes are non-recourse and secured by all of the common
stock of Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM
LLC to the Company and conditionally guaranteed by Insight Ohio, a
subsidiary of Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. Coaxial Financing and
the Company were in compliance with these covenants as of December 31,
1999.
The ability of Coaxial Financing and the Company to make scheduled payments
with respect to the Senior Discount Notes will depend on the financial and
operating performance of Insight Ohio. The required payments on the Series
B Preferred Interest equals the distributions to be made by Coaxial to the
Company to service the Senior Discount Notes.
7. Operating Lease Agreements
The Company leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $126,300 and $105,700
for the years ended December 1999 and 1998, respectively. These amounts exclude
year-to-year utility pole leases of approximately $191,000 in 1999 and 1998,
which provide for payments based on the number of poles used.
Future minimum rental commitments required under non-cancelable operating leases
are as follows:
2000 $60,400
2001 5,000
F-11
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Capital Lease Agreements
Coaxial leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under the leases are as follows:
2000 $ 92,454
2001 30,223
2002 3,004
-----------
125,681
Less: Amount representing interest (9,140)
Less: Current portion of capital lease obligations (73,544)
-----------
Long-term capital lease obligations $ 42,997
===========
9. Commitments and Contingencies
The Company is party or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
or financial position.
10. Subsequent Event
On March 15, 2000, the parent company of IHO, Insight Communications Company,
Inc. ("ICCI"), reached an agreement in principle with AT&T Corp. for the
delivery of telephone service utilizing Insight Ohio's cable television systems
under the "AT&T" brand name. The terms of the agreement in principle provide
that Insight Ohio will market, service and bill for local telephone service.
AT&T would be required to install and maintain the necessary switching
equipment, and would be the local exchange carrier of record. AT&T would pay
Insight Ohio a fee for the use of the local telephone lines, and will also
compensate Insight Ohio for installation and maintenance services at customers'
residences. In addition, AT&T would pay Insight Ohio commissions for sales
Insight Ohio makes to its customers. Insight Ohio expects to sell the AT&T-
branded local telephone service separately and as part of bundled offerings,
which would also include the sale of AT&T long-distance telephone services. The
agreement in principle is subject to the negotiation and execution of definitive
agreements.
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband,
LLC to contribute to its AT&T joint venture additional cable television systems
serving approximately 537,000 customers. Through a series of transactions,
Insight will contribute to the joint venture its interests in systems serving
approximately 187,000 customers, including the System, and AT&T Broadband will
contribute systems serving approximately 350,000 customers. As a result, the
joint venture would increase its customer base of approximately 748,800 as of
December 31, 1999 to approximately 1.3 million. Upon completion of the
transactions, the joint venture would remain equally owned by Insight and AT&T
Broadband, and Insight would continue to serve as the general partner and manage
and operate the joint venture systems. The transactions are subject to the
negotiation and execution of definitive agreements.
F-12
Report of Independent Auditors
The Shareholders
Coaxial Financing Corp.
We have audited the accompanying balance sheets of Coaxial Financing Corp. as of
December 31, 1999 and 1998. The balance sheets are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
balance sheets based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheets are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall balance sheet presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Coaxial Financing Corp. at December
31, 1999 and 1998 in conformity with accounting principles generally accepted in
the United States.
As indicated in Note 1, Coaxial Financing Corp. 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 Coaxial Financing
Corp.
/s/ Ernst & Young LLP
New York, New York
March 29, 2000
F-13
COAXIAL FINANCING CORP.
BALANCE SHEETS
December 31,
1999 1998
------ ------
ASSETS:
Cash $1,000 $1,000
------ ------
Total Assets $1,000 $1,000
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior Discount Notes (to be paid by $ -- $ --
Coaxial LLC - See Note 2)
------ ------
Total Liabilities --
------ ------
Common stock, $.01 par value;
1,000 shares authorized, 1,000 shares issued and outstanding 10 10
Additional paid-in capital 990 990
------ ------
Total liabilities and shareholders' equity $1,000 $1,000
====== ======
See accompanying notes
F-14
COAXIAL FINANCING CORP.
NOTES TO BALANCE SHEETS
1. Nature of Business
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on
July 24, 1998 for the sole purpose of being a co-issuer of the discount notes
described in Note 2, which allows certain investors the ability to be holders of
the debt. The Company has no operations. Three individuals own the outstanding
shares of the Company.
2. Notes Payable
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior
Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes
have a face amount of $55,869,000 and approximately $30,000,000 of gross
proceeds were received upon issuance. Approximately $19,500,000 of the gross
proceeds were contributed by the sole member of Coaxial LLC to certain related
entities to repay indebtedness. Approximately $9,750,000 was loaned to two
related entities ("Coaxial DJM LLC" and "Coaxial DSM LLC") by Coaxial LLC, which
then contributed that amount to certain other related entities to repay
indebtedness. The debt discount of $25,869,000 is being amortized over five
years through August 15, 2003. Thereafter, interest on the Senior Discount Notes
accrues at 12 7/8% and is payable semi-annually. All of the Senior Discount
Notes were allocated to Coaxial LLC.
The Senior Discount Notes are non-recourse, secured by all of the common stock
of Coaxial Communications of Central Ohio, Inc. ("Coaxial") and the notes issued
by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally
guaranteed by Insight Communications of Central Ohio, LLC ("Insight Ohio"), a
subsidiary of Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. The Company and Coaxial LLC
were in compliance with these covenants as of December 31, 1999.
The ability of the Company and Coaxial LLC to make scheduled payments with
respect to the Senior Discount Notes will depend on the financial and operating
performance of Insight Ohio.
