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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, 2002
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 13-4080422
Delaware 13-4061992
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
c/o Insight Communications Company, Inc.
810 Seventh Avenue
New York, NY 10019
(917) 286-2300
(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 each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
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 registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: Not Applicable
Indicate by check mark whether any registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
State the aggregate market value of the voting and non-voting 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:
o 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;
o 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;
o 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
o 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.
PART I
Item 1. Business
In this report, we rely on and refer to information and statistics
regarding the cable television industry and our market share in the sectors in
which we compete. We obtained this information and statistics from various
third-party sources, discussions with our customers and our own internal
estimates. We believe that these sources and estimates are reliable, but we have
not independently verified them and cannot guarantee their accuracy or
completeness.
Overview
Insight Ohio owns and operates a cable television system in the Columbus,
Ohio metropolitan area (the "System"). As of December 31, 2002, the System
passed approximately 198,700 homes and served approximately 88,100 basic
customers in the eastern portion of the City of Columbus and the surrounding
suburban communities. All of the System's customers are served from a single
headend allowing for efficient capital deployment for new services. A headend
processes signals received for distribution to customers over our network.
Insight Communications Company, Inc. ("Insight"), through its wholly-owned
subsidiary Insight Communications Company, L.P., serves as the manager of the
System.
The System
The System serves the eastern portion of the City of Columbus and
surrounding suburban communities. The City of Columbus is the 34th largest
designated market area ("DMA") in the United States, is the capital of Ohio and
is the home of The Ohio State University. Besides the state government and
university, the Columbus economy is well diversified with a significant presence
of prominent companies such as The Limited, Merck, Wendy's, Nationwide
Insurance, Borden and Worthington Industries. The median household income of the
System's service area is approximately $40,300 per year, while the median family
income is approximately $50,600 per year. As of December 31, 2002, the System
passed approximately 198,700 homes and served approximately 88,100 basic
customers from a single headend.
The System enjoys a high level of population growth in the suburban
communities east of Columbus. Since December 31, 1996, approximately 37,600
homes passed have been added to the System through new plant extensions,
primarily in new housing developments. This represents a 3.5% compound annual
growth rate of homes passed for the System for the six years ended December 31,
2002.
Portions of the System operate in a competitive environment. Customers in
those areas have access to two wired cable television providers -- Insight Ohio
and WideOpenWest which acquired the assets of Ameritech in December 2001. The
System also competes with direct broadcast satellite television systems ("DBS")
and multipoint multichannel distribution systems ("MMDS"). The areas of the
System served by both Insight Ohio and WideOpenWest pass approximately 129,100
homes, representing 65% of the System's total homes passed. In this competitive
environment, the System's basic customers decreased from approximately 86,000 at
the end of 1995, prior to Ameritech's entry into the marketplace, to
approximately 84,200 as of December 31, 1999 but has steadily increased to
approximately 88,100 as of December 31, 2002.
As of December 31, 2002, the System had 2,600 miles of plant, including
1,900 miles of 870 MegaHertz (MHz) capacity, or "bandwidth," plant and 700 miles
of 450 MHz. Approximately 91% of Insight Ohio's customers are served by its
upgraded network which enables delivery of an advanced suite of entertainment,
information and communications services, including interactive digital video,
high-speed data access and telephone services. Insight Ohio's upgrade efforts
are continuing.
The Manager
Insight is the ninth largest cable television system operator in the United
States based on customers served. Through its wholly-owned and managed systems,
Insight currently serves approximately 1.4 million customers, all of which are
concentrated in the four contiguous states of Indiana, Kentucky, Illinois and
Ohio. In addition to its geographic concentration, our manager's communications
network is tightly-grouped, or "clustered," with approximately 95% of our
manager's customers served from fourteen headends after giving effect to the
remaining network upgrades of its Illinois systems, expected to be substantially
completed by mid-2003. As a result, the amount of capital necessary to deploy
new and enhanced products and services is significantly reduced on a per home
basis because of the large number of customers served by a single headend.
Clustering enables our manager to efficiently deploy a bundled suite of
entertainment, information and communications services. This combination of
geographic concentration and clustering has enabled Insight to offer, under the
Insight Digital brand, a complete bundle of interactive digital video,
high-speed data access and telephone services.
We have entered into long-term agreements with Comcast Cable Holdings, LLC
(formerly known as AT&T Broadband, LLC) to facilitate the delivery of local
telephone services. Telephone services recently have been deployed in areas
within Columbus, and are available to approximately 73,500 households. Under the
terms of these agreements, we lease for a fee certain capacity on our network to
Comcast Cable. We also provide certain services and support for which we receive
additional payments. The capital required to deploy telephone over our networks
is shared, with Comcast Cable responsible for switching and transport
facilities.
Insight Business Strategy
Our manager's strategy is to become a competitive, full-service provider of
entertainment, information and communications services. This strategy is
centered on the deployment of new and enhanced products and services for the
communities served by our networks and consists of the following elements:
o Focus on operating large, tightly-grouped clusters of cable systems
with attractive technical and demographic profiles;
o Expeditiously upgrade our network;
o Introduce new and enhanced products and services, including
interactive Insight Digital service, high-speed data service and
telephone service;
o Leverage strong local presence to enhance customer and community
relations; and
o Pursue value-enhancing transactions in nearby or adjacent geographies.
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Our manager's marketing strategy is to offer our customers an array of
entertainment, information and communications services on a bundled basis. By
bundling our products and services, we provide our customers with an increased
choice of services in value-added packages, which we believe results in higher
customer satisfaction, increased use of our services and greater customer
retention. Our manager began deploying new and enhanced products and services,
such as interactive digital video and high-speed data access, during 1999, and
we have launched a telephone service alternative to SBC (Ameritech) through our
arrangement with Comcast Cable.
The System is an integral part of Insight's long-term business strategy.
The System has a strong market presence in a state capital and academic center
with a diverse, growing economy. All of the System's customers are served from a
single headend allowing for efficient capital deployment for new services.
Moreover, Insight Ohio estimates that it serves approximately 91% of the
subscribers in the System with upgraded network. Insight Ohio began launching
the interactive Insight Digital service on a node-by-node basis in November
1999, including a video-on-demand and interactive informational service and
launched its high-speed Internet service during the second quarter of 2000.
Nodes are the point of interface between our headend and our network.
System Operating Strategy
The System fits the profile of cable television systems that Insight seeks
to own and operate. The System is large enough to have a significant market
presence and all customers are serviced from one headend. In addition, Columbus
is geographically proximate to other Insight cable systems with a customer
universe having the type of demographic profile that Insight believes will
widely accept new telecommunications offerings. Insight Ohio intends to
aggressively implement Insight's upgrade strategy in Columbus.
Insight has substantially completed rebuilding the System to 870 MHz, and
began servicing customers from the rebuilt network in November 1999. Insight
Ohio has launched its signature interactive Insight Digital service with
exclusive interactive programming including Local Source, an Internet-styled
information service, and a video-on-demand service by SeaChange International.
As of December 31, 2002, the System passed 81,700 homes with its digital service
and served approximately 29,400 customers with such service, representing a
penetration level of almost 36%. Management expects to increase revenues as the
System upgrade is completed by increasing the deployment of its digital cable,
high-speed modem and telephone services. Insight Ohio has an agreement with Road
Runner to deploy the Road Runner service over cable modems. As of December 31,
2002, approximately 18,600 customers subscribed to the Road Runner service.
In addition, the System provides exclusive sports programming under the
"Sport TV!" brand, featuring sporting events from Ohio State University.
Overbuild
In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus and suburban communities in Franklin County. WideOpenWest
acquired the assets of Ameritech in December 2001, and has built its citywide
franchise, both in our service area and in the Time Warner service area on the
west side of Columbus. Insight Ohio and Time Warner service virtually distinct
areas and therefore do not compete with one another. As of December 31, 2002,
the areas of the System served by both Insight
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Ohio and WideOpenWest passed approximately 129,100 homes, representing 65% of
the System's total homes passed.
When the System was acquired by Insight Ohio in August 1999, it implemented
a strategy to end deep discounting as a defense against Ameritech. Management
believed that a relatively small customer loss, caused by discontinuing
discounts, would be preferable in exchange for achieving an increase in the
average monthly revenue per customer. As a result of this strategy, from June
30, 1998 to December 31, 2002, the average monthly revenue per customer
increased from $43.30 to $62.44 while the number of customers decreased from
91,100 to 88,100.
Technological Developments
Management believes that in order to achieve consistently high levels of
customer service, reduce operating costs, maintain a strong competitive position
and deploy important new technologies, we will need to install and maintain a
state-of-the-art technical platform. As of December 31, 2002, the System was
comprised of 2,600 miles of plant passing approximately 198,700 homes resulting
in a density of 76.4 homes per mile. Approximately 91% of the customers are
served by a network upgraded to 870 MHz, which enables delivery of an advanced
suite of entertainment, information and communications services, including our
interactive digital video, high-speed data access and telephone services.
Insight Ohio's upgrade efforts are continuing. The deployment of fiber
optic cable, which has a capacity for a very large number of channels, an
increase in the bandwidth to 870 MHz, activation of a two-way communications
network and the installation of digital equipment will allow us to deliver new
and enhanced products and services.
All of the System's basic customers currently have access to addressable
technology and approximately 80% have addressable converters in their homes as
of December 31, 2002. Addressable technology enables the System to
electronically control the cable television services being delivered to the
customer's home. As a result, the System can electronically upgrade or downgrade
services to a customer immediately, from its customer service center, without
the delay or expense associated with dispatching a technician to the customer's
home. Addressable technology also reduces premium service theft, is an effective
enforcement tool in the collection of delinquent payments and enables the System
to offer pay-per-view services, including movies and special events.
Management believes that active use of fiber optic technology as a
supplement to coaxial cable plays a major role in expanding channel capacity and
improving the performance of the System. Fiber optic strands are capable of
carrying hundreds of video, data and voice channels over extended distances
without the extensive signal amplification typically required for coaxial cable.
The System will continue to deploy fiber optic cable to further reduce amplifier
cascades while improving picture quality and system reliability.
High-speed cable modems and set-top boxes using digital compression
technology have become commercially viable. These developments allow for the
introduction of high-speed data services and Internet access and will increase
the programming services available to customers. Digital compression technology
provides for a significant expansion of channel capacity with up to 12 digital
channels to be carried in the bandwidth of one analog channel. The upgrade of
the System has given the System the ability to package a "Digital Gateway"
brand. For $7.95 customers receive the following services:
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o A digital set-top box;
o An interactive navigational program guide for all analog and digital
channels;
o A local, interactive Internet-style information and entertainment
service;
o A multi-channel premium service for customers who separately subscribe
to premium channels, such as HBO and Showtime;
o Video-on-demand;
o Mag Rack, a video magazine service with full video-on-demand
functionality; and
o A digital 40-channel audio music service.
Insight Ohio began launching the Insight Digital service in the System on a
node-by-node basis in November 1999, including its video-on-demand service and
the Local Source interactive information service, and as of December 31, 2002
served approximately 29,400 subscribers with its digital service. Insight Ohio
launched the Road Runner high-speed Internet service during the second quarter
of 2000 and served approximately 18,600 customers with this service as of
December 31, 2002.
Marketing, Programming and Rates
Marketing
The System's marketing programs and campaigns are based upon offering a
variety of cable services creatively packaged and tailored to appeal to its
different markets and to segments within its markets. The System surveys its
customer base to ensure that it is meeting the demands of its customers and
stays abreast of its competition in order to effectively counter competitors'
promotional campaigns. The System uses a coordinated array of marketing tactics
to attract and retain customers and to increase premium service penetration,
including door-to-door and direct mail solicitation, telemarketing, media
advertising, local promotional events typically sponsored by programming
services and cross-channel promotion of new services. The rebuild of the plant
allows Insight Ohio to deploy its suite of services including interactive
digital, high-speed data and telephone services. In November 1999, Insight Ohio
began to launch its interactive digital, video-on-demand and Local Source
informational product on a node-by-node basis. Insight Ohio has also deployed
its Road Runner high-speed Internet service. Using a skilled team of marketing
professionals, the System has competed by supporting an innovative variety of
marketing activities.
Programming
Insight has various contracts to obtain basic and premium programming for
the System from program suppliers whose compensation is typically based on a
fixed fee per customer. Because of our manager's relationship with Comcast Cable
(formerly known as AT&T Broadband), we have the right to purchase certain
programming services for our systems through Comcast Cable's programming
supplier Satellite Services, Inc. We believe that Satellite Services has
attractive programming costs. In addition, some program suppliers provide volume
discount pricing structures or offer marketing and launch support to the System.
The System's successful marketing of multiple premium service packages
emphasizing customer value enables the System to take advantage of such cost
incentives. The System's overall programming costs are expected to increase in
the future due to additional programming being provided to its customers,
inflationary increases and other factors affecting the cable television
industry. The System also has various retransmission consent arrangements with
commercial broadcast stations which generally have been renewed through 2003.
None of these consents require payment of fees for carriage.
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The System offers a "basic service tier," consisting primarily of local
television channels (network and independent stations) available over-the-air,
and local public, governmental and educational access channels. The System also
offers, for a monthly fee, an expanded basic tier of various
satellite-delivered, non-broadcast channels (such as CNN, ESPN, MTV, TNT, and
USA). In addition to these services, the
System provides premium services such as HBO, Cinemax, Showtime, The Movie
Channel and Starz!, which have unique appeal to various segments of the viewing
audience. These services are satellite-delivered channels consisting principally
of feature films, original programming, live sports events, concerts and other
special entertainment features, usually presented without commercial
interruption. Such premium programming services are offered by the System both
on a per-channel basis and as part of premium service packages designed to
enhance customer value and to enable the System to take advantage of programming
agreements offering cost incentives based on premium service unit growth.
Customers may subscribe to one or more premium service units. A "premium service
unit" is a single premium service for which a customer must pay an additional
monthly fee in order to receive the service.
Management is upgrading the System to digital using fiber optic technology,
which has allowed the System to expand the number of multiplexed premium screens
(additional channels such as Showtime Women and HBO Family) providing greater
value for the customer. Moreover, the upgrade has given the System the ability
to offer its Insight Digital service including interactive television and
multiple packaging options through the addition of niche programming services.
Management believes that these additional features and options will increase
basic and premium penetration as well as revenue per basic customer. The System
also provides video-on-demand, a digital service consisting principally of
feature films, adult movies, concerts and other special events, presented
without commercial interruption. Such services are offered by the System on a
"per viewing" basis, with customers only paying for programs which they select
for viewing. Mag Rock is an added-value digital service offering a library of
video magazines - from cooking to classic cars to yoga - offered on a "per view"
basis at no additional charge.
Rates
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of December 31, 2002, the
System's stated monthly basic service rate for residential customers was $11.95,
the System's monthly expanded basic service rates for residential customers was
$20.45, and per-channel premium service rates (not including special promotions)
ranged from $6.95 to $13.95 per service.
A one-time installation fee, which the System may wholly or partially waive
during a promotional period, is charged to new customers. The System charges
monthly fees for converters and remote control devices. The System also charges
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. These multiple dwelling unit ("MDU") accounts may
be offered a bulk rate in exchange for single-point billing and basic service to
all units.
On February 11, 1997, a Petition for Determination of Effective Competition
filed by the prior owner of the System challenging the certification of the City
of Columbus was granted by the FCC. This petition effectively revoked the City
of Columbus' right to regulate the System's basic cable and equipment rates.
6
Employees
As of December 31, 2002, the System employed 216 full-time equivalent
employees, none of whom is represented by a union or covered by a collective
bargaining obligation. Management believes that its relations with its employees
are good. Approximately 51% of the full-time employees have tenure of five years
or longer. Management believes that it will continue to be successful in
attracting and retaining highly qualified employees and maintaining good working
relationships with its current employees.
Customer Service and Community Relations
The System is dedicated to quality customer service. Plans to make
significant system improvements are designed in part to strengthen customer
service through greater system reliability and the introduction of new services.
Management seeks a high level of customer satisfaction by also employing a
well-trained staff of customer service representatives and experienced field
technicians.
The System is dedicated to fostering strong community relations in the
communities served by the System. The System supports local charities and
community causes through staged events and promotional campaigns, including
Children's Hospital Miracle Network Telethon, the Penny-A-Day for Children
Program and Red Cross Blood Drive donations. The System also installs and
provides free cable television service and Internet access to all eligible local
schools, as well as free cable television service for government buildings in
its franchise areas. The System has teamed up with its neighboring cable
operator Time Warner to develop a local sports and entertainment channel called
"Sport TV!" which features a broad range of local programming - including high
school sports, Major League Soccer, with the Columbus Crew, Ohio State
University sports, Columbus Clippers baseball, and Smooth Jazz Concert series -
on an exclusive basis to cable customers. Management believes that its relations
with the communities in which the System operates are generally excellent.
Franchises
Cable television systems are generally constructed and operated under
fixed-term non-exclusive franchises or other types of operating authorities that
are granted by local governmental authorities. These franchises typically
contain many conditions, such as:
o time limitations on commencement and completion of construction;
o conditions of service, including number of channels, types of
programming and the provision of free service to schools and certain
other public institutions;
o the maintenance of insurance and indemnity bonds; and
o the payment of fees to communities.
The provisions of local franchises are subject to federal regulation under
the Communications Act of 1934, as amended (the "Communications Act").
The System provides cable television service to residents of 42
governmental jurisdictions. Within each of these governmental jurisdictions, the
System operates under authority granted by the local
7
community or the State of Ohio. Actual franchise agreements are maintained with
28 jurisdictions that possess the legal basis to grant such franchises
consistent with federal and state law. These franchises, which are
non-exclusive, provide for the payment of fees to the issuing authority. In the
System, such franchise fees are passed through directly to the customers. The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") and the Cable Communications Policy Act of 1984 (the "1984 Cable
Act" and, together with the 1992 Cable Act, the "Cable Acts") prohibit
franchising authorities from imposing franchise fees in excess of 5% of gross
revenue and also permit the cable television system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances.
The majority of the System's basic customers are in governmental
jurisdictions that require a franchise. The table below groups all of the
System's governmental jurisdictions by year of expiration of the System's
franchises and presents the approximate number and percentage of basic customers
for each group as of December 31, 2002.
Percentage of
Number of Percentage of Total Basic
Year of Franchise Expiration Franchises Total Franchises Customers
- ---------------------------- ----------- ---------------- -------------
Expired* ......................... 3 10.7% 1.1%
2003 and 2004 .................... 4 14.3% 3.2%
2005 and beyond .................. 21 75.0% 93.7%
Total ...................... 28 100.0% 98.0%
- ----------------
* Such franchises are operated on a month-to-month basis and are in the process
of being renewed.
The Cable Acts provide, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by such
franchise. In addition, the Cable Acts established comprehensive renewal
procedures which require, when properly elected by an operator, that an
incumbent franchisee's renewal application be assessed on its own merits and not
as part of a comparative process with competing applications.
Management believes that the System generally has good relationships with
its franchising communities. The System has never had a franchise revoked or
failed to have a franchise renewed. In addition, all of the franchises of the
System eligible for renewal have been renewed or extended at or prior to their
stated expirations, and no franchise community has refused to consent to a
franchise transfer to the System.
Competition
Cable systems face increasing competition from alternative methods of
receiving and distributing their core video business. Both wireline and wireless
competitors have made inroads in competing against incumbent cable operators.
The extent to which a cable operator is competitive depends, in part, upon its
ability to provide to customers, at a reasonable price, a greater variety of
programming and other
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communications services than are available off-air or through alternative
delivery sources and upon superior technical performance and customer service.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies, in particular direct broadcast satellite television systems
operators, that have the potential to provide increased competition to cable
systems. Congress has also enacted legislation which permits direct broadcast
satellite companies to retransmit local television signals, eliminating one of
the objections of consumers about switching to satellites.
The 1996 Telecom Act makes it easier for local exchange telephone companies
and others to provide a wide variety of video services competitive with services
provided by cable systems. Local exchange telephone companies and other
companies also provide facilities for the transmission and distribution to homes
and businesses of interactive computer-based services, including the Internet,
as well as data and other non-video services. The ability of local exchange
telephone companies to cross-subsidize video, data and telecommunication
services also poses some threat to cable operators.
Cable television systems are operated under non-exclusive franchises
granted by local authorities thereby allowing more than one cable system to be
built in the same area. Although the number of municipal and commercial
overbuild cable systems is small, the potential profitability of a cable system
is adversely affected if the local customer base is divided among multiple
systems. Additionally, constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We believe that in order
to be successful, a competitor's overbuild would need to be able to serve the
homes in the overbuilt area on a more cost-effective basis than we can. Any such
overbuild operation would require either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming. The major source of competition for the System is the wireline
overbuild by WideOpenWest. WideOpenWest has overbuilt approximately 129,100
homes passed in the System's service area, or approximately 65% of the total
homes in the service territory as of December 31, 2002.
Franchised cable systems compete with private cable systems for the right
to service condominiums, apartment complexes and other multiple unit residential
developments. The operators of these private systems, known as satellite master
antenna television systems often enter into exclusive agreements with apartment
building owners or homeowners' associations that preclude franchised cable
television operators from serving residents of such private complexes. However,
the 1984 Cable Act gives franchised cable operators the right to use existing
compatible easements within their franchise areas on nondiscriminatory terms and
conditions. Accordingly, where there are preexisting compatible easements, cable
operators may not be unfairly denied access or discriminated against with
respect to access to the premises served by those easements. Conflicting
judicial decisions have been issued interpreting the scope of the access right
granted by the 1984 Cable Act, particularly with respect to easements located
entirely on private property.
The 1996 Telecom Act may exempt some of our competitors from regulation as
cable systems. The 1996 Telecom Act amends the definition of a "cable system"
such that providers of competitive video programming are only regulated and
franchised as "cable systems" if they use public rights-of-way. Thus, a broader
class of entities providing video programming, including operators of satellite
master antenna television systems, may be exempt from regulation as cable
television systems under the 1996 Telecom Act. This exemption may give these
entities a competitive advantage over us. As of December 31, 2002, the System
passed approximately 527 multiple dwelling unit ("MDU") complexes within its
service territory and had entry agreements, either exclusive or non-exclusive,
with complexes totaling
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approximately 71,777 MDUs. As of December 31, 2002, the System provided
programming to approximately 31,983 of these MDUs, or approximately 45% of the
total MDUs passed.
Direct broadcast satellite television systems use digital video compression
technology to increase the channel capacity of their systems. Direct broadcast
satellite television systems' programming is currently available to individual
households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar Communications Corporation. Direct broadcast satellite
television systems have some advantages over cable systems that were not
upgraded, such as greater channel capacity and digital picture quality. In
addition, legislation has been enacted which permits direct broadcast satellite
television systems to retransmit the signals of local television stations in
their local markets. However, direct broadcast satellite television systems have
a limited ability to offer locally produced programming, and do not have a
significant local presence in the community. In addition, direct broadcast
satellite television systems packages can be more expensive than cable,
especially if the subscriber intends to view the service on more than one
television in the household. Finally, direct broadcast satellite television
systems do not have the same full two-way capability, which we believe will
limit their ability to compete in a meaningful way in interactive television,
high-speed data and voice communications. Management estimates that there were
approximately 12,300 direct broadcast satellite customers in the System's
service areas as of December 31, 2002.
Several telephone companies are introducing digital subscriber line
technology ("DSL"), which allows Internet access over traditional phone lines at
data transmission speeds greater than those available by a standard telephone
modem. Although these transmission speeds are not as great as the transmission
speeds of a cable modem, we believe that the transmission speeds of DSL
technology are sufficiently high that such technology will compete with cable
modem technology. The FCC is currently considering its authority to promulgate
rules to facilitate the deployment of these services and regulate areas
including high-speed data and interactive Internet services. We cannot predict
the outcome of any FCC proceedings, or the impact of that outcome on the success
of our Internet access services or on our operations. In addition to DSL and
dialup modems for providing Internet access, other technologies are entering the
marketplace. For example, there is a wireless technology popularly known as
"Wi-Fi," which is faster than dial-up, but slower than cable modem technology.
As we expand our offerings to include telephone services, our telephone
services will be subject to competition from existing providers, including both
local exchange telephone companies and long-distance carriers. The
telecommunications industry is highly competitive and many telephone service
providers may have greater financial resources than we have, or have established
relationships with regulatory authorities. We cannot predict the extent to which
the presence of these competitors will influence customer penetration in our
telephone service areas. While our manager intends to add our telephone service
offering to its various markets, the service has only been launched in selected
markets and has not yet achieved any material penetration levels.
Other new technologies may become competitive with services that cable
communications systems can offer. Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect of ongoing or future
developments on the cable communications industry or on our operations.
10
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-ownership
between cable television systems and other communications businesses, carriage
of television broadcast programming, cable rates, consumer protection and
customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional non-basic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the FCC
to be subject to effective competition. The 1992 Cable Act substantially changed
the previous statutory and FCC rate regulation standards. The 1992 Cable Act
replaced the FCC's old standard for determining effective competition, under
which most cable television systems were not subject to rate regulation, with a
statutory provision that resulted in nearly all cable television systems
becoming subject to rate regulation of basic service. The 1996 Telecom Act
expanded the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except direct broadcast satellite television systems. Satisfaction of this test
deregulates all rates.
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For cable systems not subject to effective competition, the 1992 Cable Act
required the FCC to adopt a formula for franchising authorities to assure that
basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers, other than per-channel or per-program services, in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring basic customers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of compliance; required the FCC to adopt
regulations to establish, on the basis of actual costs, the price for
installation of cable service, remote controls, converter boxes and additional
outlets; and allowed the FCC to impose restrictions on the retiering and
rearrangement of cable services under certain limited circumstances. The 1996
Telecom Act limited the class of complainants regarding cable programming
service tier rates to franchising authorities only, and ended FCC regulation of
cable programming service tier rates on March 31, 1999. The 1996 Telecom Act
also relaxes existing uniform rate requirements by specifying that such
requirements do not apply where the operator faces effective competition, and by
exempting bulk discounts to multiple dwelling units, although complaints about
predatory pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation of
basic service rates. Local franchising authorities are empowered to order a
reduction of existing rates which exceed the maximum permitted level for basic
services and associated equipment, and refunds can be required. The FCC adopted
a benchmark price cap system for measuring the reasonableness of existing basic
service rates. Alternatively, cable operators have the opportunity to make
cost-of-service showings which, in some cases, may justify rates above the
applicable benchmarks. The rules also require that charges for cable-related
equipment, converter boxes and remote control devices, for example, and
installation services be unbundled from the provision of cable service and based
upon actual costs plus a reasonable profit. The regulations also provide that
future rate increases may not exceed an inflation-indexed amount, plus increases
in certain costs beyond the cable operator's control, such as taxes, franchise
fees and increased programming costs. Cost-based adjustments to these capped
rates can also be made in the event a cable television operator adds or deletes
channels. There is also a streamlined cost-of-service methodology available to
justify a rate increase on the basic tier for "significant" system upgrades.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, that is to say that the system is located in the station's designated
market area, to elect every three years whether to require the cable television
system to carry the station, subject to certain exceptions, or whether the cable
television system will have to negotiate for "retransmission consent" to carry
the station. The most recent election between must-carry and retransmission
consent was October 1, 2002. A cable television system is generally required to
devote up to one-third of its activated channel capacity for the carriage of
local commercial television stations whether pursuant to mandatory carriage
requirements or the retransmission consent requirements of the 1992 Cable Act.
Local non-commercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of: (i) a 50 mile
radius from the station's city of license; or (ii) the station's Grade B
contour, a measure of signal strength. Unlike commercial stations, noncommercial
stations are not given the option to negotiate retransmission consent for the
carriage of their signal. In
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addition, cable television systems have to obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations," which are commercial satellite-delivered independent stations
such as WGN. To date, compliance with the "retransmission consent" and "must
carry" provisions of the 1992 Cable Act has not had a material effect on us,
although this result may change in the future depending on such factors as
market conditions, channel capacity and similar matters when such arrangements
are renegotiated. The FCC has issued a decision in a rulemaking proceeding
dealing with the carriage of television signals in a digital format, both high
definition and standard digital. The rules require carriage of local television
broadcast stations that transmits in both analog and digital format during the
current several-year transition period is entitled to carriage for only its
analog signal. The FCC has been asked to reconsider this decision. The FCC is
also considering whether the mandatory carriage obligation should extend beyond
the primary video signal to multiple services transmitted by a station over its
digital channel. The outcome of these proceedings could have a material effect
on the number of services that a cable operator will be required to carry.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis. FCC
regulations also enable television stations that have obtained exclusive
distribution rights for syndicated programming in their market to require a
cable television system to delete or "black out" such programming from other
television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues from the provision of cable services. Under the 1996 Telecom Act,
franchising authorities may not exact franchise fees from revenues derived from
telecommunications services, although they may be able to exact some additional
compensation for the use of public rights-of-way. The FCC has ruled that
franchise fees may not be imposed on revenue from cable modem services.
Franchising authorities are also empowered, in awarding new franchises or
renewing existing franchises, to require cable television operators to provide
cable-related facilities and equipment and to enforce compliance with voluntary
commitments. In the case of franchises in effect prior to the effective date of
the 1984 Cable Act, franchising authorities may enforce requirements contained
in the franchise relating to facilities, equipment and services, whether or not
cable-related. The 1984 Cable Act, under certain limited circumstances, permits
a cable operator to obtain modifications of franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal and to provide specific grounds for franchising authorities to consider
in making renewal decisions, including a franchisee's performance under the
franchise and community needs. Even after the formal renewal procedures are
invoked, franchising authorities and cable television operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account
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the cost of meeting such requirements. Similarly, if a franchising authority's
consent is required for the purchase or sale of a cable television system or
franchises, such authority may attempt to impose burdensome or onerous franchise
requirements in connection with a request for such consent. Historically,
franchises have been renewed for cable television operators that have provided
satisfactory services and have complied with the terms of their franchises. At
this time, we are not aware of any current or past material failure on our part
to comply with our franchise agreements. We believe that we have generally
complied with the terms of our franchises and have provided quality levels of
service.
The 1992 Cable Act makes several changes to the process under which a cable
television operator seeks to enforce its renewal rights which could make it
easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it fails to respond to a written notice from the cable
television operator of its failure or inability to cure. Courts may not reverse
a denial of renewal based on procedural violations found to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable
television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers providing video programming directly to customers within their local
exchange telephone service areas. Consequently, the 1996 Telecom Act permits
telephone companies to compete directly with operations of cable television
systems. Under the 1996 Telecom Act and FCC rules adopted to implement the 1996
Telecom Act, local exchange carriers may provide video service as broadcasters,
common carriers, or cable operators. In addition, local exchange carriers and
others may also provide video service through "open video systems," a regulatory
regime that may give them more flexibility than traditional cable television
systems. Open video system operators (including local exchange carriers) can,
however, be required to obtain a local cable franchise, and they can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
In general, open video system operators must make their systems available to
programming providers on rates, terms and conditions that are reasonable and
nondiscriminatory. Where carriage demand by programming providers exceeds the
channel capacity of an open video system, two-thirds of the channels must be
made available to programmers unaffiliated with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers from
purchasing a greater than 10% ownership interest in a cable television system
located within the local exchange carrier's telephone service area, prohibits
cable operators from purchasing local exchange carriers whose service areas are
located within the cable operator's franchise area, and prohibits joint ventures
between operators of cable
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television systems and local exchange carriers operating in overlapping markets.