F-15
Report of Independent Public Accountants
To the Shareholders of
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying statements of operations and changes in
stockholders' equity and cash flows of Coaxial Communications of Central Ohio,
Inc. for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Coaxial
Communications of Central Ohio, Inc. for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998
F-16
Report of Independent Auditors
The Shareholders
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying consolidated balance sheets of Coaxial
Communications of Central Ohio, Inc. as of December 31, 1999 and 1998 and the
related consolidated statements of operations and shareholder's deficit and cash
flows for the years then ended. 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 Coaxial
Communications of Central Ohio, Inc. at December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
March 29, 2000
F-17
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
1999 1998
--------- ---------
ASSETS
Cash and cash equivalents $ 882 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $383 and $306 in 1999 and 1998, respectively 790 1,186
Other accounts receivable, less allowance for doubtful accounts
of $175 and $145 in 1999 and 1998, respectively 3,136 1,520
Prepaid expenses and other current assets 155 166
--------- ---------
Total current assets 4,963 11,581
PROPERTY AND EQUIPMENT, at cost:
Land and Land Improvements 260 260
CATV systems 96,734 71,032
Equipment 8,027 7,102
Furniture 362 333
Leasehold improvements 71 71
--------- ---------
105,454 78,798
Less accumulated depreciation and amortization (53,999) (46,898)
--------- ---------
Total property and equipment, net 51,455 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,404 7,385
Deferred financing costs and other 1,604 1,447
--------- ---------
9,008 8,832
Less accumulated amortization (7,600) (7,400)
--------- ---------
Total intangible assets, net 1,408 1,432
Due from Related Parties 158 149
--------- ---------
Total assets $ 57,984 $ 45,062
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,963 3,230
Accrued interest 1,519 1,250
Accrued liabilities 5,061 2,536
Accrued programming 1,890 1,868
--------- ---------
Total current liabilities 13,506 9,007
NOTES PAYABLE:
Senior Notes 34,435 34,435
Senior Credit Facility 11,000 --
--------- ---------
Total notes payable 45,435 34,435
Capital Lease Obligations 43 105
Other Liabilities 2,408 1,146
Due to related parties -- 1,029
--------- ---------
Total liabilities 61,392 45,722
Commitments and Contingencies
SHAREHOLDERS' DEFICIT:
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 1999 and 1998; $1 par value 1 1
Paid-in capital 11,501 11,501
Retained deficit (14,910) (12,162)
--------- ---------
Total shareholders' deficit (3,408) (660)
--------- ---------
Total liabilities and shareholders' deficit $ 57,984 $ 45,062
========= =========
See accompanying notes
F-18
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
(dollars in thousands)
For the years ended December 31,
1999 1998 1997
-------- -------- --------
REVENUES $ 46,747 $ 47,956 $ 48,229
OPERATING EXPENSES:
Service and administrative 27,619 29,695 28,889
Severance and transaction structure costs -- 4,822 --
Depreciation and amortization 7,301 5,311 5,256
-------- -------- --------
Total operating expenses 34,920 39,828 34,145
-------- -------- --------
OPERATING INCOME 11,827 8,128 14,084
Other Income (Expense) 92 (421) (272)
Interest Income (Expense):
Interest income--related parties -- 2,846 4,297
Interest income 208 35 70
Interest expense--related parties -- (1,019) (2,412)
Interest expense (3,949) (3,484) (3,184)
-------- -------- --------
Total interest expense, net (3,741) (1,622) (1,229)
-------- -------- --------
Income before extraordinary loss 8,178 6,085 12,583
Extraordinary loss on extinguishment of debt -- 847 --
-------- -------- --------
NET INCOME 8,178 5,238 12,583
Shareholders' (deficit) equity, beginning of
year (660) 54,326 42,331
Capital distributions (10,926) (82,787) (588)
Shareholder contributions -- 22,563 --
-------- -------- --------
Shareholders' (deficit) equity, end of year $ (3,408) $ (660) $ 54,326
======== ======== ========
See accompanying notes
F-19
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the years ended December 31,
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,178 $ 5,238 $ 12,583
Adjustments to reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 7,301 5,532 5,805
Extraordinary loss on extinguishment of debt -- 847 --
Loss on disposals of property and equipment -- -- 77
Changes in operating assets and liabilities:
Subscriber receivables 396 (524) 182
Other accounts receivable, prepaid
expenses and other current assets (1,605) (423) 325
Accounts payable 1,734 425 422
Accrued interest 269 (440) 176
Accrued liabilities 3,808 1,942 (692)
Deferred compensation -- -- (256)
Due to related parties (1,038) -- --
-------- -------- --------
Net cash provided by operating activities $ 19,043 $ 12,597 $ 18,622
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (26,656) (7,369) (5,570)
Proceeds from disposal of property and equipment -- 11 26
Due from related parties -- 3,888 (9,697)
Increase in intangible assets (98) -- --
-------- -------- --------
Net cash used in investing activities $(26,754) $ (3,470) $(15,241)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable -- 34,435 750
Principal payments on notes payable -- (26,808) (5,681)
Costs incurred in debt financing (78) (1,447) (117)
Principal payments on capital lease obligations (112) (179) (265)
Capital distributions (10,926) -- (588)
Capital contributions -- 12,000 --
(Decrease) increase in amounts due to related parties -- (18,992) 2,189
Borrowings under senior credit facility 11,000 -- --
-------- -------- --------
Net cash used in financing activities $ (116) $ (991) $ (3,712)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (7,827) 8,134 (331)
CASH, beginning of year 8,709 575 906
-------- -------- --------
CASH, end of year $ 882 $ 8,709 $ 575
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 3,680 $ 3,924 $ 2,391
See accompanying notes
F-20
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization And Purpose
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio LLC ("Insight Ohio"), operates a cable television
system which provides basic and expanded cable television services to homes in
the eastern parts of Columbus, Ohio and surrounding areas. Insight Ohio operates
in one business segment. In connection with the contribution of the Company's
cable system described below, the issuance of the senior notes described in Note
6(a), and the issuance of the senior discount notes by the Company's majority
shareholder, during 1998 the three individuals who previously owned the
outstanding stock of the Company contributed their stock to three separate
limited liability companies. Accordingly, the Company is a subsidiary of Coaxial
LLC, which owns 67 1/2% of its outstanding stock.
Other related entities affiliated with Coaxial include Coaxial LLC, Coaxial
Financing Corp., Coaxial DJM LLC, Coaxial DSM LLC, Phoenix Associates
("Phoenix"), Coaxial Communications of Southern Ohio, Inc. ("Southern Ohio"),
Coaxial Associates of Columbus I ("Columbus I"), Coaxial Associates of Columbus
II ("Columbus II"), Paxton Cable Television, Inc. ("Paxton Cable") and Paxton
Communications, Inc. ("Paxton Communications").
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to Insight Ohio, a newly formed subsidiary. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns a
$140 million Series A preferred equity interest and a $30 million series B
preferred equity interest of Insight Ohio (the "Series A Preferred Interest" and
"Series B Preferred Interest" respectively). These voting preferred equity
interests provide for distributions to Coaxial, Phoenix and Coaxial, LLC in
amounts equal to the payments required on the senior and senior discount notes
described in Note 6. IHO serves as the manager of Insight Ohio.
As a result of the transaction described above, the Company incurred severance
costs and transactions structuring costs totaling $4,822,078 in 1998, which have
been reflected in the accompanying statements of operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at December 31, 1999 and 1998, the accompanying financial statements include the
accounts of the Company and Insight Ohio. All intercompany balances have been
eliminated in consolidation. At December 31, 1999 and 1998, Insight Ohio had a
members' deficiency, accordingly, the accompanying financial statements do not
include a minority interest liability for Insight's 75% common equity interest
in Insight Ohio.
Cash
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
F-21
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts of current asset and liabilities approximate their fair
market value because of the immediate or short term maturity of these financial
instruments.
At December 31, 1998, the carrying value of the senior notes approximate their
fair value. At December 31, 1999, the carrying value and fair value of the
senior notes was $34,435 and $33,746, respectively.
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements. Such
amounts were not significant at December 31, 1999 and 1998.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1999 and 1998,
the Company had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in the statements of operations.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets as follows:
Cable television ("CATV") systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
Depreciation expense for the years ended December 31, 1999 and 1998 was
approximately $7,096,000 and $5,268,000, respectively.
At December 31, 1999 and 1998, the Company had net assets held under capital
leases of $116,541 and $228,458, respectively.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
F-22
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate to costs, primarily legal fees and bank facility
fees incurred to negotiate and secure long term financing (see Note 6). These
costs are being amortized on a straight-line basis over the life of the
applicable loans. In connection with the issuance of the senior notes (see Note
6), the Company repaid the outstanding indebtedness under its prior debt
facility. Accordingly, the accompanying statement of operations for the year
ended December 31, 1998 includes an extraordinary loss of $846,641 on early
extinguishment of such debt.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $1,309,000,
$2,152,000 and $1,025,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal years beginning after June 15, 2000. The Company does
not anticipate the adoption of this Statement to have a material impact on its
financial statements.
F-23
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Income Taxes
Coaxial is a Subchapter S corporation. Therefore, each shareholder reports his
distributive share of income or loss on his respective income tax return. As a
result, the Company does not provide for Federal or State income taxes in its
accounts. In the event that the Subchapter S corporation election is terminated,
deferred taxes related to book and tax temporary differences would be required
to be reflected in the financial statements.
4. 401(k) Plan
The Company sponsors various 401(k) Plan (the "Plans") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employee's wages. Company
contributions to the Plans approximated $120,000, $145,000 and $133,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
5. Related Party Transactions
Effective August 21, 1998, the Company entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues. Fees
under this management agreement were approximately $1,435,000 for the year ended
December 31, 1999 and $493,000 for the period from August 21, 1998 through
December 31, 1998. Prior to August 21, 1998, service and administrative expenses
included administrative expenses and other management fees for services provided
by the Company. Such expenses were approximately $1,371,000 for the period
January 1, 1998 through August 21, 1998.