There are some statutory exceptions, including a rural exemption that permits
buyouts in which the purchased cable television system or local exchange carrier
serves a non-urban area with fewer than 35,000 inhabitants, and exemptions for
the purchase of small cable television systems located in non-urban areas. Also,
the FCC may grant waivers of the buyout provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repealed the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act were eliminated in 1996, although
the parallel FCC regulations prohibiting broadcast/cable common-ownership
remained in effect. The U.S. Court of Appeals for the District of Columbia
circuit struck down these rules. The FCC's rules also generally prohibit cable
operators from offering satellite master antenna service separate from their
franchised systems in the same franchise area, unless the cable operator is
subject to "effective competition" there.
The 1996 Telecom Act amended the definition of a "cable system" under the
Communications Act so that competitive providers of video services will be
regulated and franchised as "cable systems" only if they use public
rights-of-way. Thus, a broader class of entities providing video programming may
be exempt from regulation as cable television systems under the Communications
Act.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. The prohibition on
certain types of exclusive programming arrangements was set to expire on October
5, 2002, but the FCC has determined that a five-year extension of the
prohibition is necessary to preserve and protect competition in video
programming distribution.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable television operators can collect and disclose data about individual system
customers. The statute also requires that the system operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable television
operator was found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements were strengthened to require
that cable television operators take such actions as are necessary to prevent
unauthorized access to personally
15
identifiable information. Certain of these requirements were modified by the
Electronic Communications Privacy Act of 2001.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after receipt
of all information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable television system
signal leakage. Periodic testing by cable television operators for compliance
with the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to periodically update its technical standards to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable television system's
use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable television systems and
consumer electronics equipment. These regulations, among other things, generally
prohibit cable television operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable television systems, and
otherwise to rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC
has adopted rules to assure the competitive availability to consumers of
customer premises equipment, such as converters, used to access the services
offered by cable television systems and other multichannel video programming
distributors. Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their multichannel video programming
distributors so long as the equipment does not harm the network, does not
interfere with the services purchased by other customers and is not used to
receive unauthorized services. As of July 1, 2000, multichannel video
programming distributors, other than operators of direct broadcast satellite
television systems, were required to separate security from non-security
functions in the customer premises equipment which they sell or lease to their
customers and offer their customers the option of using component security
modules obtained from the multichannel video programming distributors with
set-top units purchased or leased from retail outlets. As of January 1, 2005,
multichannel video programming distributors will be prohibited from distributing
new set-top equipment integrating both security and non-security functions to
their customers.
Inside Wiring; Customer Access
FCC rules require an incumbent cable operator upon expiration of a multiple
dwelling unit service contract to sell, abandon, or remove "home run" wiring
that was installed by the cable operator in a multiple dwelling unit building.
These inside wiring rules assist building owners in their attempts to replace
existing cable operators with new programming providers who are willing to pay
the building
16
owner a higher fee, where such a fee is permissible. The FCC has also issued an
order preempting state, local and private restrictions on over- the-air
reception antennas placed on rental properties in areas where a tenant has
exclusive use of the property, such as balconies or patios. However, tenants may
not install such antennas on the common areas of multiple dwelling units, such
as on roofs. This order limits the extent to which multiple dwelling unit owners
may enforce certain aspects of multiple dwelling unit agreements which otherwise
would prohibit, for example, placement of direct broadcast satellite television
systems television receiving antennae in multiple dwelling unit areas, such as
apartment balconies or patios, under the exclusive occupancy of a renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they adequately regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they adequately regulate the
rates, terms and conditions for pole attachments. Illinois, Ohio and Kentucky,
states in which we operate, have made such a certification. In the absence of
state regulation, the FCC administers such pole attachment and conduit use rates
through use of a formula which it has devised. Pursuant to the 1996 Telecom Act,
the FCC has adopted a new rate formula for any attaching party, including cable
television systems, which offers telecommunications services. This new formula
will result in higher attachment rates than at present, but they will apply only
to cable television systems which elect to offer telecommunications services.
Any increases pursuant to this new formula began in 2001, and will be phased in
by equal increments over the five ensuing years. The FCC ruled that the
provision of Internet services will not, in and of itself, trigger use of the
new formula. The United States Supreme Court affirmed this decision and also
held that the FCC's authority to regulate rates for attachments to utility poles
extended to attachments by cable operators and telecommunications carriers that
are used to provide Internet service or for wireless telecommunications service.
This development benefits our business and will place a constraint on the prices
that utilities can charge with regard to the cable facilities over which we also
provide Internet access service. However, the FCC has also initiated a
proceeding to determine whether it should adjust certain elements of the current
rate formula. If adopted, these adjustments could increase rates for pole
attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; equal employment opportunity; deletion of
syndicated programming; registration procedure and reporting requirements;
customer service; closed captioning; obscenity and indecency; program access and
exclusivity arrangements; and limitations on advertising contained in
nonbroadcast children's programming.
The FCC has recently issued a Notice of Inquiry covering a wide range of
issues relating to Interactive Television ("ITV"). Examples of ITV services are
interactive electronic program guides and access to a graphic interface that
provides supplementary information related to the video display. In the near
term, cable systems are likely to be the platform of choice for the distribution
of ITV services. The FCC has posed a series of questions including the
definition of ITV, the potential for discrimination by cable systems in favor of
affiliated ITV providers, enforcement mechanisms, and the proper regulatory
classification of ITV service.
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Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable television operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to
over-the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable television operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks, such as HBO, and basic cable networks, such as
USA Network, is licensed by the networks through private agreements with the
American Society of Composers and Publishers, generally known as ASCAP, and BMI,
Inc., the two major performing rights organizations in the United States. Both
the American Society of Composers and Publishers and BMI offer "through to the
viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises, and
allows franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The
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1992 Cable Act also allows franchising authorities to operate their own
multichannel video distribution system without having to obtain a franchise and
permits states or local franchising authorities to adopt certain restrictions on
the ownership of cable television systems. Moreover, franchising authorities are
immunized from monetary damage awards arising from regulation of cable
television systems or decisions made on franchise grants, renewals, transfers
and amendments. The 1996 Telecom Act prohibits a franchising authority from
either requiring or limiting a cable television operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. To date, none of the states in
which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal, state
and local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at high
speeds via high capacity broadband transmission facilities and cable modems. We
compete with many other providers of Internet access services which are known as
Internet service providers ("ISPs"). ISPs include such companies as America
Online and Mindspring Enterprises as well as major telecommunications providers,
including AT&T and local exchange telephone companies. A number of local
franchising authorities have attempted to require cable companies offering
Internet access service over their broadband facilities to allow access to those
facilities on an unbundled basis to other ISPs. To date, all such efforts have
been overturned in the courts. However, many ISPs and local franchising
authorities have continued to ask the U.S. Congress and the FCC to mandate such
access, or at least to allow local authorities to impose such a requirement.
Although the FCC has thus far declined to impose such an access requirement on
cable companies, the issue remains under consideration. The FCC has recently
decided that cable Internet service should be classified for regulatory purposes
as an "information service" rather than either a "cable service" or a
"telecommunications service." Concurrently, the FCC has initiated a wide-ranging
rulemaking proceeding in which it seeks comment on the regulatory ramifications
of this classification. Among the issues to be decided are whether the FCC
should permit local authorities to impose an access requirement, whether local
authorities should be prohibited from imposing fees on cable Internet service
revenues, and what regulatory role local authorities should be permitted to
play. The outcome of this proceeding could have a material impact on our
provision of cable Internet service.
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act, added to that act by the 1996 Telecom Act, declares it to be the policy of
the United States to promote the continued development of the Internet and other
interactive computer services and interactive media, and to preserve the vibrant
and competitive free market that presently exists for the Internet and other
interactive computer services, unfettered by federal or state regulation. One
area in which Congress did attempt to regulate content over
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the Internet involved the dissemination of obscene or indecent materials. The
provisions of the 1996 Telecom Act, generally referred to as the Communications
Decency Act, were found to be unconstitutional, in part, by the United States
Supreme Court in 1997. In response, Congress passed the Child Online Protection
Act. The constitutionality of this act is currently being challenged in the
courts. In May 2002, the Supreme Court reversed the finding by the Third Circuit
Court of Appeals that the use of "contemporary community standards" to identify
material "harmful to minors" was overly broad and therefore violative of the
First Amendment. The Supreme Court, however, remanded the matter to the Third
Circuit to determine the validity of other challenges to the constitutionality
of the Child Online Protection Act and kept the stay prohibiting government
enforcement in place until further action by the lower courts. Finally,
disclosure of customer communications or records is governed by the Electronic
Communications Privacy Act of 2001 and the Cable Act , both of which were
amended by the USA Patriot Act.
Local Telecommunications Services
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require fair and reasonable, competitively neutral and
non-discriminatory compensation for management of the public rights-of-way when
cable operators provide telecommunications service. State and local governments
must publicly disclose required compensation from telecommunications providers
for use of public rights-of-way.
We have long-term agreements with Comcast Cable (formerly known as AT&T
Broadband) that allow Comcast Cable to provide to customers telephone services
using our network infrastructure and Comcast Cable's switching and long distance
transport facilities. Local telecommunications service is subject to regulation
by state utility commissions. Use of local telecommunications facilities to
originate and terminate long distance services, a service commonly referred to
as "exchange access," is subject to regulation both by the FCC and by state
utility commissions. As a provider of local exchange service, Comcast Cable
would be subject to the requirements imposed upon local exchange carriers by the
1996 Telecom Act and state law. These include requirements governing just and
reasonable rates and practices, service quality, resale, telephone number
portability, dialing parity, access to rights-of-way, reciprocal compensation,
access for people with disabilities and truth-in-billing. Although we do not
provide telecommunications services, and are not currently regulated with regard
to Comcast Cable's provision of telecommunications services over our facilities,
there is a possibility that we could be subject to increased regulation in the
future. Although we cannot predict whether and the extent to which the state may
seek to regulate us, increased regulation would likely increase our cost of
doing business.
Item 2. 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
20
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
None.
21
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 three individual holders of the
equity of Coaxial LLC and Coaxial Financing Corp., and the common equity of
Insight Ohio is held by Insight Holdings of Ohio, LLC, a wholly-owned subsidiary
of Insight Midwest, L.P.
Item 6. Selected Financial Data
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998. As a
result of the August 8, 2000 purchase by Insight Ohio of Coaxial's 25% common
equity interest in Insight Ohio and certain amendments to Insight Ohio's
operating agreement, the operating results of Coaxial LLC include the operating
results of Insight Ohio only through August 8, 2000.
The following tables present selected historical financial data for Coaxial
LLC and Insight Ohio as of and for the five years ended December 31, 2002 and
selected historical financial data for Coaxial Financing Corp. as of and for the
four years ended December 31, 2002 and the period from July 24, 1998 (inception)
through December 31, 1998. These tables should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto included
elsewhere in this report.
Under Insight Ohio's franchise agreements, it is obligated to pay to local
franchising authorities a percentage of it's revenue derived from providing
cable and other services the majority of which are passed through to customers.
Insight Ohio has historically recorded revenue net of franchise fees charged to
its customers. Staff Announcement D-103, issued by the FASB in November 2001,
specifies that reimbursements received from a customer should be reflected as
revenues and not as a reduction of expenses. This Staff Announcement applies to
financial reporting periods beginning after December 15, 2001. Upon application
of this Staff Announcement, comparative financial statements for prior periods
are required to be reclassified to comply with the guidance in this Staff
Announcement. Consequently, Insight Ohio has reclassified the prior period
amounts in the accompanying consolidated statements of operations to reflect
franchise fees on a gross basis with reimbursements as revenue and payments as
expense. The effect on the prior period statements of operations was to increase
both revenue and selling, general and administrative costs by $1.5 million, $1.4
million, $1.3 million and $1.3 million for each of the years ended December 31,
2001, 2000, 1999 and 1998.
Additionally, the consolidated financial statements of Coaxial LLC have
been adjusted to reflect such prior period reclassifications. The effect on the
prior period statements of operations was to increase both revenue and selling,
general and administrative costs by $824,000 for the period from January 1, 2000
through August 8, 2000 and $1.3 million for the years ended 1999 and 1998.
22
Coaxial LLC
(dollars in thousands)
Year Ended December 31,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Statement of Operations Data:
Revenues ............................... $ -- $ -- $ 28,920 $ 48,032 $ 49,274
Operating costs and expenses:
Programming and other operating costs -- -- 10,955 16,863 18,130
Selling general and administrative .. -- -- 7,300 12,041 12,883
Severance and transaction structure
costs .................................. -- -- -- -- 4,822
Depreciation and amortization ....... 764 764 6,702 7,871 5,471
--------- --------- --------- --------- ---------
Total operating costs and expenses 764 764 24,957 36,775 41,306
Operating income (loss) ................ (764) (764) 3,963 11,257 7,968
Interest expense, net ............... (18,055) (17,626) (17,983) (16,968) (6,489)
Gain on sale of common equity
interest(1) ...................... -- -- 171,460 -- --
Dividend on preferred interest ...... 20,107 19,432 7,882 -- --
Other income (expense) .............. -- -- 31 92 (421)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
item ............................. 1,288 1,042 165,353 (5,619) 1,058
Extraordinary loss on extinguishments
of debt .......................... -- -- -- -- (847)
--------- --------- --------- --------- ---------
Net income (loss) ...................... $ 1,288 $ 1,042 $ 165,353 $ (5,619) $ 211
========= ========= ========= ========= =========
Financial Data:
Capital expenditures ................... $ -- $ -- $ 19,943 $ 26,656 $ 7,369
Net cash provided by (used in) operating
activities ...................... (3,444) (3,444) 7,224 19,043 13,053
Net cash used in investing activities .. -- -- 20,950 26,754 3,470
Net cash provided by (used in) financing
activities ...................... 3,444 3,444 12,844 (116) (1,449)
Balance Sheet Data: (at end of period)
Total assets ........................... $ 227,098 $ 229,127 $ 222,125 $ 74,011 $ 60,318
Total debt ............................. 191,820 185,713 180,281 186,556 172,760
Total liabilities ...................... 197,070 190,963 185,531 206,470 186,747
Total members' equity (deficit) ........ 30,028 38,164 36,594 (132,459) (126,429)
23
Coaxial Financing Corp.
(in thousands)
Period from
July 24,
1998
(inception)
through
Year Ended December 31, December 31,
2002 2001 2000 1999 1998
----------- ------------ ------------ ------------ --------------
Statement of Operations Data:
Expenses:
Amortization ...................... $ (136) $ (136) $ (136) $ (136) $ (48)
Interest .......................... (6,107) (5,432) (4,725) (4,046) (1,510)
----------- ------------ ------------ ------------ --------------
Net loss ............................. $(6,243) $ (5,568) $ (4,861) $ (4,182) $ (1,558)
=========== ============ ============ ============ ==============
Balance Sheet Data: (at the end of
the period)
Total assets ......................... $ 763 $ 899 $ 1,035 $ 1,171 $ 1,307
Total debt ........................... 51,820 45,713 40,281 35,556 31,510
Total liabilities .................... 51,820 45,713 40,281 35,556 31,510
Total shareholders' deficit .......... (51,057) (44,814) (39,246) (34,385) (30,203)
24
Insight Communications of Central Ohio, LLC
(dollars in thousands)
Year Ended December 31,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Statement of Operations Data:
Revenues ................................ $ 63,140 $ 57,019 $ 51,116 $ 48,032 $ 49,274
Operating costs and expenses:
Programming and other operating costs 22,268 22,129 19,509 16,863 18,130
Selling general and administrative ... 12,367 12,270 11,436 10,606 11,019
Severance and transaction
structure ............................... costs -- -- -- 4,822
Management fee ....................... 1,895 1,664 1,493 1,435 493
Home office .......................... -- -- -- -- 1,371
Depreciation and amortization ........ 17,987 13,397 10,882 7,148 5,311
--------- --------- --------- --------- ---------
Total operating costs and expenses 54,517 49,460 43,320 36,052 41,146
Operating income ........................ 8,623 7,559 7,796 11,980 8,128
Interest income (expense), net .......... (927) (1,682) (1,792) (297) 59
Other income (expense) .................. 80 (279) (274) 92 (422)
--------- --------- --------- --------- ---------
Net income .............................. $ 7,776 $ 5,598 $ 5,730 $ 11,775 $ 7,765
========= ========= ========= =========
Financial Data:
Operating Cash Flow (2) ................. $ 26,610 $ 20,956 $ 18,678 $ 19,128 $ 18,261
Operating Cash Flow margin (3) .......... 42.1% 36.8% 36.5% 39.8% 37.1%
Capital expenditures .................... 33,662 28,409 35,982 26,656 7,369
Net cash provided by operating activities 24,226 23,023 15,995 22,425 14,399
Net cash used in investing activities ... 33,890 28,534 36,073 26,754 6,679
Net cash provided by (used in) financing
activities .............................. 8,500 6,500 20,365 (1,498) (1,585)
Operating Data: (at end of period)
Homes passed (4) ........................ 198,682 190,959 184,427 178,310 171,753
Basic customers (5) ..................... 88,145 86,042 85,415 84,236 87,637
Basic penetration (6) ................... 44.4% 45.1% 46.3% 47.2% 51.0%
Premium service (7) ..................... 64,374 66,684 84,648 98,202 90,032
Premium penetration (8) ................. 73.0% 77.5% 99.1% 116.6% 102.7%
Balance Sheet Data: (at the end of the
period)
Total assets ............................ $ 112,314 $ 98,657 $ 83,359 $ 56,964 $ 41,967
Total debt, including preferred interests 216,820 210,713 205,281 186,673 171,666
Total liabilities ....................... 45,745 48,364 45,164 19,782 15,248
Total member's deficit .................. (125,251) (135,420) (142,086) (149,491) (144,719)
25
Notes To Selected Financial and Operating Data
(1) Represents gain on redemption of common equity interests in Insight Ohio.
(2) Operating Cash Flow ("OCF") represents operating income before depreciation
and amortization and severance and transaction structure costs. Insight
Ohio believes that OCF is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, OCF is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as
determined in accordance with accounting principles generally accepted in
the United States. Refer to Insight Ohio's financial statements; including
it's statements of cash flows, which appear elsewhere in this report.
(3) Represents OCF as a percentage of revenue.
(4) Homes passed are the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(5) Basic customers are customers of a cable television system who receive a
package of over-the-air broadcast stations, local access channels and
certain satellite-delivered cable television services, other than premium
services, and who are usually charged a flat monthly rate for a number of
channels.
(6) Basic penetration represents basic customers as a percentage of total
number of homes passed.
(7) Premium service units represents the number of subscriptions to premium
services, which are paid for on an individual unit basis.
(8) Premium penetration represents premium service units as a percentage of the
total number of basic customers. A customer may purchase more than one
premium service, each of which is counted as a separate premium service
unit. This ratio may be greater than 100% if the average customer
subscribes to more than one premium service unit.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes that are included elsewhere in this report.
Offering of Senior Discount Notes and Senior Notes and Acquisition of System by
Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a
private offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their 12 7/8% Senior Discount Notes due in 2008
(the "Senior Discount Notes") in connection with a Financing Plan (the
"Financing Plan") which included the contribution of Coaxial's cable television
system (the "System") to Insight Ohio. On February 16, 1999, Coaxial LLC and
Coaxial Financing Corp. consummated an
26
exchange of registered Senior Discount Notes for their privately issued Senior
Discount Notes. Coaxial LLC and Coaxial Financing Corp. have only nominal assets
except for Coaxial LLC's ownership of 67.5% of the common stock of Coaxial and
notes of Coaxial DJM LLC and Coaxial DSM LLC (the other two owners of Coaxial),
which notes are secured by the remaining 32.5% of the common stock of Coaxial.
The Senior Discount Notes are guaranteed on a conditional basis by Insight Ohio.
The limited liability companies that own Coaxial are referred to herein as the
"Individual LLCs".
As part of the Financing Plan, Coaxial and Phoenix Associates, an
affiliated general partnership, completed a private offering (the "Senior Notes
Offering") of $140,000,000 aggregate principal amount of their 10% Senior Notes
due in 2006 (the "Senior Notes"). On February 16, 1999, Coaxial and Phoenix
consummated an exchange of registered Senior Notes for their privately issued
Senior Notes. The Senior Notes are also guaranteed on a conditional basis by
Insight Ohio. The conditional guarantee of the Senior Discount Notes is
subordinated to the conditional guarantee of the Senior Notes. Coaxial and
Phoenix have only nominal assets. Coaxial holds the Series A Preferred Interest
and the Series B Preferred Interest of Insight Ohio (together the "Preferred
Interests").
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series B Preferred Interest
will be used to pay dividends to the Individual LLCs, which dividends will be
used to pay interest and principal on the Senior Discount Notes and the
distributions from the Series A Preferred Interest are used to pay interest and
principal on the Senior Notes. Distributions by Insight Ohio are subject to
certain financial covenants and other conditions set forth in its Senior Credit
Facility.
Coaxial LLC and Coaxial Financing Corp. do not conduct any business and are
dependent upon the cash flow of Insight Ohio to meet their obligations under the
Senior Discount Notes. Insight LP serves as the manager of the System.
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common
equity interest in Insight Ohio, resulting in Insight LP owning 100% of the
common equity of Insight Ohio. The purchase price was 800,000 shares of common
stock of Insight and cash paid by Insight to the principals of the Individual
LLCs in the amount of $2.6 million. In connection with the purchase, Insight
Ohio's operating agreement was amended to, among other things, remove certain
participating rights of the principals of the Individual LLCs, and vest in the
common equity interests of Insight Ohio 70% of its total voting power and in the
preferred equity interests 30% of its total voting power. As a result of this
purchase Coaxial LLC no longer consolidates the results of Insight Ohio
subsequent to August 8, 2000.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight LP and an indirect subsidiary of AT&T Broadband (now
known as "Comcast Cable"), entered into definitive agreements with Insight LP
and certain subsidiaries of AT&T Corp. ("AT&T Cable Subsidiaries") for the
acquisition of additional cable television systems, including Insight Ohio.
Through a series of transactions, Insight Midwest acquired all of Insight LP's
wholly owned systems serving approximately 280,000 customers, including the
approximately 85,400 customers then served by Insight Ohio and including systems
which Insight LP purchased from AT&T Cable Subsidiaries. At the same time,
Insight Midwest acquired from AT&T Cable Subsidiaries systems serving
approximately 250,000 customers. Insight Ohio is an unrestricted subsidiary
under the indentures governing Insight's and Insight Midwest's senior notes and
is prohibited by the terms of its indebtedness from making distributions to
Insight Midwest. Insight Midwest remains equally owned by Insight LP and AT&T
Broadband, and
27
Insight LP continues to serve as the general partner and manages and operates
the Insight Midwest systems, including Insight Ohio.
Insight Ohio's conditional guarantee of the Senior Notes and the Senior
Discount Notes remains in place. If at any time the Senior Notes or the Senior
Discount Notes are repaid or significantly modified, or in any case after August
15, 2008, the principals of the Individual LLCs may require Insight LP to
purchase the Preferred Interests for a purchase price equal to the difference,
if any, of $32.6 million less the then market value of the 800,000 shares of
Insight Inc. common stock issued on August 8, 2000.
The following discussion relates to the operations of Insight Ohio for
years ended December 31, 2002, 2001 and 2000. The financial statements of
Insight Ohio are included in the consolidated financial statements of Coaxial
through August 8, 2000 and Coaxial was deemed to be a subsidiary of Coaxial LLC
and, as such, the financial statements of Coaxial are included in the
consolidated financial statements of Coaxial LLC. The historical operating
results of Coaxial LLC reflect the actual results of the System through August
8, 2000 in addition to certain financing activities unrelated to the operation
of the System. These financing activities relate primarily to the offering of
the Senior Discount Notes and Senior Notes discussed above as well as certain
borrowings and repayments of debt with affiliated companies. These activities
resulted in related financing and interest costs. The historical results of
Coaxial LLC appear elsewhere in this report under the heading "Coaxial LLC."
Introduction
Insight Ohio relies on Insight LP, for all of its strategic, managerial,
financial and operational oversight and advice. Insight LP also centrally
purchases programming and equipment and provides the associated discount to
Insight Ohio. In exchange for all such services provided to Insight Ohio and
subject to certain restrictions contained in the covenants with respect to
Insight Ohio's Senior Credit Facility and the Senior Notes, Insight LP receives
management fees of 3.0% of gross revenues of Insight Ohio. Such management fees
are payable only after distributions have been made with respect to the
Preferred Interests and only to the extent that such payments would be permitted
by an exception to the restricted payments covenants of the Senior Notes as well
as Insight Ohio's Senior Credit Facility.
Results of Operations
Revenues are earned from customer fees for cable television programming
services including premium, digital and pay-per-view services and ancillary
services, such as rental of converters and remote control devices, installations
and from selling advertising. In addition, Insight Ohio earns revenues from
providing high-speed data services and from facilitating the delivery of
telephone services as well as from commissions for products sold through home
shopping networks.
Under Insight Ohio's franchise agreements, it is obligated to pay to local
franchising authorities a percentage of it's revenue derived from providing
cable and other services the majority of which are passed through to customers.
Insight Ohio has historically recorded revenue net of franchise fees charged to
it's customers. Staff Announcement D-103, issued by the FASB in November 2001,
specifies that reimbursements received from a customer should be reflected as
revenues and not as a reduction of expenses. This Staff Announcement applies to
financial reporting periods beginning after December 15, 2001. Upon application
of this Staff Announcement, comparative financial statements for prior periods
are
28
required to be reclassified to comply with the guidance in this Staff
Announcement. Consequently, Insight Ohio has reclassified the prior period
amounts in the accompanying consolidated statements of operations to reflect
franchise fees on a gross basis with reimbursements as revenue and payments as
expense. The effect on the prior period statements of operations was to increase
both revenue and selling, general and administrative costs by $1.5 million and
$1.4 million for each of the years ended December 31, 2001 and 2000,
respectively.
The following table is derived for the periods presented from Insight
Ohio's financial statements that are included in this report and sets forth
certain statement of operations data for the System:
Year ended December 31,
2002 2001 2000
-----------------------------------------------------
(in thousands)
Revenue $ 63,140 $ 57,019 $ 51,116
Operating costs and expenses:
Programming and other operating costs 22,268 22,129 19,509
Selling, general and administrative 12,367 12,270 11,436
Management fees 1,895 1,664 1,493
Depreciation and amortization 17,987 13,397 10,882
-----------------------------------------------------
Total operating costs and expenses 54,517 49,460 43,320
-----------------------------------------------------
Operating income 8,623 7,559 7,796
Operating cash flow 26,610 20,956 18,678
Interest expense 949 1,732 1,883
Net income 7,776 5,598 5,730
Net cash provided by operating activities 24,226 23,023 15,995
Net cash used in investing activities 33,890 28,534 36,073
Net cash provided by financing activities 8,500 6,500 20,365
Operating Cash Flow ("OCF") represents operating income before depreciation
and amortization. Insight Ohio believes that OCF is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, OCF is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with accounting principles generally accepted in the
United States. Refer to Insight Ohio's financial statements, including its
statements of cash flows, which appear elsewhere in this report.
29
The following calculations of OCF are not necessarily comparable to similarly
titled amounts of other companies:
Year ended December 31,
2002 2001 2000
-----------------------------------------------------
(in thousands)
Operating income $ 8,623 $ 7,559 $ 7,796
Adjustments:
Depreciation and amortization 17,987 13,397 10,882
-----------------------------------------------------
Operating Cash Flow $ 26,610 $ 20,956 $ 18,678
-----------------------------------------------------
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenue for the year ended December 31, 2002 increased $6.1 million or 11%
to $63.1 million from $57.0 million for the year ended December 31, 2001. For
the year ended December 31, 2002, customers served averaged approximately 87,400
compared to approximately 85,800 during the year ended December 31, 2001. The
increase in revenue was primarily attributable to increases in our basic,
digital and high-speed data services.
Revenue by service offering was as follows for the year ended December 31,
(in thousands):
2002 2001
Revenue Revenue
by Service % of Total by Service % of Total
Offering Revenue Offering Revenue
-------------- -------------- -------------- --------------
Basic $ 31,097 49.3% $ 29,046 50.9%
Digital 5,282 8.4% 3,861 6.8%
High-speed data 8,260 13.1% 4,349 7.6%
Premium 6,159 9.7% 6,705 11.8%
Analog pay-per-view 562 .9% 1,194 2.1%
Advertising sales 4,503 7.1% 4,385 7.7%
Franchise fees 1,577 2.5% 1,525 2.7%
Other 5,700 9.0% 5,954 10.4%
-------------- -------------- -------------- --------------
Total $ 63,140 100.0% $ 57,019 100.0%
============== ============== ============== ==============
RGUs (Revenue Generating Units) were approximately 137,600 as of December
31, 2002 compared to approximately 120,000 as of December 31, 2001. This
represents an annual growth rate of 15%. RGUs represent the sum of basic,
digital, high-speed data and telephone customers.
Average monthly revenue per basic customer for the year ended December 31,
2002 was $60.18 compared to $55.37 for the year ended December 30, 2001. Average
monthly revenue per basic customer for digital and high-speed data services was
$12.90 for the year ended December 31, 2002 compared to $7.97 for the year ended
December 31, 2001. As of December 31, 2002, there were approximately 29,400
digital customers compared to approximately 22,600 digital customers as of
December 31, 2001,
30
representing penetrations of 36% and 34%, respectively. As of December 31, 2002,
there were approximately 18,600 high-speed data customers compared to
approximately 11,400 high-speed data customers as of December 31, 2001,
representing penetrations of 10% and 7%, respectively.
Programming and other operating costs remained relatively flat from 2001
increasing $139,000 or .6% to $22.3 million for the year ended December 31, 2002
from $22.1 million for the year ended December 31, 2001. The increase was
primarily attributable to increased digital programming and increased
programming rates associated with classic services offset by decreased
engineering salaries, video-on-demand and high-speed data charges.
Selling, general and administrative expenses remained relatively flat from
2001 increasing $97,000 or .8% to $12.4 million for the year ended December 31,
2002 from $12.3 million for the year ended December 31, 2001. The increase was
primarily attributable to increases in employee related costs such as salaries
and benefits offset by decreases in marketing and other general corporate
expenses.
Management fees are directly related to revenue as these fees are
calculated as approximately 3% of revenues.