Coaxial had a receivable from a related party as of December 31, 1997 of $98,584
relating to the leasing of fiber optic facilities. On June 29, 1998, the related
party bought out the lease for approximately $347,000.
At December 31, 1997, Coaxial had advanced funds to and received advances from
related entities for working capital and debt service requirements. During
August 1998, in connection with the issuance of the senior notes described in
Note 6, the amounts relating to debt service requirements were settled. Coaxial
recognized interest income of approximately $2,846,300 in 1998 and $4,296,500 in
1997 and interest expense of approximately $1,019,300 in 1998 and $914,300 in
1997 related to such advances. During 1998, Coaxial advanced funds to and
received advances from related entities for working capital requirements in the
amount of $149,321 and $1,029,369 respectively.
Prior to 1998, Coaxial had an agreement with a key officer to defer certain
discretionary compensation amounts each year. In connection therewith, Coaxial
entered into an unsecured note payable to this officer with an outstanding
balance as of December 31, 1997 of $2,046,880, which represented all vested
deferred compensation at December 31, 1997. The note was scheduled to mature in
December 2005. Interest expense on the note was $184,810 in 1997. Pursuant to
the Contribution Agreement, amounts outstanding were paid during 1998.
Other related party transactions are described in Note 6.
F-24
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Notes Payable
Notes payable at December 31, 1999 and 1998 consisted of:
1999 1998
-------------- -------------
Senior Notes (a) $ 34,435,092 $ 34,435,092
Senior Credit Facility (b) 11,000,000 --
-------------- ------------
Total notes payable $ 45,435,092 $ 34,435,092
============== ============
(a) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest is payable in cash semi-annually on each February 15 and
August 15. Interest payments commenced on February 15, 1999. The Senior
Notes are secured by the outstanding Series A Preferred Interest in Insight
Ohio. The Series A Preferred Interest has a liquidation preference of $140
million and pays distributions in an amount equal to the interest payments
on the Senior Notes. The Series A Preferred Interest is owned by Coaxial
and is pledged to Bank of Montreal Trust Company, as trustee, for the
benefit of the holders of the Senior Notes. Coaxial will utilize cash
distributions made by Insight Ohio on the Series A Preferred Interest to
make payments on the Senior Notes. The Senior Notes contain covenants that,
among other things, restrict the ability of Coaxial, Phoenix, Insight Ohio
and any of their Restricted Subsidiaries to: incur additional indebtedness;
pay dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interest or Series B Preferred
Interest for any purpose other than required payments of interest and
principal on the Senior Notes or Senior Discount Notes, respectively; and
swap assets. Coaxial, as joint and several issuer, with Phoenix, of the
Senior Notes, provides the funding that will allow Phoenix to repay its
share of the notes payable, as Phoenix has no operations.
In connection with the issuance of the Senior Notes, the Company incurred
financing fees of $1,225,833 that are being amortized over the life of the
Senior Notes. Amortization expense for deferred financing costs was
$152,688 and $51,945 for the years ended December 31, 1999 and 1998,
respectively. Interest expense on Coaxial's portion of the Senior Notes was
$3,444,000 and $1,249,889 for the years ended December 31, 1999 and 1998,
respectively.
(b) Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the
upgrade of the System's cable plant and for the introduction of new video
services. The Senior Credit Facility has a six-year maturity, with
reductions to the amount of the commitment commencing after three years.
The amount available for borrowing is reduced by any outstanding letter of
credit obligations. Insight Ohio's obligations under the Senior Credit
Facility are secured by substantially all the tangible and intangible
assets of Insight Ohio. Loans under the Senior Credit Facility bear
interest, at Insight Ohio's option, at the prime rate or at a Eurodollar
rate. In addition to the index rates, Insight Ohio pays an additional
margin percentage tied to its ratio of total debt to adjusted annualized
operating cash flow. At December 31, 1999, the weighted average interest
rate in effect was 7.9%.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including, in the event of a payment default under the Senior Credit
Facility, distributions on the Series A Preferred Interest and Series B
Preferred Interest that are required to pay the Senior Notes and the Senior
Discount Notes, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
certain activities. In addition, the Senior Credit Facility requires
F-25
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Notes Payable (continued)
compliance with certain financial ratios, including with respect to total
leverage, interest coverage and pro forma debt service coverage. At
December 31, 1999, Insight Ohio exceeded the annual capital expenditure
limit stated in the Senior Credit Facility. Insight Ohio's lender has
waived this limitation through December 31, 1999. Management does not
expect that these covenants will materially impact the ability of Insight
Ohio to operate its business.
As of December 31, 1999, $11,000,000 was borrowed under the Senior Credit
Facility. Interest expense including fees paid to the lender was
approximately $500,000 for the year ended December 31, 1999.
7. Operating Lease Agreements
The Company leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $126,300, $105,700 and
$218,500 in 1999, 1998 and 1997, respectively. These amounts exclude
year-to-year utility pole leases of approximately $191,000 in 1999 and 1998 and
$186,400 in 1997, which provide for payments based on the number of poles used.
Future minimum rental commitments required under non-cancelable operating leases
are as follows:
2000 $ 60,400
2001 5,000
8. Capital Lease Agreements
Coaxial leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under the leases are as follows:
2000 $ 92,454
2001 30,223
2002 3,004
--------
125,681
Less: Amount representing interest (9,140)
Less: Current portion of capital lease obligations (73,544)
--------
Long-term capital lease obligations $ 42,997
========
9. Commitments and Contingencies
The Company is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's results of operation or
financial position.
10. Subsequent Event
On March 15, 2000, the parent company of IHO, Insight Communications Company,
Inc. ("ICCI"), reached an agreement in principle with AT&T Corp. for the
delivery of telephone service utilizing Insight Ohio's cable television systems
under the "AT&T" brand name. The terms of the agreement in principle provide
that Insight Ohio will market, service and bill for local telephone service.
AT&T would be required to install and maintain the necessary switching
equipment, and would be the local exchange carrier of record. AT&T would pay
Insight Ohio a fee for the use of the local telephone lines, and will also
compensate Insight Ohio for installation and maintenance services at customers'
residences. In addition, AT&T would pay Insight Ohio commissions for sales
Insight Ohio makes to its customers. Insight Ohio expects to sell the AT&T-
branded local telephone service separately and as part of bundled offerings,
which would also include the sale of AT&T long-distance telephone services. The
agreement in principle is subject to the negotiation and execution of definitive
agreements.
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband,
LLC to contribute to its AT&T joint venture additional cable television systems
serving approximately 537,000 customers. Through a series of transactions,
Insight will contribute to the joint venture its interests in systems serving
approximately 187,000 customers, including the System, and AT&T Broadband will
contribute systems serving approximately 350,000 customers. As a result, the
joint venture would increase its customer base of approximately 748,800 as of
December 31, 1999 to approximately 1.3 million. Upon completion of the
transactions, the joint venture would remain equally owned by Insight and AT&T
Broadband, and Insight would continue to serve as the general partner and manage
and operate the joint venture systems. The transactions are subject to the
negotiation and execution of definitive agreements.
F-26
Report of Independent Public Accountants
The General Partners
Phoenix Associates
We have audited the accompanying statements of operations and changes in
partners' deficit and cash flows of Phoenix Associates for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Phoenix
Associates for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
As indicated in Note 1, Phoenix Associates 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 Phoenix
Associates.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998
F-27
Report of Independent Auditors
The General Partners
Phoenix Associates
We have audited the accompanying balance sheets of Phoenix Associates as of
December 31, 1999 and 1998, and the related statements of operations and
partners' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Associates at December
31, 1999 and 1998 and the results of their operations and their cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States.