Depreciation and amortization expense for the year ended December 31, 2002
increased $4.6 million or 34% to $18.0 million from $13.4 million for the year
ended December 31, 2001. This increase was primarily attributable to increased
capital expenditures associated with the launch of new services, the near
completion of the rebuild of plant and an $871,000 write-down of the carrying
value of current video-on-demand equipment, which was replaced as of December
31, 2002 in connection with our transition to a new video-on-demand service
provider.
OCF increased $5.7 million or 27% to $26.6 million for the year ended
December 31, 2002 from $21.0 million for the year ended December 31, 2001. This
increase was primarily due to increased digital and high-speed data revenue,
partially offset by slight increases in programming and other operating costs
and selling, general and administrative costs.
Interest expense for the year ended December 31, 2002 decreased $783,000 or
45% to $949,000 from $1.7 million for the year ended December 31, 2001. This
decrease was primarily attributable to lower interest rates.
For the year ended December 31, 2002, the net income was $7.8 million
primarily for the reasons set forth above.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue for the year ended December 31, 2001 increased $5.9 million or 12%
to $57.0 million from $51.1 million for the year ended December 31, 2000. For
the year ended December 31, 2001, customers served averaged approximately 85,800
compared to approximately 84,800 during the year ended December 31, 2000. The
increase in revenue was primarily attributable to new product launches,
specifically digital services and high-speed data services.
31
Revenue by service offering was as follows for the year ended December 31,
(in thousands):
2001 2000
Revenue Revenue
by Service % of Total by Service % of Total
Offering Revenue Offering Revenue
-------------- -------------- ------------- ---------------
Basic $ 29,046 50.9% $ 27,457 53.7%
Digital 3,861 6.8% 1,604 3.1%
High-speed data 4,349 7.6% 887 1.7%
Premium 6,705 11.8% 6,941 13.6%
Analog pay-per-view 1,194 2.1% 1,763 3.4%
Advertising sales 4,385 7.7% 4,781 9.4%
Franchise fees 1,525 2.7% 1,367 2.7%
Other 5,954 10.4% 6,316 12.4%
-------------- -------------- ------------- ---------------
Total $ 57,019 100.0% $ 51,116 100.0%
============== ============== ============= ===============
RGUs (Revenue Generating Units) were approximately 120,000 as of December
31, 2001 compared to approximately 103,700 as of December 31, 2000. This
represents an annual growth rate of 16%. RGUs represent the sum of basic,
digital, high-speed data and telephone customers.
Average monthly revenue per basic customer for the year ended December 31,
2001 was $55.37 compared to $50.21 for the year ended December 30, 2000. Average
monthly revenue per basic customer for digital and high-speed data services was
$7.97 for the year ended December 31, 2001 compared to $2.45 for the year ended
December 31, 2000. As of December 31, 2001, there were approximately 22,600
digital customers compared to approximately 13,400 digital customers as of
December 31, 2000, representing a penetration of 34% and 28%, respectively. As
of December 31, 2001, there were approximately 11,400 high-speed data customers
compared to approximately 4,900 high-speed data customers as of December 31,
2000, representing a penetration of 7% and 5%, respectively. High-speed data
services were launched during the year ended December 31, 2000.
Programming and other operating costs increased $2.6 million or 13% to
$22.1 million for the year ended December 31, 2001 from $19.5 million for the
year ended December 31, 2000. The increase was primarily attributable to
increased digital programming and increased programming rates associated with
classic services in addition to increased high-speed data costs.
Selling, general and administrative expenses increased $834,000 or 7% to
$12.3 million for the year ended December 31, 2001 from $11.4 million for the
year ended December 31, 2000. The increase was primarily attributable to
increased marketing activity and corporate expenses associated with advertising
sales.
Management fees are directly related to revenue as these fees are
calculated as approximately 3% of revenues.
Depreciation and amortization expense for the year ended December 31, 2001
increased $2.5 million or 23% to $13.4 million from $10.9 million for the year
ended December 31, 2000. This increase
32
was primarily attributable to increased capital expenditures associated with the
rebuild of plant and launch of new services.
OCF increased $2.3 million or 12% to $21.0 million for the year ended
December 31, 2001 from $18.7 million for the year ended December 31, 2000. This
increase was primarily due to increased digital and high-speed data revenue,
partially offset by increases in programming and other operating costs and
selling, general and administrative costs.
Interest expense for the year ended December 31, 2001 decreased $151,000 or
8% to $1.7 million from $1.9 million for the year ended December 31, 2000. This
decrease was primarily attributable to lower interest rates partially offset by
higher average outstanding borrowings.
For the year ended December 31, 2001, the net income was $5.6 million
primarily for the reasons set forth above.
33
Liquidity and Capital Resources
The cable television business is a capital-intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. Capital expenditures totaled $33.7 million for the
year ended December 31, 2002. These expenditures were primarily for the upgrade
of the System and plant expansions and to launch new services. Capital
expenditures were financed by cash flows from operations and capital
contributions. Capital expenditures are expected to approximate $16.7 million
during the year ending December 31, 2003 to support new customer additions,
capital replacement and the continued implementation of telephone services.
Cash provided by operations for the year ended December 31, 2002 and 2001
was $24.2 million and $23.0 million, respectively. The increase was primarily
attributable to the timing of cash receipts and payments related to working
capital accounts.
Cash used in investing activities for the year ended December 31, 2002 and
2001 was $33.9 million and $28.5 million, respectively, reflecting capital
expenditures to upgrade the System and build plant expansions.
Cash provided by financing activities for the year ended December 31, 2002
was $8.5 million. This was comprised of capital contributions from Insight
Midwest of $22.5 million partially offset by distributions on preferred
interests of $14.0 million. Cash provided by financing activities for the year
ended December 31, 2001 was $6.5 million. This was comprised of capital
contributions from Insight Midwest of $20.5 million partially offset by
distributions on preferred interests of $14.0 million. The $25.0 million Senior
Credit Facility was fully borrowed as of December 31, 2002 and 2001.
The Senior Credit Facility contains covenants restricting, among other
things, our ability to make capital expenditures, acquire or dispose of assets,
make investments and engage in transactions with related parties. The facility
also requires compliance with certain financial ratios and contains customary
events of default. As of December 31, 2002, Insight Ohio was in compliance with
its debt covenant requirements relating to the credit facility. Given current
operating conditions and projected results of operations, we anticipate full
compliance with this credit facility agreement for the foreseeable future.
The following table summarizes Insight Ohio's contractual obligations and
commitments, excluding interest, preferred dividends and commitments for
programming, as of December 31, 2002, including periods in which the related
payments are due (in thousands):
Long-Term Preferred Operating Total
Debt Interests Leases
------------------ ------------------- ----------------- -----------------
2003 $ 5,000 $ - $ 17 $ 5,017
2004 20,000 - 7 20,007
2005 - - 7 7
2006 - 140,000 7 140,007
2007 - - 7 7
Thereafter - 55,869 91 55,960
------------------ ------------------- ----------------- -----------------
Total cash obligations $ 25,000 $ 195,869 $ 136 $ 221,005
================== =================== ================= =================
34
Due to the increased capital expenditures, management determined that cash
flows from operations will not be sufficient to finance the operating and
capital requirements of the System, debt service requirements and distributions
on the Preferred Interests over the next year. As such, Insight Midwest has
committed to provide capital contributions to fund cash requirements through the
year ending December 31, 2003. Insight Midwest contributed $22.5 million to
Insight Ohio during the year ended December 31, 2002.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Disposal
Obligations", which became effective for Insight Ohio beginning January 1, 2003.
SFAS No. 146 supersedes EITF Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 addresses the
accounting for and disclosure of costs to terminate an existing contractual
obligation (including but not limited to operating leases), incremental direct
and other costs associated with the related disposal activity and termination
benefits (severance pay) provided to employees pursuant to a one-time benefit
arrangement that does not constitute a preexisting or newly-created ongoing
benefit plan. The adoption of SFAS No. 146 had no impact on Insight Ohio's
financial position or results of operations.
Critical Accounting Policies
The methods, estimates and judgments Insight Ohio uses in applying its most
critical accounting policies have a significant impact on the results it reports
in its financial statements. Insight Ohio evaluates its estimates and judgments
on an on-going basis. It bases its estimates on historical experience and on
assumptions that it believes to be reasonable under the circumstances. Insight
Ohio's experience and assumptions form the basis for its judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may vary from what it anticipates and different
assumptions or estimates about the future could change its reported results.
Insight Ohio believes the following accounting policies are the most critical to
it, in that they are important to the portrayal of its financial statements and
they require Insight Ohio's most difficult, subjective or complex judgments in
the preparation of its financial statements.
Fixed Assets
As of December 31, 2002, the carrying value of Insight Ohio's property and
equipment totaled $107.4 million, which represents approximately 96% of total
assets. Fixed assets include costs capitalized for labor and overhead incurred
in connection with the installation of cable systems and is stated at cost.
Depreciation for buildings, cable system equipment, furniture, fixtures and
office equipment is calculated using the straight-line method over estimated
useful lives ranging from 2 to 30 years. Building improvements are amortized
using the straight-line method over the shorter of the remaining terms of the
leases or the estimated lives of the improvements.
35
Allowance for Doubtful Accounts
Insight Ohio maintains allowances for doubtful accounts for estimated
losses from its customers' inability to make payments. In order to estimate the
appropriate level of this allowance, it analyzes historical bad debts, current
customer credit-worthiness, current economic trends and changes in customer
payment patterns. If the financial condition of customers were to deteriorate
and to impair their ability to make payments, additional allowances might be
required in future periods.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Companies do not engage in trading market risk sensitive
instruments and do not purchase hedging instruments or "other than trading"
instruments that are likely to expose any of them to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
The Companies have not entered into forward or future contracts, purchased
options or entered into swaps.
Insight Ohio's Senior Credit Facility bears interest at floating rates.
Accordingly, Insight Ohio is exposed to potential losses related to changes in
interest rates. A hypothetical 100 basis point increase in interest rates along
the entire interest rate yield curve would increase projected annual interest
expense by approximately $250,000. The Senior Notes issued by Coaxial and
Phoenix bear interest at fixed rates.
The fair value of borrowings under Insight Ohio's senior credit
facility approximates carrying value as it bears interest at floating rates. The
fair value and carrying value of the Senior Notes and Senior Discount Notes as
of December 31, 2002 was $122.8 million and $140.0 million and $36.7 million and
$51.8 million, respectively.
Item 8. Financial Statements and Supplementary Data
Reference is made to our consolidated financial statements beginning on
page F-1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
36
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, and Insight
LP. Insight LP is wholly-owned by Insight. Insight LP owns 50% of and is the
general partner of Insight Midwest, which is the parent of Insight Ohio. Insight
LP also serves as manager of the Individual LLCs and Insight Ohio and Insight
thereby effectively controls the management and affairs of the Individual LLCs,
Coaxial and Insight Ohio. The executive officers of Insight are compensated by
Insight. Insight Ohio pays management fees to Insight LP. Sidney Knafel, Michael
Willner and Kim Kelly serve as the directors of Coaxial. None of the executive
officers of Coaxial, Coaxial LLC and Coaxial Financing Corp. are compensated for
their services as such. Coaxial Financing Corp. only has nominal assets and does
not conduct any business.
Name Age Position
---- --- --------
Sidney R. Knafel 72 Chairman of Insight
Michael S. Willner 50 Chairman of the Individual LLCs, Coaxial and Insight Ohio, and Vice Chairman and
Chief Executive Officer of Insight
Kim D. Kelly 46 President, Chief Executive Officer and Chief Operating Officer of the Individual
LLCs, Coaxial, Insight Ohio, and President and Chief Operating Officer of Insight
Dinesh C. Jain 39 Senior Vice President and Chief Financial Officer of the Individual LLCs,
Coaxial, Insight Ohio and Insight
Elliot Brecher 37 Senior Vice President and General Counsel of the Individual LLCs, Coaxial,
Insight Ohio and Insight
Sidney R. Knafel, a director of Insight, has been Chairman of the Board
of Insight since 1985. He was the founder, Chairman and an equity holder of
Vision Cable Communications, Inc. from 1971 until its sale in 1981. Mr. Knafel
is presently the managing partner of SRK Management Company, a private
investment company, and also serves as Chairman of BioReliance Corporation, a
biological testing company. He is a director of General American Investors
Company, Inc. and IGENE Biotechnology, Inc., as well as several private
companies. Mr. Knafel is a graduate of Harvard College and Harvard Business
School.
Michael S. Willner, a director of Insight, co-founded and has served as
Chief Executive Officer since 1985. Mr. Willner has also served as Vice Chairman
since August 2002, and previously served as President from 1985. Mr. Willner
served as Executive Vice President and Chief Operating Officer of Vision Cable
from 1979 through 1985, Vice President of Marketing for Vision Cable from 1977
to 1979 and General Manager of Vision Cable's Bergen County, New Jersey cable
television system from 1975 to 1977. He is serving his second term as Chairman
of the National Cable & Telecommunications Association's Board of Directors and
Executive Committee. He also serves on the boards of C-SPAN,
37
CableLabs and the Walter Kaitz Foundation. Mr. Willner is a graduate of Boston
University's College of Communication and serves on the school's Executive
Committee.
Kim D. Kelly, a director of Insight, has served as President since
August 2002 and as Chief Operating Officer since January 1998. She joined
Insight in 1990 as Executive Vice President, and served from then until January
2002 as Chief Financial Officer. Since August 2002, she has also served as Chief
Executive Officer of Insight Midwest, the Individual LLCs, Coaxial and Insight
Ohio. She served from 1982 to 1990 with Marine Midland Bank, becoming its Senior
Vice President in 1988, with primary responsibility for media lending
activities. Ms. Kelly is Chairperson of the Cable Advertising Bureau's Board of
Directors. She also serves as a member of the National Cable &
Telecommunications Association Subcommittees for Telecommunications Policy,
Diversity Initiatives and Accounting. Ms. Kelly also serves as a director of
Bank of New York Hamilton Funds, and serves on the boards of Cable in the
Classroom and the Cable Center. Ms. Kelly is a graduate of George Washington
University.
Dinesh C. Jain has served as Senior Vice President and Chief Financial
Officer since January 2002. Previously, Mr. Jain was employed for more than the
past five years as a Managing Director of NTL, one of Europe's leading cable and
telecommunications companies. His background in the cable industry includes a
nine-year period with OCOM Corporation and International CableTel, working in
various key general management positions. His roles have included Deputy
Managing Director, NTL Consumer Group, as well as Managing Director of Cable and
Wireless' Consumer Division.
Elliot Brecher has served as Senior Vice President and General Counsel
since January 2000. Previously, he was associated with the law firm Cooperman
Levitt Winikoff Lester & Newman, P.C., which served as our legal counsel until
July 2000 when it merged with Sonnenschein Nath & Rosenthal, which continues to
serve as our legal counsel. He joined that firm in February 1994 and served as a
partner from January 1996 until joining Insight. Prior to that, he was an
associate of the law firm Rosenman & Colin from October 1988. Mr. Brecher
received his law degree from Fordham University.
All executive officers serve at the discretion of the Board of
Directors.
Item 11. Executive Compensation
Coaxial LLC and Coaxial Financing Corp. do not make any payments in
respect of compensation to any of their executive management personnel. Rather,
executive management personnel of Coaxial LLC and Coaxial Financing Corp.
receive compensation from Insight. Accordingly, Insight utilizes its management
fees from Insight Ohio to pay for all of its operating expenses for managing the
day-to-day affairs of the System.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The outstanding shares of common stock of Coaxial are owned by the
Individual LLCs as described in the table below. All of the outstanding shares
of common stock of Coaxial Financing Corp. and all of the outstanding membership
interests of the Individual LLCs are wholly-owned by the individuals indicated
in the footnotes to the table in the same ownership percentages as the
respective Individual LLCs' ownership in Coaxial. Insight LP is the manager of
each of the Individual LLCs and
38
thereby effectively controls the business of each of such Individual LLCs and
Coaxial. Accordingly, Insight LP and members of its executive
management may be deemed to beneficially own (as defined by Rule 13d-3
under the Securities Exchange Act of 1934) all of the outstanding shares of
common stock of Coaxial.
Name and Address of Beneficial Owner Percentage Ownership
------------------------------------ --------------------
Coaxial LLC (1)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242 ............................. 67.5%
Coaxial DJM LLC (2)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242 ............................. 22.5%
Coaxial DSM LLC (3)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242 ............................. 10.0%
- --------
(1) Wholly-owned by Barry Silverstein.
(2) Wholly-owned by Dennis J. McGillicuddy.
(3) Wholly-owned by D. Stevens McVoy.
Item 13. Certain Relationships and Related Transactions
Management Fees
In accordance with the Operating Agreement of Insight Ohio, Insight LP
is entitled to be paid management fees for managing the day-to-day operations of
Insight Ohio. Pursuant to the Operating Agreement, subject to certain covenants
in the Indentures, Insight LP is entitled to receive management fees of 3.0% of
gross revenues of Insight Ohio. Fees under this management agreement were
approximately $1.9 million and $1.7 million for the years ended December 31,
2002 and 2001. Insight LP is also entitled to reimbursement from Insight Ohio
for all direct, out-of-pocket expenses incurred by or on behalf of Insight LP
that directly relate to its management of the business and operations of Insight
Ohio, including any such expenses incurred in connection with the management of
Coaxial LLC and Coaxial Financing Corp. However, Insight LP is not entitled to
reimbursement from Insight Ohio for corporate overhead (including employee
bonuses and health, welfare, retirement, and other employee benefits and
overhead expenses of its corporate office management, development, internal
accounting, and finance management personnel).
Coaxial and Phoenix
All of the outstanding shares of Coaxial's capital stock and all of the
outstanding partnership interests in Phoenix are held indirectly by the same
three individuals, Barry Silverstein, Dennis J. McGillicuddy
39
and D. Stevens McVoy. Coaxial and Phoenix were co-obligors (along with certain
other affiliates) with respect to the Chase Credit Facility. Coaxial and Phoenix
continue to be co-obligors with respect to the Senior Notes.
Coaxial
Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC
Upon the closing of the Senior Discount Notes offering, Coaxial LLC
(which owns 67.5% of the common equity of Coaxial) loaned 22.5% of the gross
proceeds of the Senior Discount Notes offering (approximately $6.75 million) to
Coaxial DJM LLC (which owns 22.5% of the common equity of Coaxial) and 10% of
such proceeds (approximately $3.0 million) to Coaxial DSM LLC (which owns 10% of
the common equity of Coaxial) in order to allow for distributions to their
respective holders (Barry Silverstein, Dennis J. McGillicuddy and D. Stevens
McVoy, respectively) for purposes of repaying the amounts outstanding under the
Chase Credit Facility. Such loans are evidenced by the LLC Mirror Notes. Each of
the LLC Mirror Notes incorporates the terms of the Senior Discount Notes with
respect to payments and otherwise. Accordingly, Coaxial LLC will rely on the
provisions of the LLC Mirror Notes in requiring payments from Coaxial DJM LLC
and Coaxial DSM LLC in order to make corresponding payments on the Senior
Discount Notes. The LLC Mirror Note issued by Coaxial DJM LLC is in the amount
of $12,570,525 (i.e., 22.5% of the principal amount at maturity of the Senior
Discount Notes) and is secured by 22.5% of the outstanding common equity of
Coaxial. The LLC Mirror Note issued by Coaxial DSM LLC is in the amount of
$5,586,900 (i.e., 10% of the principal amount at maturity of the Senior Discount
Notes) and is secured by 10% of the outstanding common equity of Coaxial.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, under the
supervision and with the participation of Coaxial LLC's management, including
its Chief Executive Officer and its Chief Financial Officer, Coaxial LLC's
management has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, Coaxial LLC's Chief Executive Officer and its Chief
Financial Officer have concluded that Coaxial LLC's disclosure controls and
procedures are effective in timely alerting them to material information
relating to Coaxial LLC (including its consolidated subsidiaries) required to be
included in Coaxial LLC's periodic SEC filings. There have been no significant
changes in Coaxial LLC's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
Within the 90 days prior to the date of this report, under the
supervision and with the participation of Coaxial Financing Corp.'s management,
including its Chief Executive Officer and its Chief Financial Officer, Coaxial
Financing Corp.'s management has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, Coaxial Financing Corp.'s Chief
Executive Officer and its Chief Financial Officer have concluded that Coaxial
Financing Corp.'s disclosure controls and procedures are effective in timely
alerting them to material information
40
relating to Coaxial Financing Corp. (including its consolidated subsidiaries)
required to be included in Coaxial Financing Corp.'s periodic SEC filings. There
have been no significant changes in Coaxial Financing Corp.'s internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of their evaluation.
Within the 90 days prior to the date of this report, under the
supervision and with the participation of Insight Ohio's management, including
its Chief Executive Officer and its Chief Financial Officer, Insight Ohio's
management has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, Insight Ohio's Chief Executive Officer and its Chief
Financial Officer have concluded that Insight Ohio's disclosure controls and
procedures are effective in timely alerting them to material information
relating to Insight Ohio (including its consolidated subsidiaries) required to
be included in Insight Ohio's periodic SEC filings. There have been no
significant changes in Insight Ohio's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation.
41
PART IV
Item 15. 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
Coaxial LLC Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Coaxial LLC Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-3
Coaxial LLC Consolidated Statements of Changes in Members' Equity
(Deficit) for the years ended December 31, 2002, 2001 and 2000 F-4
Coaxial LLC Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-5
Coaxial LLC Notes to Consolidated Financial Statements F-6
Coaxial Financing Corp. Report of Independent Auditors - Ernst & Young LLP F-12
Coaxial Financing Corp. Balance Sheets as of December 31, 2002 and 2001 F-13
Coaxial Financing Corp. Statements of Operations for the year ended
December 31, 2002, 2001 and 2000 F-14
Coaxial Financing Corp. Statements of Changes in Shareholders' Deficit for the
years ended December 31, 2002, 2001 and 2000 F-15
Coaxial Financing Corp. Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-16
Coaxial Financing Corp. Notes to Financial Statements F-17
Coaxial Communications of Central Ohio, Inc. Report of Independent Auditors -
Ernst & Young LLP F-19
42
Page
----
Coaxial Communications of Central Ohio, Inc. Balance Sheets as of
December 31, 2002 and 2001 F-20
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of
Operations for the years ended December 31, 2002, 2001 and 2000 F-21
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of
Changes in Shareholders' Equity (Deficit) for the years ended December 31,
2002, 2001 and 2000. F-22
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Cash
Flows for the years ended December 31, 2002, 2001 and 2000. F-23
Coaxial Communications of Central Ohio, Inc. Notes to Consolidated Financial Statements F-24
Phoenix Associates Report of Independent Auditors - Ernst & Young LLP F-29
Phoenix Associates Balance Sheets as of December 31, 2002 and 2001 F-30
Phoenix Associates Statements of Operations for the years ended December 31, 2002, 2001 and 2000 F-31
Phoenix Associates Statements of Changes in Partners' Deficit for the
years ended December 31, 2002, 2001 and 2000 F-32
Phoenix Associates Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-33
Phoenix Associates Notes to Financial Statements F-34
Insight Communications of Central Ohio, LLC Report of Independent Auditors -
Ernst & Young LLP F-38
Insight Communications of Central Ohio, LLC Balance Sheets as of December 31, 2002 and 2001 F-39
Insight Communications of Central Ohio, LLC Statements of Operations
and Changes in Members' Deficit for the years ended December 31, 2002,
2001 and 2000 F-40
43
Insight Communications of Central Ohio, LLC Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000 F-41
Insight Communications of Central Ohio, LLC Notes to Financial Statements F-42
(b) Reports on Form 8-K:
None.
(c) Exhibits
2.1 Purchase and Option Agreement, dated as of August 8, 2000, among
Coaxial Communications of Central Ohio, Inc., Insight Communications of
Central Ohio, LLC, Insight Holdings of Ohio, LLC, Insight
Communications Company, L.P., Insight Communications Company, Inc.,
Coaxial LLC, Coaxial DJM LLC, Coaxial DSM LLC, Barry Silverstein,
Dennis J. McGillicuddy, and D. Stevens McVoy (1)
2.2 Asset Contribution Agreement, dated August 15, 2000, by and among,
Command Cable of Eastern Illinois Limited Partnership, MediaOne of
Illinois, Inc., Northwest Illinois TV Cable Company, S/D Cable
Partners, Ltd., TCI American Cable Holdings, L.P., TCO of
Bloomington/Normal, Inc., TCI of Cablevision of Texas, Inc., UACC
Midwest, Inc., United Cable Television of Illinois Valley, Inc., United
Cable Television of Southern Illinois Valley, Inc., United Cable
Television of Southern Illinois, Inc., TCI of Indiana Holdings, LLC,
Insight Communications Company, L.P, and Insight Midwest, L.P. ("Asset
Contribution Agreement") (2)
2.3 Amendment to the Asset Contribution Agreement, dated January 5, 2001
(3)
2.4 Asset Exchange Agreement, dated August 15, 2000, by and between
MediaOne of Illinois, Inc., and Insight Communications Company, L.P.
("Asset Exchange Agreement") (2)
2.5 Amendment to the Asset Exchange Agreement, dated January 5, 2001 (3)
2.6 Assets Purchase and Sale Agreement, dated August 15, 2000, by and
between TCI of Illinois, Inc., TCI of Racine, Inc., UACC Midwest, Inc.
and Insight Communications Company, L.P. ("Asset Purchase and Sale
Agreement") (2)
2.7 Amendment to the Asset Purchase and Sale Agreement, dated January 5,
2001 (3)
44
3.1 Certificate of Incorporation of Coaxial Financing Corp., filed July 24,
1998(4)
3.2 By-Laws of Coaxial Financing Corp.(4)
3.3 Certificate of Formation of Insight Communications of Central Ohio, LLC
filed July 23, 1998 (4)
3.4 Amended and Restated Operating Agreement of Insight Ohio, dated as of
August 8, 2000 (1)
3.5 Certificate of Formation of Coaxial LLC filed July 24, 1998 (4)
3.6 Operating Agreement of Coaxial LLC dated August 21, 1998 (4)
10.1 Indenture among Coaxial LLC, Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC and Bank of Montreal Trust Company
dated August 21, 1998 (4)
10.2 Securities Pledge Agreement between Coaxial Communications of Central
Ohio, Inc. and Bank of Montreal Trust Company dated August 21, 1998 (4)
10.3 Securities Pledge Agreement between Coaxial LLC and Bank of Montreal
Trust Company dated August 21, 1998 (4)
10.4 Securities Pledge Agreement between Coaxial DSM LLC and Coaxial LLC
dated August 21, 1998 (4)
10.5 Securities Pledge Agreement between Coaxial DJM LLC and Coaxial LLC
dated August 21, 1998 (4)
10.6 Mirror Note of Coaxial DJM LLC payable to the order of Coaxial LLC
dated August 21, 1998 (4)
10.7 Mirror Note of Coaxial DSM LLC payable to the order of Coaxial LLC
dated August 21, 1998 (4)
10.8 Revolving Credit Agreement dated as of October 7, 1998 among Insight
Communications of Central Ohio, LLC, several banks and financial
institutions or entities, and Canadian Imperial Bank of Commerce, as
administrative agent ("Credit Agreement") (4)
10.8(a) First Amendment to Credit Agreement dated as of June 30, 2000 (5)
10.8(b) Second Amendment to Credit Agreement dated as of June 30, 2000 (5)
10.8(c) Third Amendment to Credit Agreement dated as of March 4, 2002 (5)
45
10.9 Indenture among Coaxial Communications of Central Ohio, Inc., Phoenix
Associates, Insight Communications of Central Ohio, LLC, CIBC
Oppenheimer Corp. and Bank of Montreal Trust Company dated August 21,
1998 (6)
10.10 Cable Facilities Lease Agreement, dated July 17, 2000, among AT&T
Broadband, LLC and Insight Communications Company, Inc. and certain of
its affiliates, including Insight Ohio (1)
21.1 Subsidiaries of Registrants (7)
- -----------
(1) Filed as an Exhibit to Insight Communications Company, Inc.'s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000 (File
No. 0-26677) and incorporated herein by reference.
(2) Filed as an Exhibit to Insight Communications Company, Inc.'s Current
Report on Form 8-K, dated August 15, 2000 (File No. 0-26677) and
incorporated herein by reference.
(3) Filed as an Exhibit to Insight Communications Company, Inc.'s Current
Report on Form 8-K, dated January 5, 2001 (File No. 0-26677) and
incorporated herein by reference.
(4) Filed as an Exhibit to Registrants' Registration Statement on Form S-4
(File No. 333-64449) and incorporated herein by reference.
(5) Filed as an Exhibit to Registrants' Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002 and incorporated herein by
reference.
(6) Filed as an Exhibit to Registration Statement in Form S-4 (File No.
333-63677) and incorporated herein by reference.
(7) Filed as an Exhibit to Registrants' Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 and incorporated herein by
reference.