As indicated in Note 1, Phoenix Associates 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 Phoenix
Associates.
/s/ Ernst & Young LLP
New York, New York
March 29, 2000
F-28
PHOENIX ASSOCIATES
BALANCE SHEETS
(dollars in thousands)
As of December 31,
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Interest receivable 215 57
--------- ---------
Total current assets 215 57
--------- ---------
OTHER ASSETS:
Due from related parties 406 406
Notes receivable--related parties 550 550
Deferred financing fees, net of accumulated amortization
of $627 and $160 in 1999 and 1998, respectively 3,173 3,400
--------- ---------
Total other assets 4,129 4,356
--------- ---------
Total assets $ 4,344 $ 4,413
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Current portion of notes $ -- $ --
Interest payable 4,017 3,841
--------- ---------
Total current liabilities 4,017 3,841
--------- ---------
NOTES PAYABLE 105,565 105,565
--------- ---------
Total liabilities 109,582 109,406
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT (105,238) (104,993)
--------- ---------
Total liabilities and partners' deficit $ 4,344 $ 4,413
========= =========
See accompanying notes
F-29
PHOENIX ASSOCIATES
STATEMENTS OF OPERATIONS AND CHANGE IN PARTNERS' DEFICIT
(dollars in thousands)
For the years ended December 31,
1999 1998 1997
--------- --------- ---------
EXPENSES $ -- $ (61) $ (89)
INTEREST INCOME (EXPENSE):
Interest income-related parties 158 640 1,785
Interest income -- 1 3
Interest expense-related parties -- (2,666) (4,026)
Interest expense (11,024) (10,326) (9,856)
--------- --------- ---------
Total interest expense, net (10,866) (12,351) (12,094)
--------- --------- ---------
Loss Before Extraordinary Item (10,866) (12,412) (12,183)
Extraordinary Item--gain on settlement of former limited
partner notes -- 100 3,315
--------- --------- ---------
NET LOSS (10,866) (12,312) (8,868)
PARTNERS' DEFICIT, beginning of year (104,993) (170,412) (161,544)
CAPITAL CONTRIBUTIONS 10,621 78,499 --
CAPITAL DISTRIBUTIONS -- (768) --
--------- --------- ---------
PARTNERS' DEFICIT, end of year $(105,238) $(104,993) $(170,412)
========= ========= =========
See accompanying notes
F-30
PHOENIX ASSOCIATES
STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the years ended December 31,
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,866) $ (12,312) $ (8,868)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Gain on settlement of former limited partner notes -- (100) (3,315)
Amortization of deferred financing fees 468 160 --
Changes in operating assets and liabilities:
Interest receivable (158) (57) --
Other accounts receivable -- 1 (1)
Interest payable -- 3,841 --
Accrued interest 176 -- --
Accounts payable -- (1) 1
--------- --------- ---------
Net cash used in operating activities $ (10,380) $ (8,468) $ (12,183)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in amounts due from related parties -- 6,003 (359)
Proceeds from notes receivable -- 326 4,824
--------- --------- ---------
Net cash provided by investing activities $ -- $ 6,329 $ 4,465
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable -- (105,925) (745)
Proceeds from issuance of notes payable -- 105,565 --
Contributions from partners, net 10,621 78,498 --
(Decrease) increase in amounts due to related parties -- (72,440) 8,348
Increase in deferred financing costs (241) (3,559) --
--------- --------- ---------
Net cash provided by financing activities $ 10,380 $ 2,139 $ 7,603
--------- --------- ---------
NET DECREASE IN CASH -- -- (115)
CASH, beginning of year -- -- 115
--------- --------- ---------
CASH, end of year $ -- $ -- $ --
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 10,380 $ -- $ --
See accompanying notes
F-31
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix 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 Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 5, along with an affiliate, Coaxial Communications
of Central Ohio, Inc. ("Coaxial").
Phoenix consists of three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial
Financing Corp., Insight Communications of Central Ohio, LLC ("Insight Ohio"),
Coaxial Communications of Southern Ohio, Inc. ("Southern Ohio"), Coaxial
Associates of Columbus I ("Columbus I"), Coaxial Associates of Columbus II
("Columbus II"), Paxton Cable Television, Inc. ("Paxton Cable") and Paxton
Communications, Inc. ("Paxton Communications").
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio, and Insight
Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of Insight, contributed
$10 million in cash to Insight Ohio. As a result of this Contribution Agreement,
Coaxial owns 25% of the non-voting common equity and IHO owns 75% of the
non-voting common equity of Insight Ohio. Coaxial also owns a $140 million
Series A preferred equity interest and a $30 million Series B preferred equity
interest of Insight Ohio the ("Series A Preferred Interest" and "Series B
Preferred Interest," respectively). These voting preferred equity interests
provide for distributions to Coaxial equal in amount to the payments on the
senior notes and senior discount notes discussed in Note 5. Coaxial will make
distributions that will enable Phoenix to fund the required payments on the
senior notes.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
Fair Value of Financial Instruments
At December 31, 1998, the carrying value of Phoenix's financial instruments
approximate fair value. At December 31, 1999, the carrying value and fair value
of the senior notes was $105,565 and $103,454, respectively.
F-32
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." Statement No.
133 established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Statement No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Phoenix does
not anticipate that the adoption of this Statement will have a material impact
on its financial statements.
3. Income Taxes
Phoenix is a general partnership. Therefore, each partner reports its
distributive share of income or loss on its respective income tax returns. As a
result, Phoenix does not provide for Federal or State income taxes in its
accounts.
4. Related Party Transactions
As of December 31, 1997, Phoenix had advanced funds to and received advances
from related entities for working capital and for debt service. During August
1998, in connection with the issuance of the senior notes described in Note 5,
these amounts were settled. A portion of these amounts was settled by a net
contribution of $74,171,097 from the partners. Phoenix recognized interest
income of approximately $234,200 in 1998 and $358,800 in 1997 and interest
expense of approximately $2,665,536 in 1998 and $4,025,800 in 1997 relating to
such advances.
Phoenix had the following notes and accrued interest receivable from related
parties at December 31, 1999 and 1998:
Columbus I(a) $ 2,348,892
Columbus II(b) 118,245
-----------
Total face amount of notes receivable 2,467,137
Less: Amounts in excess of purchase price (1,916,840)
-----------
Net notes and accrued interest receivable $ 550,297
===========
(a) The $2,348,892 due from Columbus I represent a note, including past due
interest that was added to the principal, which was purchased from CNA
Financial Corporation on November 24, 1982. Interest was payable to Phoenix
monthly, through August 20, 1998, at an annual rate of 20% of the face
amount of the notes receivable. Effective August 21, 1998 the rate was
amended to an annual rate of 5.5%. Phoenix recognized interest income of
approximately $157,872, $346,900 and $1,138,000 in 1999, 1998 and 1997,
respectively, related to the note receivable. The principal is due and
payable to Phoenix on October 31, 2002.
(b) The $118,245 due from Columbus II represents a note, including past due
interest that was added to the principal, which were purchased from CNA
Financial Corporation on November 24, 1982. Interest is payable to Phoenix
monthly at an annual rate of 20% of the face amount of the notes
receivable. Phoenix recognized interest income of approximately $59,000 and
$288,300 in 1998 and 1997, respectively, related to the note receivable.
The principal is due and payable to Phoenix on October 31, 2002. In August
1998, in connection with the issuance of the Senior Notes, a portion of the
notes receivable from Columbus II were settled. The amount in excess of the
purchase price relating to these notes was realized at the time of the
settlement. The 1998 financial statements reflect an extraordinary item for
the gain on partial settlement of the notes of $100,182.