46
Report of Independent Auditors
The Member of
Coaxial LLC
We have audited the accompanying consolidated balance sheets of Coaxial LLC (the
"Company") as of December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in members' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2, the Company has no operations. The Company's ability to
satisfy its debt and related interest obligations is dependent upon funding from
a related entity in which it owns preferred equity interests which provide for
distributions in amounts equal to the payments required on its debt.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2002 and 2001 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
February 25, 2003
F-1
COAXIAL LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, December 31,
2002 2001
---------------------- ----------------------
Assets
Investments $ 9,904 $ 19,328
Dividends receivable 5,250 5,250
---------------------- ----------------------
Total current assets 15,154 24,578
Deferred financing costs, net of accumulated amortization of $3,331
and $2,567 as of December 31, 2002 and 2001, respectively 3,050 3,814
Investment in affiliate 191,820 185,713
Note receivable - Coaxial DJM LLC 6,750 6,750
Note receivable - Coaxial DSM LLC 3,000 3,000
Interest receivable on notes 7,324 5,272
---------------------- ----------------------
Total assets $ 227,098 $ 229,127
====================== ======================
Liabilities and members' equity
Accrued interest $ 5,250 $ 5,250
---------------------- ----------------------
Total current liabilities 5,250 5,250
Senior discount notes 51,820 45,713
Senior notes, including $105.6 million to be paid by Phoenix
Associates 140,000 140,000
---------------------- ----------------------
Total liabilities 197,070 190,963
Commitments and contingencies
Members' equity:
In-substance allocation of proceeds related to senior notes to be paid
by Phoenix Associates (59,707) (70,263)
Members' accumulated equity 97,331 106,599
Accumulated other comprehensive income (loss) (7,596) 1,828
---------------------- ----------------------
Total members' equity 30,028 38,164
---------------------- ----------------------
Total liabilities and members' equity $ 227,098 $ 229,127
====================== ======================
See accompanying notes
F-2
COAXIAL LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2002 2001 2000
------------------ ------------------ -----------------
Revenue $ - $ - $ 28,920
Operating costs and expenses:
Programming and other operating costs - - 10,955
Selling, general and administrative - - 7,300
Depreciation and amortization 764 764 6,702
------------------ ------------------ -----------------
Total operating costs and expenses 764 764 24,957
Operating income (loss) (764) (764) 3,963
Other income (expense):
Interest income - related parties 2,052 1,806 1,602
Interest income - - 50
Interest expense (20,107) (19,432) (19,635)
Gain on sale of common equity interest - - 171,460
Dividend on preferred interests 20,107 19,432 7,882
Other - - 31
------------------ ------------------ -----------------
Total other income, net 2,052 1,806 161,390
------------------ ------------------ -----------------
Net income $ 1,288 $ 1,042 $ 165,353
================== ================== =================
See accompanying notes
F-3
COAXIAL LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
(in thousands)
In-substance
contribution Accumulated
(allocation) of other Total
proceeds from Members' comprehensive members'
senior notes equity (deficit) income (loss) equity (deficit)
-------------------------------------------------------------------------------------
Balance, January 1, 2000 $ (91,375) $ (41,084) $ - $ (132,459)
Capital contributions - 5,000 - 5,000
Capital distributions - (13,156) - (13,156)
Interest payments made by Phoenix
Associates on senior notes 10,556 - - 10,556
Net income - 165,353 - 165,353
Unrealized gain on investments - - 1,300 1,300
---------------------
Total comprehensive income 166,653
-------------------------------------------------------------------------------------
Balance, December 31, 2000 (80,819) 116,113 1,300 36,594
Capital distributions - (10,556) - (10,556)
Interest payments made by Phoenix
Associates on senior notes 10,556 - - 10,556
Net income - 1,042 - 1,042
Change in unrealized gain on investments - - 528 528
---------------------
Total comprehensive income 1,570
-------------------------------------------------------------------------------------
Balance, December 31, 2001 (70,263) 106,599 1,828 38,164
Capital distributions - (10,556) - (10,556)
Interest payments made by Phoenix
Associates on senior notes 10,556 - - 10,556
Net income - 1,288 - 1,288
Change in unrealized gain on investments - - (9,424) (9,424)
---------------------
Total comprehensive loss (8,136)
-------------------------------------------------------------------------------------
Balance, December 31, 2002 $ (59,707) $ 97,331 $ (7,596) $ 30,028
=====================================================================================
See accompanying notes
F-4
COAXIAL LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2002 2001 2000
---------------- ---------------- ---------------
Operating activities:
Net income $ 1,288 $ 1,042 $ 165,353
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of common equity interest - - (171,460)
Provision for losses on trade accounts receivable - - 367
Depreciation and amortization 764 764 6,702
Interest expense assumed by affiliate 10,556 10,556 10,556
Dividend on preferred interest (20,107) (19,432) (7,882)
Accretion of original issue discount on Senior Discount Notes 6,107 5,432 4,725
Changes in operating assets and liabilities:
Trade accounts receivable - - (516)
Prepaid expenses and other assets - - (1,188)
Accounts payable and accrued expenses - - 567
Due from related parties (2,052) (1,806) -
---------------- ---------------- ---------------
Net cash provided by (used in) operating activities (3,444) (3,444) 7,224
---------------- ---------------- ---------------
Investing activities:
Purchase of property and equipment - - (19,943)
Decrease in cash upon sale of common equity interest - - (1,004)
Purchase of intangible assets - - (3)
---------------- ---------------- ---------------
Net cash used in investing activities - - (20,950)
---------------- ---------------- ---------------
Financing activities:
Capital distributions (10,556) (10,556) (13,156)
Proceeds from dividend on preferred interests 14,000 14,000 12,000
Borrowings under senior credit facility - - 14,000
---------------- ---------------- ---------------
Net cash provided by financing activities 3,444 3,444 12,844
---------------- ---------------- ---------------
Net decrease in cash and cash equivalents - - (882)
Cash and cash equivalents, beginning of year - - 882
---------------- ---------------- ---------------
Cash and cash equivalents, end of year $ - $ - $ -
================ ================ ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,444 $ 3,444 $ 3,444
Supplemental disclosure of significant non-cash financing activities:
In-substance contribution related to senior notes to be paid by Phoenix
Associates $ 10,556 $ 10,556 $ 10,556
See accompanying notes
F-5
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and Basis of Presentation
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67 1/2% of the common stock of Coaxial
Communications of Central Ohio, Inc. ("Coaxial Inc."). The Company has one
individual as its sole member.
Coaxial Inc., an Ohio corporation, through its ownership of preferred interests,
has a 30% voting interest in Insight Communications of Central Ohio, LLC
("Insight Ohio"). Insight Ohio operates a cable television system that provides
basic and expanded cable television services to homes in the eastern parts of
Columbus, Ohio and surrounding areas.
In connection with the contribution of Coaxial Inc.'s cable system (the
"System") described below and with the issuance of the Senior Notes and Senior
Discount Notes by Coaxial Inc. and the Company during 1998, the three
individuals who previously owned the outstanding stock of Coaxial Inc.
contributed their stock to three separate limited liability companies.
Accordingly, Coaxial Inc. is a subsidiary of the Company, which owns 67 1/2% of
Coaxial Inc.'s outstanding stock.
Other related entities affiliated with the Company in addition to Coaxial Inc.,
include Coaxial DJM LLC, Coaxial DSM LLC, (collectively, the "Coaxial
Entities"), Phoenix Associates ("Phoenix"), Coaxial Financing Corp., Coaxial
Associates of Columbus I and Coaxial Associates of Columbus II.
The Company and Coaxial Financing Corp. are co-issuers of the Senior Discount
Notes. Coaxial Inc. and Phoenix are co-issuers of the Senior Notes. The ability
of Coaxial Financing Corp., the Company, Coaxial Inc. and Phoenix to make
scheduled payments with respect to the Senior Discount Notes and Senior Notes is
dependent on the financial and operating performance of Insight Ohio. The
required distributions on the Series A preferred equity interest and Series B
preferred equity interest to Coaxial Inc. are designed to provide the cash flow
necessary to service the debt requirements on the Senior Notes and Senior
Discount Notes, respectively.
On August 21, 1998, Coaxial Inc. and Insight Communications Company, L.P.
("Insight LP") entered into a contribution agreement (the "Contribution
Agreement") pursuant to which Coaxial Inc. contributed substantially all of the
assets and liabilities comprising the System to a newly formed subsidiary,
Insight Ohio. In connection therewith, Insight Holdings of Ohio, LLC ("Insight
Holdings"), a wholly owned subsidiary of Insight LP, contributed $10.0 million
in cash to Insight Ohio. As a result of the Contribution Agreement, Coaxial Inc.
owned 25% of the non-voting common equity and Insight Holdings owned 75% of the
non-voting common equity of Insight Ohio. Coaxial Inc. also owns a $140.0
million Series A preferred equity interest and a $30.0 million Series B
preferred equity interest in Insight Ohio.
On August 8, 2000, Insight Ohio purchased Coaxial Inc.'s 25% non-voting common
equity interest in Insight Ohio. The purchase price was 800,000 shares of common
stock of Insight LP's general partner, Insight Communications Company, Inc.
("Insight Inc.") with a value of $10.4 million and cash in the amount of $2.6
million. In connection with the purchase, Insight Ohio's operating agreement was
amended to, among other things, remove certain participating rights of the
principals of Coaxial Inc. and the Coaxial Entities. Additionally, the agreement
was amended to incorporate 70% of Insight Ohio's
F-6
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and Basis of Presentation (continued)
total voting power into the common equity interests of Insight Ohio and 30% of
Insight Ohio's total voting power into the preferred equity interests of Insight
Ohio.
2. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial Inc.'s ownership of all of the voting equity of Insight
Ohio through August 8, 2000, the accompanying financial statements include the
accounts of Insight Ohio through such date. All inter-company balances have been
eliminated in consolidation. Since Insight Ohio had a members' deficiency, the
accompanying financial statements do not include a minority interest liability
for Insight Holdings of Ohio LLCs' 75% common equity interest in Insight Ohio
for any period prior to August 8, 2000.
As a result of the sale of Coaxial Inc.'s common equity interest and change in
voting interest, the Company no longer consolidates the accounts of Insight Ohio
subsequent to August 8, 2000 and consequently has no operations.
Investments
Investments consist of 800,000 shares of common stock of Insight Inc. These
securities are classified as available-for-sale under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with SFAS No. 115, available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of members' equity.
Investment in Affiliate
In connection with the Contribution Agreement described in Note 1, Insight Ohio
issued to Coaxial Inc. a $140.0 million Series A preferred equity interest
("Series A Preferred Interest") and a $30.0 million Series B preferred equity
interest ("Series B Preferred Interest") (the "Preferred Interests"). These
voting Preferred Interests provide for distributions to Coaxial Inc. and
indirectly to Phoenix and the Company in amounts equal to the payments required
on the Senior Notes and the Senior Discount Notes issued by the Company due in
August 2008 with a maturity value of $55.9 million. The accreted value of the
Senior Discount Notes was $51.8 million as of December 31, 2002. Additionally,
the Preferred Interests have liquidation preferences equal to the investment in
affiliate balance.
Fair Value of Financial Instruments
The carrying amounts of current assets (excluding investments which are carried
at fair value) and liabilities approximate their fair market value because of
the immediate or short-term maturity of these
F-7
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
financial instruments. The fair value of the Senior Discount Notes and the
Senior Notes was $36.7 million and $122.8 million and $42.6 million and $143.5
million as of December 31, 2002 and 2001, respectively.
Revenue Recognition
Prior to 2001, revenue included service, connection and launch fees. Service
fees were recorded in the month cable television and pay television services
were provided to subscribers. Connection fees were charged for the hook-up of
new customers and were recognized as current revenues. Launch fees were deferred
and amortized over the period of the underlying contract.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees, associated with the Senior Notes and Senior Discount Notes,
which are amortized over the life of the Senior Notes and Senior Discount Notes,
respectively.
Marketing and Promotional Costs
Prior to 2001, marketing and promotional costs were expensed as incurred.
Marketing and promotional expense, primarily for campaign and
telemarketing-related efforts, was $758,000 for the year ended December 31,
2000.
In-Substance Allocation of Note Proceeds
Since both Phoenix and Coaxial Inc. are severally and jointly liable, the Senior
Notes, deferred financing costs and associated interest expense are reflected in
the Company's financial statements as well as a charge to the equity section
representing an in-substance allocation of the proceeds from Phoenix's allocated
portion of the Senior Notes. Coaxial Inc. accrues interest on the total Senior
Note balance. When Phoenix makes interest payments, Coaxial Inc. reduces accrued
interest payable and records an in-substance contribution to equity.
Comprehensive Income (Loss)
The Company owns common stock that is classified as available-for-sale and
reported at market value, with unrealized gains and losses recorded as
accumulated other comprehensive income or loss in the accompanying balance
sheets.
F-8
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company is a limited liability company. Therefore, its members report the
income or loss on their income tax returns. As a result, the Company does not
provide for federal or state income taxes in its accounts. In the event that the
limited liability company election is terminated, deferred taxes related to book
and tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
members is limited to their investment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Under the Company's franchise agreements, it was obligated to pay to local
franchising authorities a percentage of its revenue derived from providing cable
and other services the majority of which are passed through to customers. The
Company had historically recorded revenue net of franchise fees charged to its
customers. Staff Announcement D-103, issued by the FASB in November 2001,
specifies that reimbursements received from a customer should be reflected as
revenues and not as a reduction of expenses. This Staff Announcement applies to
financial reporting periods beginning after December 15, 2001. Upon application
of this Staff Announcement, comparative financial statements for prior periods
are required to be reclassified to comply with the guidance in this Staff
Announcement. Consequently, the Company has reclassified the prior period
amounts in the accompanying consolidated statements of operations to reflect
franchise fees on a gross basis with reimbursements as revenue and payments as
expense. The effect on the prior period statements of operations was to increase
both revenue and selling, general and administrative costs by $824,000 for the
period from January 1, 2000 through August 8, 2000.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. 401(k) Plan
Insight Ohio sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. Insight Ohio's
contributions to the Plans, which were equal to a portion of the employees'
contributions up to 5% of the employees' wages, were $75,000 for the year ended
December 31, 2000.
F-9
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of Insight Ohio
under an operating agreement dated August 21, 1998 that provided for a
management fee equal to 3% of Insight Ohio's revenues. In connection with the
purchase of Coaxial Inc.'s 25% common equity interest in Insight Ohio, Insight
Ohio's operating agreement was amended to provide for Insight LP to serve as
manager of Insight Ohio. Fees under this operating agreement were $870,000 for
the year ended December 31, 2000. Other related party transactions are described
in Note 5.
5. Notes Payable
Senior Notes
On August 21, 1998, Coaxial Inc. and Phoenix Associates completed an offering of
$140.0 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to Coaxial Inc.
Interest is payable in cash semi-annually on each February 15 and August 15
through 2006. Interest payments commenced on February 15, 1999. The Senior Notes
are secured by the outstanding Series A Preferred Interest in Insight Ohio and
contain certain financial and other debt covenants.
The Series A Preferred Interest pays distributions in an amount equal to the
interest payments on the Senior Notes. The Series A Preferred Interest is owned
by Coaxial Inc. and is pledged to Bank of New York, as trustee, for the benefit
of the holders of the Senior Notes. Coaxial Inc. utilizes cash distributions
made by Insight Ohio on the Series A Preferred Interest to make debt service
payments on the Senior Notes. The ability of Coaxial Inc. and Phoenix to make
scheduled debt service payments with respect to the Senior Notes depends on the
financial and operating performance of Insight Ohio. Coaxial Inc., as joint and
several issuer with Phoenix of the Senior Notes, provides the funding which
allows Phoenix to repay its share of the Senior Notes, as Phoenix has no
operations.
In connection with the issuance of the Senior Notes, Coaxial Inc. incurred
financing fees of $5.0 million that are being amortized over the life of the
Senior Notes. Amortization expense for these deferred financing costs was
$628,000 for each of the years ended December 31, 2002, 2001 and 2000.
On August 21, 1998, the Company and Coaxial Financing issued Senior Discount
Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes have a
maturity value of $55.9 million and $30.0 million of gross proceeds were
received upon issuance. Of the gross proceeds $19.5 million was contributed by
the members of the Company to certain related entities to repay indebtedness. Of
the remaining proceeds, $9.8 million was loaned to two related entities (Coaxial
DJM LLC and Coaxial DSM LLC) by the Company. The Company received notes payable
from these related entities with identical interest and maturity terms to the
Senior Discount Notes. The debt discount of $25.9 million is being amortized
using the effective interest method over five years through August 15, 2003.
Thereafter, interest on the Senior Discount Notes accrues at 127/8% per annum
and is payable semi-
F-10
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Notes Payable (continued)
annually. All of the proceeds from the Senior Discount Notes were allocated to
the Company.
In connection with the issuance of the Senior Discount Notes, the Company
incurred financing fees of approximately $1.4 million that are being amortized
over the life of the Senior Discount Notes. Amortization expense related to the
deferred financing costs was $136,000 for each of the years ended December 31,
2002, 2001 and 2000.
The Senior Discount Notes are non-recourse and secured by all of the common
stock of Coaxial Inc. and the notes issued by Coaxial DJM LLC and Coaxial DSM
LLC to the Company and conditionally guaranteed by Insight Ohio.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions and the transfer or sale of assets. The ability of Coaxial
Financing and the Company to make scheduled payments with respect to the Senior
Discount Notes will depend on the financial and operating performance of Insight
Ohio. The distributions on the Series A and B Preferred Interests equal the
interest payments on the Senior Notes and Senior Discount Notes.
F-11
Report of Independent Auditors
The Shareholders
Coaxial Financing Corp.