F-33
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Related Party Transactions (continued)
Amounts in excess of purchase price represent the difference between the face
amount and the accrued interest receivable on the notes purchased and the price
paid. The amounts in excess of purchase price will be recognized when the
principal due on the notes is received, net of any costs associated with final
settlement.
In 1997, the notes receivable from former Limited Partners of Columbus I and
Columbus II matured. The "amounts in excess of purchase price" relating to these
notes were realized at the time of settlement. The 1997 financial statements
reflect a gain on the settlement of the notes of $3,315,337 (amounts in excess
of purchase price).
Advances to and from related entities as of December 31, 1999 and 1998 consisted
of advances to Columbus I of $406,220.
These related entities are under the control of the partners of Phoenix. The
partners have represented that substantially all of these amounts will be
settled among the parties.
5. Notes Payable
Notes payable at December 31, 1999 and 1998 was $105,564,908. On August 21, 1998
Coaxial and Phoenix completed an offering of $140 million 10% senior notes
("Senior Notes") due 2006. The proceeds of the Senior Notes were allocated
$105.6 million to Phoenix and $34.4 million to Coaxial. Interest is payable in
cash semi-annually on each February 15 and August 15. Interest payments
commenced on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interest in Insight Ohio. The Series A Preferred Interest has
a liquidation preference of $140 million and pays distributions in an amount
equal to the interest payments on the Senior Notes. The Series A Preferred
Interest is owned by Coaxial and is pledged to Bank of Montreal Trust Company,
as trustee, for the benefit of the holders of the Senior Notes. Coaxial will
utilize cash distributions on the Series A Preferred Interest to make payments
on the Senior Notes, including distributions to Phoenix. The Senior Notes
contain covenants that, among other things, restrict the ability of Coaxial,
Phoenix, Insight Ohio and any of their Restricted Subsidiaries to: incur
additional indebtedness; pay dividends and make distributions; issue stock of
subsidiaries to third parties; make certain investments; repurchase stock;
create liens; enter into transactions with affiliates; enter into sale and
leaseback transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving all or
substantially all of the assets of Coaxial, Phoenix and their Restricted
Subsidiaries, taken as a whole; transfer or sell assets; use distributions on
the Series A Preferred Interest or Series B Preferred Interest for any purpose
other than required payments of interest and principal on the Senior Notes or
Discount Notes, respectively; and swap assets.
In connection with the issuance of the Senior Notes, Phoenix incurred financing
fees of $3,800,262 that are being amortized over the life of the Senior Notes.
Amortization expense related to the deferred financing costs was $467,995 and
$159,502 for the years ended December 31, 1999 and 1998, respectively. Interest
expense incurred on the Senior Notes was $10,556,000 and $3,841,211 for the
years ended December 31, 1999 and 1998, respectively.
F-34
Report of Independent Auditors
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheets of Insight Communications of
Central Ohio, LLC as of December 31, 1999 and 1998, and the related statements
of operations and members' deficit and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insight Communications of
Central Ohio, LLC at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 29, 2000
F-35
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEETS
(in thousand of dollars)
December 31,
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 882 $ 6,709
Subscriber receivables, less allowance for doubtful
Accounts of $383 and $306 in 1999 and 1998, respectively 790 1,186
Other accounts receivable, less allowance for doubtful
Accounts of $175 and $145 in 1999 and 1998, respectively 3,136 1,520
Prepaid expenses and other current assets 155 166
--------- ---------
Total current assets 4,963 9,581
PROPERTY AND EQUIPMENT, at cost:
Land and Land Improvements 260 260
CATV systems 96,734 71,032
Equipment 8,027 7,102
Furniture 362 333
Leasehold improvements 71 71
--------- ---------
105,454 78,798
Less accumulated depreciation and amortization (53,999) (46,898)
--------- ---------
Total property and equipment, net 51,455 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,404 7,385
Other intangible assets 379 300
Less accumulated amortization (7,395) (7,348)
--------- ---------
Total intangible assets, net 388 337
Due from Related Parties 158 149
--------- ---------
Total assets $ 56,964 $ 41,967
========= =========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,963 3,230
Accrued interest 212 --
Accrued liabilities 5,060 2,535
Accrued programming 1,890 1,868
Series A Preferred Dividend Payable 5,250 5,211
--------- ---------
Total current liabilities 17,448 12,967
Capital lease obligations 43 105
Other deferred credits 2,408 1,146
Due to related parties -- 1,029
Series A Preferred Interest 140,000 140,000
Series B Preferred Interest 35,556 31,438
Senior Credit Facility 11,000 --
--------- ---------
Total liabilities and preferred interests 206,455 186,685
--------- ---------
Members' deficit (149,491) (144,718)
--------- ---------
Total liabilities and members' deficit $ 56,964 $ 41,967
========= =========
see accompanying notes
F-36
Insight Communications of Central Ohio, LLC
StatementS of Operations and Changes in Members' Deficit
(dollars in thousands)
For the years ended December 31,
1999 1998
--------- ---------
REVENUES $ 46,747 $ 47,956
OPERATING EXPENSES:
Service and administrative 27,619 29,695
Severance and transaction structure costs -- 4,822
Depreciation and amortization 7,148 5,311
--------- ---------
Total operating expenses 34,767 39,828
--------- ---------
OPERATING INCOME 11,980 8,128
OTHER INCOME (EXPENSE) 92 (422)
Interest expense (505) --
Interest income 208 59
--------- ---------
Interest (expense) income, net (297) 59
--------- ---------
NET INCOME 11,775 7,765
Accrual of preferred interests (17,928) (6,649)
--------- ---------
(Loss) income attributable to common interests (6,153) 1,116
Members' deficit, beginning of period (144,718) --
Net assets contributed -- 25,571
Member Contributions 2,000 10,000
Preferred Membership Interest -- (170,000)
Capital Distributions (620) (11,405)
--------- ---------
Members' deficit, end of period $(149,491) $(144,718)
========= =========
See accompanying notes
F-37
Insight Communications of Central Ohio, LLC
StatementS of Cash Flows
(dollars in thousands)
For the years ended December 31,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,775 $ 7,765
Adjustments to reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 7,148 5,311
Changes in certain assets and liabilities:
Subscriber receivables 396 (524)
Other accounts receivable, prepaid expenses and other
current assets (1,605) (423)
Accounts payable and accrued liabilities 5,537 2,270
Accrued interest 212 --
Due to affiliates (1,038) --
-------- --------
Net cash provided by operating activities $ 22,425 $ 14,399
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (26,656) (7,369)
Increase in other intangible assets (98) (300)
Proceeds from disposal of property and equipment -- 11
Increase in amounts due to/from related parties -- 979
-------- --------
Net cash used in investing activities $(26,754) $ (6,679)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (112) (180)
Capital Contributions 2,000 10,000
Capital Distributions (620) (11,405)
Cash used in activities not included in net assets
contributed to Insight -- --
Preferred interest distribution (13,766) --
Borrowings under senior credit facility 11,000 --
-------- --------
Net cash used in financing activities $ (1,498) $ (1,585)
-------- --------
NET (DECREASE) INCREASE IN CASH (5,827) 6,135
CASH, beginning of period 6,709 574
-------- --------
CASH, end of period $ 882 $ 6,709
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 293 $ --
see accompanying notes
F-38
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the "Company")
was formed on July 23, 1998 in order to acquire all of the assets and
liabilities comprising the cable television system of Coaxial Communications of
Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television system (the "System") for which Coaxial received a 25% non-voting
common membership interest in Insight Ohio as well as 100% of the voting
preferred membership interests of Insight Ohio ("Series A Preferred Interest"
and "Series B Preferred Interest"). In conjunction therewith, Insight Holdings
of Ohio, LLC ("IHO") contributed $10 million in cash to Insight Ohio for which
it received a 75% non-voting common membership interest in Insight Ohio. The
accompanying financial statements include the operations of the cable television
systems contributed by Coaxial to Insight Ohio, as if the aforementioned
contribution had occurred as of January 1, 1998. The amounts included in the
accompanying financial statements for periods prior to August 21, 1998 represent
the operations of the cable system operating unit (the "Operating Unit" and
predecessor to Insight), which, prior to such date, was an operating unit within
Coaxial. Insight Ohio provides basic and expanded cable services to homes in
Columbus, Ohio and surrounding areas. The Company operates in one business
segment.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140 million of 10% senior notes ("Senior Notes") due in 2006. The Senior Notes
are non-recourse and are secured by the issued and outstanding Series A
Preferred Interest in Insight Ohio and are conditionally guaranteed by Insight
Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related
entities, issued 12 7/8% senior discount notes due 2008 ("Senior Discount
Notes"). The Senior Discount Notes have a face amount of $55.9 million and
approximately $30 million of gross proceeds were received upon issuance. The
Senior Discount Notes are non-recourse, secured by the issued and outstanding
Series B Preferred Interest in Insight Ohio and 100% of the common stock of
Coaxial, and conditionally guaranteed by Insight Ohio. 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 Interest
in August 2006 and the Series B Preferred Interest on August 21, 2008 at their
respective face values. In addition, Insight Ohio is required to pay dividends
on the Series A Preferred Interest and the Series B Preferred Interest in
amounts equal to the interest requirements on the Senior Notes and the Senior
Discount Notes.
As a result of the transaction described above, Insight Ohio incurred severance
costs and transaction structure costs of approximately $4,822,000 in 1998 which
have been reflected in the accompanying statements of operations.
2. Summary of Significant Accounting Policies
Cash
Insight Ohio considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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.
Fair Value of Financial Instruments
The carrying amounts of current asset and liabilities approximate their fair
market value because of the immediate or short term maturity of these financial
instruments.
F-39
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS, (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements. Such
amounts were not significant at December 31, 1999 and 1998.
Concentration of Credit Risk
Financial instruments that potentially subject Insight Ohio to concentrations of
credit risk consist principally of trade accounts receivable. Insight Ohio's
customer base consists of a number of homes concentrated in the central Ohio
area. Insight Ohio continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1999 and 1998,
Insight Ohio had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in the statement of operations.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets as follows:
Cable television ("CATV") systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
Depreciation expense for the years ended December 31, 1999 and 1998 was
approximately $7,096,000 and $5,268,000, respectively.
Assets held under capital leases at December 31, 1999 and 1998 were $116,541 and
$228,458, respectively.
Insight Ohio internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Insight Ohio reviews its property, plant and equipment and other long term
assets when events or changes in circumstances indicate the carrying amounts may
not be recoverable. When such conditions exist, management estimates the future
cash flows from operations or disposition. If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount would be recorded, and an impairment loss would be
recognized. Insight Ohio does not believe that there is an impairment of such
assets.
Franchise Costs
Franchise costs are amortized using the straight-line method over the lives of
the related franchises which range from 7 to 15 years.
F-40
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS, (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $1,309,000 and
$2,152,000 for the years ended December 31, 1999 and 1998, respectively.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal years beginning after June 15, 2000. The Company does
not anticipate the adoption of this Statement to have a material impact on its
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. Income Taxes
Insight Ohio is a limited liability corporation. Therefore, each member reports
his distributive share of income or loss on his respective income tax returns.
Prior to August 21, 1998 the Operating Unit was an operating unit within
Coaxial, which in turn was a subchapter S Corporation. Therefore, each
shareholder reported his distributive share of income or loss on his respective
tax return. As a result, Insight Ohio does not provide for Federal or State
income taxes in its accounts. In the event that the limited liability
corporation election is terminated, deferred taxes related to book and tax
temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of Insight Ohio's
members are limited to their respective investments.
4. 401(k) Plan
The Company sponsors various 401(k) Plans (the "Plans") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employee's wages. Company
contributions to the Plans approximated $120,000 and $145,000 in 1999 and 1998,
respectively.
5. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity, with reductions to the amount of
the commitment commencing after three years. The amount available for borrowing
is reduced by any outstanding letter of credit obligations. Insight Ohio's
obligations under the Senior Credit Facility are secured by substantially all
the tangible and intangible assets of Insight Ohio. Loans under the Senior
Credit Facility bear interest, at Insight Ohio's option, at the prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow. The weighted average interest rate in effect at
December 31, 1999 was 7.9%.
F-41
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS, (CONTINUED)
5. Credit Facility (continued)
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including, in
the event of a payment default under the Senior Credit Facility, distributions
on the Series A Preferred Interest and the B Preferred Interest that are
required to pay the Senior Notes and the Senior Discount Notes create liens on
assets, make investments, make acquisitions, engage in mergers or
consolidations, engage in certain transactions with subsidiaries and affiliates
and otherwise restrict certain activities. In addition, the Senior Credit
Facility requires compliance with certain financial ratios, including with
respect to total leverage, interest coverage and proforma debt service coverage.
At December 31, 1999, Insight Ohio exceeded the annual capital expenditure limit
stated in the Senior Credit Facility. Insight Ohio's lender has waived this
limitation through December 31, 1999. Management does not expect that these
covenants will materially impact the ability of Insight Ohio to operate its
business.
As of December 31, 1999, $11,000,000 was borrowed under the Senior Credit
Facility. Interest expense including fees paid to the lender was approximately
$500,000 for the year ended December 31, 1999.
6. Related Party Transactions
Effective August 21, 1998, the Company entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee of equivalent to 3% of Insight Ohio's gross operating revenues.
Fees under this management agreement were approximately $1,435,000 for the year
ended December 31, 1999 and $493,000 for the period from August 21 through
December 31, 1998. Prior to August 21, 1998, service and administrative expenses
included administrative expenses and management fees for services provided by an
affiliate of the Company. Such expenses were approximately $1,371,000 for the
period from January 1, 1998 to August 21, 1998.
Insight Ohio had receivables from related parties as of December 31, 1999 and
1998 of $158,000 and $149,321, respectively, relating to working capital
requirements.
7. Operating Lease Agreements
Insight Ohio leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $126,300 and $105,700
for the years ended December 31, 1999 and 1998, respectively. These amounts
exclude year-to-year utility pole leases of approximately $191,000 in 1999 and
1998, which provide for payments based on the number of poles used.
Future minimum rental commitments required under non-cancelable operating leases
are as follows:
2000 $ 60,400
2001 5,000
F-42
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS, (CONTINUED)
8. Capital Lease Agreements
Insight Ohio leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under these leases are as follows:
2000 $ 92,454
2001 30,223
2002 3,004
--------
125,681
Less: Amount representing interest (9,140)
Less: Current portion of capital lease obligations (73,544)
---------
Long-term capital lease obligations $ 42,997
=========
9. Commitments and Contingencies
Insight Ohio is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either Insight Ohio's future results of operations
or financial position.
10. Subsequent Event
On March 15, 2000, the parent company of IHO, Insight Communications Company,
Inc. ("ICCI"), reached an agreement in principle with AT&T Corp. for the
delivery of telephone service utilizing Insight Ohio's cable television systems
under the "AT&T" brand name. The terms of the agreement in principle provide
that Insight Ohio will market, service and bill for local telephone service.
AT&T would be required to install and maintain the necessary switching
equipment, and would be the local exchange carrier of record. AT&T would pay
Insight Ohio a fee for the use of the local telephone lines, and will also
compensate Insight Ohio for installation and maintenance services at customers'
residences. In addition, AT&T would pay Insight Ohio commissions for sales
Insight Ohio makes to its customers. Insight Ohio expects to sell the AT&T-
branded local telephone service separately and as part of bundled offerings,
which would also include the sale of AT&T long-distance telephone services. The
agreement in principle is subject to the negotiation and execution of definitive
agreements.
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband,
LLC to contribute to its AT&T joint venture additional cable television systems
serving approximately 537,000 customers. Through a series of transactions,
Insight will contribute to the joint venture its interests in systems serving
approximately 187,000 customers, including the System, and AT&T Broadband will
contribute systems serving approximately 350,000 customers. As a result, the
joint venture would increase its customer base of approximately 748,800 as of
December 31, 1999 to approximately 1.3 million. Upon completion of the
transactions, the joint venture would remain equally owned by Insight and AT&T
Broadband, and Insight would continue to serve as the general partner and manage
and operate the joint venture systems. The transactions are subject to the
negotiation and execution of definitive agreements.
F-43
Report of Independent Public Accountants
To the Shareholders of
Coaxial Communications of Central Ohio, Inc.:
We have audited the accompanying statement of net assets to be contributed of
Central Ohio Cable System Operating Unit as of December 31, 1997 and the related
statements of operations and cash flows relating to the net assets to be
contributed for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements of net assets to be contributed were
prepared to present the net assets of Central Ohio Cable System Operating Unit
to be contributed to a newly formed company pursuant to the Contribution
Agreement described in Note 10, and is not intended to be a complete
presentation of Central Ohio Cable System Operating Unit.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets to be contributed of Central Ohio Cable
System Operating Unit as described in Note 10, as of December 31, 1997, and the
results of its operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998.
F-44
Central Ohio Cable System Operating Unit
Statement of Net Assets to be Contributed
as of December 31, 1997
(dollars in thousands)
ASSETS
Current assets:
Cash ............................................................ $ 574
Subscriber receivables, less allowance for doubtful
accounts of $202 ........................................ 661
Other accounts receivable, less allowance for
doubtful accounts of $172 ............................... 1,037
Prepaid expenses and other current assets .................. 201
--------
Total current assets ............................................ 2,473
--------
Property and equipment, at cost:
CATV systems ............................................... 64,949
Equipment .................................................. 6,941
Furniture .................................................. 211
Leasehold improvements ..................................... 70
--------
72,171
Less--Accumulated depreciation and amortization ............ (42,434)
--------
Total property and equipment, net ............................... 29,737
--------
Intangible assets, at cost:
Franchise rights and other ................................. 7,392
Less--Accumulated amortization ............................. (7,323)
--------
Total intangible assets, net .................................... 69
--------
Other assets:
Due from related parties ................................... 99
--------
Total other assets .............................................. 99
--------
Total assets .................................................... $ 32,378
========
LIABILITIES AND NET ASSETS
Current liabilities:
Current portion of capital lease obligations ............... $ 213
Accounts payable ........................................... 2,805
Accrued liabilities ........................................ 3,597
--------
Total current liabilities ....................................... 6,615
--------
Capital lease obligations ....................................... 194
--------
Total liabilities ............................................... 6,809
Commitments and contingencies
Net assets to be contributed ............................... 25,569
--------
Total liabilities and net assets ................................ $ 32,378
========
The accompanying notes to financial statements are an integral part of these
statements.
F-45
Central Ohio Cable System Operating Unit
Statement of Operations Related to Net Assets to be Contributed
For the year ended December 31, 1997
(dollars in thousands)
Operating revenues:
Service fees ................................................ $42,544
Advertising ................................................. 3,373
Connection fees ............................................. 282
Other ....................................................... 2,030
-------
Total operating revenues .............................. 48,229
-------
Operating expenses:
Service and administrative .................................. 28,889
Depreciation ................................................ 4,755
Amortization ................................................ 483
-------
Total operating expenses .............................. 34,127
-------
Operating income ................................................. 14,102
Other expenses ................................................... 322
Other income ..................................................... 50
Interest income .................................................. 70
-------
Net income from net assets to be contributed (Note 3) ............ 13,900
=======
The accompanying notes to financial statements are an integral part of these
statements.
F-46
Central Ohio Cable System Operating Unit
Statement of Cash Flows
For the year ended December 31, 1997
(dollars in thousands)
Cash flows from operating activities:
Net income .................................................. $ 13,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................... 5,238
Loss on disposals of property and equipment ................. 77
Changes in certain assets and liabilities:
(Increase) decrease in assets--
Subscriber receivables ................................ 182
Other accounts receivable, prepaid expenses
and other current assets ........................... 325
Increase (decrease) in liabilities--
Accounts payable ...................................... 422
Accrued liabilities ................................... (692)
Deferred income ....................................... --
--------
Net cash provided by operating activities ............. 19,452
--------
Cash flows from investing activities:
Capital expenditures for property and equipment ............. (5,529)
Proceeds from disposal of property and equipment ............ 26
(Increase) decrease in amounts due from related
parties .................................................. (51)
--------
Net cash used in investing activities ................. (5,554)
Cash flows from financing activities:
Principal payments on capital lease obligations ................ $ (265)
Cash used for activities not included in net
assets to be contributed .................................... (13,967)
--------
Net cash used in financing activities ................. (14,232)
--------
Net increase (decrease) in cash ................................ (334)
Cash, beginning of year ..................................... 908
--------
Cash, end of year ........................................... $ 574
========
Supplemental Disclosure of Investing and Financing Noncash Transactions:
During 1997, the Operating Unit entered into capital leases to acquire
vehicles and equipment totaling $57.
The accompanying notes to financial statements are an integral part of these
statements.
F-47
Central Ohio Cable System Operating Unit
Notes to Financial Statements
1. Business Organization and Purpose
Central Ohio Cable System Operating Unit (the Operating Unit or the
System), an operating unit within Coaxial Communications of Central Ohio, Inc.
(Coaxial), operates a cable television system which provides basic and expanded
cable services to homes in Columbus, Ohio and surrounding areas. The Operating
Unit's financial statements include only those assets, liabilities, revenues and
expenses directly related to the cable television system to be contributed (see
Note 10). All costs pertaining to the Operating Unit are specifically
identifiable and are included in the Operating Unit's financial statements. No
allocation of costs is necessary.
2. Summary Of Significant Accounting Policies
Cash
The Operating Unit considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on- and off-balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current assets and
liabilities approximate their fair market value because of the immediate or
short-term maturity of these financial instruments.
Operating Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system.
Concentration of Credit Risk
Financial instruments that potentially subject the Operating Unit to
concentrations of credit risk consist principally of trade accounts receivable.
The Operating Unit's customer base consists of a number of homes concentrated in
the central Ohio area. The Operating Unit continually monitors the exposure for
credit losses and maintains allowances for anticipated losses. As of December
31, 1997, the Operating Unit had no significant concentrations of credit risk.
F-48
Central Ohio Cable System Operating Unit
Notes to Financial Statements (Continued)
2. Summary Of Significant Accounting Policies--(Continued)
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs
are expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
Years
-----
CATV systems................................... 10 to 15
Equipment...................................... 5
Furniture...................................... 5
Leasehold improvements......................... Life of lease
The Operating Unit internally constructs certain CATV systems. Construction
costs capitalized include payroll, fringe benefits and other overhead costs
associated with construction activity.
The Operating Unit reviews its property, plant and equipment and other long
term assets when events or changes in circumstances indicate the carrying
amounts may not be recoverable. When such conditions exist, management estimates
the future cash flows from operations or disposition. If the estimated
undiscounted future cash flows are less than the carrying amount of the asset,
an adjustment to reduce the carrying amount would be recorded, and an impairment
loss would be recognized. The Operating Unit does not believe that there is an
impairment of such assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Years
-----
Franchise rights................................... 7 to 15
Home Office Expenses
Home office expenses of approximately $1,498,000 in 1997 (included in
selling and administrative expenses) include billings for legal fees, management
fees, salaries, travel and other management expenses for services provided by an
affiliated services company.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily
for campaign and telemarketing-related efforts was approximately $1,025,000 in
1997.
F-49
Central Ohio Cable System Operating Unit
Notes to Financial Statements (Continued)
2. Summary Of Significant Accounting Policies--(Continued)
Change in Net Assets
The components of the change in net assets at December 31, 1997 are as
follows:
Beginning Balance............................................... $25,636,856
Net income.................................................. 13,900,935
Advances, loans and repayments
by Coaxial............................................ (13,967,020)
-----------
Ending Balance.................................................. $25,570,771
===========
Advances, loans and repayments by Coaxial represent cash generated by the
Operating Unit that was used by Coaxial primarily for lending to related parties
and paying of notes payable. The advances, loans and repayments consist of the
following for the year ended December 31, 1997:
Advances........................................................ $(10,519,748)
Loans........................................................... 2,938,723
Repayments...................................................... (6,385,995)
----------
(13,967,020)
3. Income Taxes
The Operating Unit is an operating unit within Coaxial, which is a
Subchapter S corporation. Therefore, each shareholder reports his distributive
share of income or loss on his respective income tax returns. As a result, the
Operating Unit does not provide for Federal or state income taxes in its
accounts.
4. Thrift Plan
The Operating Unit participates in an employer sponsored Thrift Plan (the
Plan) for employees having at least one full year of service. Employees can
contribute up to 6% of their salary to the Plan which is matched 50% by the
Operating Unit. Employees can also contribute an additional 1% to 10% which is
not matched by the Operating Unit. Employees become fully vested in matching
contributions after 5 years. There is no partial vesting. The Operating Unit's
contributed approximately $133,000 to the Plan in 1997.
5. Workers' Compensation Reserves
The Operating Unit is partially self-insured for workers' compensation
benefits. The amounts charged to expense for workers' compensation were
approximately $89,200 for 1997 and were based on actual and estimated claims
incurred. The liability for workers' compensation obligations, as of December
31, 1997 is approximately $78,000.
F-50
Central Ohio Cable System Operating Unit
Notes to Financial Statements (Continued)
6. Related Party Transactions
The Operating Unit has a receivable from a related party as of December 31,
1997 of $98,584 relating to the leasing of fiber optic facilities. The Operating
Unit pays rent to a partnership owned by Coaxial's shareholders for two
facilities. Total charges for rent were approximately $99,500 in 1997.
7. Operating Lease Agreements
The Operating Unit leases land for tower locations, office equipment,
office space, vehicles and the use of utility poles under various operating
lease agreements. Rental expense for all operating leases was approximately
$218,500 in 1997. These amounts exclude year-to-year utility pole leases of
$182,700 which provide for payments based on the number of poles used.
Minimum rental commitments required under noncancellable operating leases
are as follows:
1998................................................................... $157,214
1999................................................................... 146,389
2000................................................................... 89,421
2001................................................................... 200
--------
$393,224
========
8. Capital Lease Agreements
The Operating Unit leases vehicles, computer equipment and Xerox equipment
under capital leases. These leases have various terms of 4-5 years. Future
minimum payments under the leases are as follows:
For the Years Ending December 31,
---------------------------------
1998................................................................... $244,516
1999................................................................... 124,019
2000................................................................... 66,283
2001................................................................... 24,370
2002................................................................... 3,005
--------
462,193
Less: Amount representing interest..................................... 54,896
Less: Current portion of capital lease obligations..................... 213,103
--------
Long-term capital lease obligations.................................... $194,194
========
As of December 31, 1997, the Operating Unit has assets held under capital
leases as follows:
Total costs............................................................ $1,151,354
Related accumulated amortization....................................... (628,973)
----------
Net book value as of December 31, 1997................................. $ 522,381
==========
F-51
Central Ohio Cable System Operating Unit
Notes to Financial Statements (Continued)
9. Commitments and Contingencies
The Operating Unit is party in or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Operating Unit's future
results of operations or financial position.
Capital expenditures for the Operating Unit for 1998 are expected to be
approximately $5,515,000.
10. Subsequent Event
On June 30, 1998, Coaxial and Insight Communications Company, L.P.
(Insight) entered into a Contribution Agreement (the Contribution Agreement)
pursuant to which Coaxial will contribute to a newly formed subsidiary (a
limited liability company) of Coaxial (the Operating Company) substantially all
of the assets and liabilities comprising the Operating Unit, and Insight will
contribute $10 million in cash to the Operating Company. As a result of this
Contribution Agreement, Coaxial will own 25% of the non-voting common equity and
Insight will own 75% of the non-voting common equity of the Operating Company,
subject to possible adjustments pursuant to the Contribution Agreement. Coaxial
will also own two separate series of voting preferred equity (a $140 preferred
equity interest and a $30 million preferred equity interest) of the Operating
Company; the voting preferred equity interest will provide for distributions to
Coaxial equal in amount to the payments on the senior and senior discount notes
described below. Insight or an affiliate will serve as the manager of the
Operating Company.
The closing of the Contribution Agreement is conditioned upon, among other
things, the private placement of $140 million senior notes by Coaxial and
Phoenix Associates (a related entity) and the private placement of $30 million
of senior discount notes by the majority shareholder of Coaxial.
F-52
Report of Independent Auditors
The Member
Coaxial LLC
We have audited the consolidated financial statements of Coaxial LLC as of
December 31, 1999 and 1998 and for the years then ended, and have issued our
report thereon dated March 29, 2000 (included elsewhere in this Form 10-K). Our
audits also included the financial statement schedule listed in Item 14(a) of
this Form 10-K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 29, 2000
Coaxial LLC
Schedule II - Valuation and Qualifying Accounts
Charged to Charged to
Beginning Costs & Other Ending
Description Balance Expenses Accounts Deductions (1) Balance
----------- ------- -------- -------- -------------- -------
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts ...... 374,000 833,000 -- (756,000) 451,000
Year ended December 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts ...... 451,000 918,000 -- (811,000) 558,000
- ------------
(1) Uncollectible accounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Coaxial LLC
Date: March 29, 2000 By: /s/ Michael S. Willner
-----------------------
Michael S. Willner, President
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 March 29, 2000
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President and Chief Executive Officer (Principal March 29, 2000
- ---------------------- Executive Officer)
Michael S. Willner
/s/ Kim D. Kelly Executive Vice President, Chief Financial and Operating March 29, 2000
- ---------------- Officer and Treasurer (Principal Financial and
Kim D. Kelly Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Coaxial Financing Corp.
Date: March 29, 2000 By: /s/ Michael S. Willner
-----------------------
Michael S. Willner, President
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 Director and Chairman March 29, 2000
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner Director, President and Chief Executive Officer March 29, 2000
- ---------------------- (Principal Executive Officer)
Michael S. Willner
/s/ Kim D. Kelly Director, Executive Vice President, Chief Financial and March 29, 2000
- ---------------- Operating Officer and Treasurer (Principal Financial
Kim D. Kelly and Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Insight Communications of Central Ohio LLC
Date: March 29, 2000 By: /s/ Michael S. Willner
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Michael S. Willner, President
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 March 29, 2000
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President and Chief Executive Officer (Principal March 29, 2000
- ---------------------- Executive Officer)
Michael S. Willner
/s/ Kim D. Kelly Executive Vice President, Chief Financial and Operating March 29, 2000
- ---------------- Officer and Treasurer (Principal Financial and
Kim D. Kelly Accounting Officer)