We have audited the accompanying balance sheets as of December 31, 2002 and 2001
and the related statements of operations, changes in shareholders' deficit and
cash flows of Coaxial Financing Corp. (the "Company") for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, the Company has no operations. Its ability to satisfy
debt and other obligations is dependent upon funding from related entities,
which are under the common control of the owners of the Company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2002 and 2001 and the results of their operations and cash flows for the each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 25, 2003
F-12
COAXIAL FINANCING CORP.
BALANCE SHEETS
(in thousands)
December 31, December 31,
2002 2001
---------------------- ----------------------
Assets
Cash $ 1 $ 1
Deferred financing costs, net 762 898
---------------------- ----------------------
Total assets $ 763 $ 899
====================== ======================
Liabilities and shareholders' deficit
Senior discount notes, to be paid by Coaxial LLC $ 51,820 $ 45,713
Shareholders' deficit:
Common stock; $.01 par value; 1,000 shares authorized, issued and
outstanding - -
Paid-in-capital 1 1
In-substance allocation of proceeds related to senior discount notes
to be paid by Coaxial LLC (28,646) (28,646)
Accumulated deficit (22,412) (16,169)
---------------------- ----------------------
Total shareholders' deficit (51,057) (44,814)
---------------------- ----------------------
Total liabilities and shareholders' deficit $ 763 $ 899
====================== ======================
See accompanying notes
F-13
COAXIAL FINANCING CORP.
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2002 2001 2000
----------------- ------------------ ------------------
Expenses:
Amortization $ (136) $ (136) $ (136)
Interest (6,107) (5,432) (4,725)
----------------- ------------------ ------------------
Net loss $ (6,243) $ (5,568) $ (4,861)
================= ================== ==================
See accompanying notes
F-14
COAXIAL FINANCING CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(in thousands)
In-substance
allocation of Total
Additional proceeds from Accumulated shareholders'
paid-in-capital senior notes deficit deficit
-------------------- ------------------- -------------------- -------------------
Balance, January 1, 2000 $ 1 $ (28,646) $ (5,740) $ (34,385)
Net loss - - (4,861) (4,861)
-------------------- ------------------- -------------------- -------------------
Balance, December 31, 2000 1 (28,646) (10,601) (39,246)
Net loss - - (5,568) (5,568)
-------------------- ------------------- -------------------- -------------------
Balance, December 31, 2001 1 (28,646) (16,169) (44,814)
Net loss - - (6,243) (6,243)
-------------------- ------------------- -------------------- -------------------
Balance, December 31, 2002 $ 1 $ (28,646) $ (22,412) $ (51,057)
==================== =================== ==================== ===================
See accompanying notes
F-15
COAXIAL FINANCING CORP.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2002 2001 2000
------------------ ------------------ -----------------
Cash flows from operating activities:
Net loss $ (6,243) $ (5,568) $ (4,861)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of deferred financing costs 136 136 136
Accretion of original issue discount on senior discount notes
assumed by affiliate 6,107 5,432 4,725
------------------ ------------------ -----------------
Net cash provided by operating activities - - -
------------------ ------------------ -----------------
Net increase in cash - - -
Cash, beginning of year 1 1 1
------------------ ------------------ -----------------
Cash, end of year $ 1 $ 1 $ 1
================== ================== =================
See accompanying notes
F-16
COAXIAL FINANCING CORP.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on
July 24, 1998, for the sole purpose of being a co-issuer with Coaxial LLC, a
related entity, of the discount notes described in Note 3, which allows certain
investors the ability to be holders of the debt. The Company has no operations.
Three individuals own the outstanding shares of the Company.
2. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees associated with the Senior Discount Notes, which are amortized
over the life of the Senior Discount Notes.
Fair Value of Financial Instruments
The fair value of the Senior Discount Notes as of December 31, 2002 and 2001 was
$36.7 million and $42.6 million, respectively.
In-Substance Allocation of Note Proceeds
Since both Coaxial LLC and the Company are severally and jointly liable, the
Senior Discount Notes, deferred financing costs and associated interest expense
are reflected in the Company's financial statements as well as a charge to the
equity section representing an in-substance allocation of the proceeds from the
Senior Discount Notes received by Coaxial LLC in 1998. The Company has accreted
interest on the outstanding balance and will accrue interest when it begins to
become payable in 2003. When Coaxial LLC makes an interest payment or repays the
debt, the Company will reduce accrued interest or the debt balance and record an
in-substance contribution to equity.
Income Taxes
The Company has prepared its income tax provision using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse. As of
December 31, 2002 and 2001 the Company had no deferred tax assets or liabilities
and no tax provision to record.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-17
COAXIAL FINANCING CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Notes Payable
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior
Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes
have a maturity value of $55.9 million and $30.0 million of gross proceeds were
received upon issuance. Of the gross proceeds, $19.5 million was contributed by
the members of Coaxial LLC to certain related entities to repay indebtedness. In
addition, $9.8 million was loaned to two related entities ("Coaxial DJM LLC" and
"Coaxial DSM LLC") by Coaxial LLC. The debt discount of $25.9 million is being
amortized, using the effective interest method, over five years through August
15, 2003. Thereafter, interest on the Senior Discount Notes accrues at 127/8%
per annum and is payable semi-annually. All of the proceeds from the Senior
Discount Notes were allocated to Coaxial LLC.
In connection with the issuance of the Senior Discount Notes, the Company
incurred financing fees of approximately $1.4 million that are being amortized
over the life of the Senior Discount Notes. Amortization expense related to the
deferred financing costs was $136,000 for each of the years ended December 31,
2002, 2001 and 2000.
The Senior Discount Notes are non-recourse, secured by all of the common stock
of Coaxial Communications of Central Ohio, Inc. ("Coaxial Inc.") and the notes
issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally
guaranteed by Insight Communications of Central Ohio, LLC ("Insight Ohio"), an
affiliate of Coaxial Inc.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets.
The ability of the Company and Coaxial LLC to make scheduled payments with
respect to the Senior Discount Notes will depend on the financial and operating
performance of Insight Ohio. Although the Company is a co-issuer of the Senior
Discount Notes, it has no substantial assets or any operations and will not have
access to additional sources of cash flow to make any payments on such debt.
F-18
Report of Independent Auditors
The Shareholders
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheets of Coaxial Communications of
Central Ohio, Inc. (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations and changes in shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2, the Company has no operations. The Company's ability to
satisfy its debt and related interest obligations is dependent upon funding from
a related entity in which it owns preferred equity interests which provide for
distributions in amounts equal to the payments required on its debt.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2002 and 2001 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
February 25, 2003
F-19
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
BALANCE SHEETS
(in thousands)
December 31, December 31,
2002 2001
----------------------------------------
Assets
Investments $ 9,904 $ 19,328
Dividend receivable 5,250 5,250
----------------------------------------
Total current assets 15,154 24,578
Deferred financing costs, net of accumulated amortization of $2,740 and $2,112
as of December 31, 2002 and 2001, respectively 2,287 2,915
Investment in affiliate 191,820 185,713
----------------------------------------
Total assets $ 209,261 $ 213,206
========================================
Liabilities and shareholders' equity
Accrued interest $ 5,250 $ 5,250
----------------------------------------
Total current liabilities 5,250 5,250
Senior notes, including $105.6 million to be paid by Phoenix Associates 140,000 140,000
----------------------------------------
Total liabilities 145,250 145,250
Commitments and contingencies
Shareholders' equity:
Common stock; $1 par value; 2,000 shares authorized; 1,080 shares issued and
outstanding as of December 31, 2002 and 2001, respectively 1 1
Paid in capital 11,501 11,501
In-substance allocation of proceeds related to senior notes to be paid by
Phoenix Associates (59,707) (70,263)
Retained earnings 119,812 124,889
Accumulated other comprehensive income (loss) (7,596) 1,828
----------------------------------------
Total shareholders' equity 64,011 67,956
----------------------------------------
Total liabilities and shareholders' equity $ 209,261 $ 213,206
========================================
See accompanying notes
F-20
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31,
2002 2001 2000
-----------------------------------------------------
Revenue $ - $ - $ 28,920
Operating costs and expenses:
Programming and other operating costs - - 10,955
Selling, general and administrative - - 7,300
Depreciation and amortization 628 628 6,474
-----------------------------------------------------
Total operating costs and expenses 628 628 24,729
Operating income (loss) (628) (628) 4,191
Other income (expense):
Interest income - - 50
Interest expense (14,000) (14,000) (14,911)
Gain on sale of common equity interest of affiliate - - 171,460
Dividend on preferred interests 20,107 19,432 7,882
Other - - 31
-----------------------------------------------------
Total other income, net 6,107 5,432 164,512
-----------------------------------------------------
Net income $ 5,479 $ 4,804 $ 168,703
=====================================================
See accompanying notes
F-21
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
In-substance
contribution
(allocation) of Accumulated Total
proceeds Retained other shareholders'
Common Paid-in- related to earnings comprehensive equity
stock capital senior notes (deficit) income (loss) (deficit)
------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $ 1 $ 11,501 $ (91,375) $ (29,906) $ - $ (109,779)
Capital contributions - - - 5,000 - 5,000
Capital distributions - - - (13,156) - (13,156)
Interest payments made by Phoenix
Associates on senior notes - - 10,556 - - 10,556
Net income - - - 168,703 - 168,703
Unrealized gain on investments - - - - 1,300 1,300
-----------------
Total comprehensive income 170,003
------------------------------------------------------------------------------------------------
Balance, December 31, 2000 1 11,501 (80,819) 130,641 1,300 62,624
Capital distributions - - - (10,556) - (10,556)
Interest payments made by Phoenix
Associates on senior notes - - 10,556 - - 10,556
Net income - - - 4,804 - 4,804
Change in unrealized gain on
investments - - - - 528 528
-----------------
Total comprehensive income 5,332
------------------------------------------------------------------------------------------------
Balance, December 31, 2001 1 11,501 (70,263) 124,889 1,828 67,956
Capital distributions - - - (10,556) - (10,556)
Interest payments made by Phoenix
Associates on senior notes - - 10,556 - - 10,556
Net income - - - 5,479 - 5,479
Change in unrealized gain on
investments - - - - (9,424) (9,424)
-----------------
Total comprehensive loss (3,945)
------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 1 $ 11,501 $ (59,707) $ 119,812 $ (7,596) $ 64,011
================================================================================================
See accompanying notes
F-22
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2002 2001 2000
----------------------------------------------------
Operating activities:
Net income $ 5,479 $ 4,804 $ 168,703
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 628 628 6,474
Interest expense assumed by affiliate 10,556 10,556 10,556
Provision for losses on trade accounts receivable - - 367
Gain on sale of common equity interest - - (171,460)
Dividend on preferred interest (20,107) (19,432) (7,882)
Changes in operating assets and liabilities:
Trade accounts receivable - - (516)
Prepaid expenses and other current assets - - 415
Accounts payable and accrued expenses - - 567
----------------------------------------------------
Net cash provided by (used in) operating activities (3,444) (3,444) 7,224
----------------------------------------------------
Investing activities:
Purchase of property and equipment - - (19,943)
Decrease in cash upon sale of common equity interest - - (1,004)
Increase in intangible assets - - (3)
----------------------------------------------------
Net cash used in investing activities - - (20,950)
----------------------------------------------------
Financing activities:
Capital distributions (10,556) (10,556) (13,156)
Proceeds from dividend on preferred interest 14,000 14,000 -
Capital contributions - - 12,000
Borrowings under senior credit facility - - 14,000
----------------------------------------------------
Net cash provided by financing activities 3,444 3,444 12,844
----------------------------------------------------
Net decrease in cash and cash equivalents - - (882)
Cash and cash equivalents, beginning of year - - 882
----------------------------------------------------
Cash and cash equivalents, end of year $ - $ - $ -
====================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,444 $ 3,444 $ 3,444
Supplemental disclosure of significant non-cash financing activities:
In-substance contribution related to senior notes to be paid by
Phoenix Associates $ 10,556 $ 10,556 $ 10,556
See accompanying notes
F-23
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization and Purpose
Coaxial Communications of Central Ohio, Inc. (the "Company"), an Ohio
corporation, through its ownership of preferred interests (discussed below), has
a 30% voting interest in Insight Communications of Central Ohio, LLC ("Insight
Ohio"). Insight Ohio operates a cable television system that provides basic and
expanded cable services to homes in the eastern parts of Columbus, Ohio and
surrounding areas.
In connection with the contribution of the Company's cable system ("the System")
described below and with the issuance of the Senior Notes and Senior Discount
Notes by the Company's majority shareholder, Coaxial LLC during 1998, the three
individuals who previously owned the outstanding stock of the Company
contributed their stock to three separate limited liability companies.
Accordingly, the Company is a subsidiary of Coaxial LLC, which owns 67 1/2% of
the Company's outstanding stock.
Other related entities affiliated with the Company in addition to Coaxial LLC,
include Coaxial DJM LLC, Coaxial DSM LLC, (collectively, the "Coaxial
Entities"), Phoenix Associates ("Phoenix"), Coaxial Financing Corp., Coaxial
Associates of Columbus I and Coaxial Associates of Columbus II.
On August 21, 1998, the Company and Insight Communications Company, L.P.
("Insight LP") entered into a contribution agreement (the "Contribution
Agreement") pursuant to which the Company contributed substantially all of the
assets and liabilities comprising the System to a newly formed subsidiary,
Insight Ohio. In connection therewith, Insight Holdings of Ohio, LLC ("Insight
Holdings"), a wholly owned subsidiary of Insight LP, contributed $10.0 million
in cash to Insight Ohio. As a result of the Contribution Agreement, the Company
owned 25% of the non-voting common equity and Insight Holdings owned 75% of the
non-voting common equity of Insight Ohio. The Company also owns a $140.0 million
Series A preferred equity interest and a $30.0 million Series B preferred equity
interest of Insight Ohio.
On August 8, 2000, Insight Ohio purchased the Company's 25% non-voting common
equity interest in Insight Ohio. The purchase price was 800,000 shares of common
stock of Insight LP's general partner, Insight Communications Company, Inc.
("Insight Inc.") with a value of $10.4 million and cash in the amount of $2.6
million. In connection with the purchase, Insight Ohio's operating agreement was
amended to, among other things, remove certain participating rights of the
principals of the Company and the Coaxial Entities. Additionally, the agreement
was amended to incorporate 70% of Insight Ohio's total voting power into the
common equity interests of Insight Ohio and 30% of Insight Ohio's total voting
power into the preferred equity interests of Insight Ohio.
As a result of this transaction, the Company recorded a gain on the sale of its
common equity interest of $171.5 million which was equal to the difference
between the value of the shares of Insight Inc. common stock and cash received
plus the fair value of a guaranteed security price adjustment ($20.1 million) as
compared to the Company's recorded investment in Insight Ohio (net liability of
$151.4 million) as of the transaction date.
F-24
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Business Organization and Purpose (continued)
Insight Ohio is prohibited by the terms of its indebtedness from making
distributions to Insight Inc. or any of its subsidiaries. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes remains
in place. If at any time the Senior Notes or the Senior Discount Notes are
repaid or significantly modified, the principals of the Coaxial Entities may
require Insight Inc. to purchase their preferred interests in the Coaxial
Entities for a purchase price equal to the difference, if any, of $32.6 million
less the then market value of the 800,000 shares of Insight Inc. common stock
issued on August 8, 2000. The fair value of the aforementioned guaranteed
security price of $32.6 million compared to the market value of the 800,000
shares of Insight Inc. common stock as of the date of acquisition was $7.1
million.
2. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of the Company's ownership of all of the voting equity of Insight
Ohio through August 8, 2000, the accompanying financial statements include the
accounts of Insight Ohio through such date. All inter-company balances have been
eliminated in consolidation. Since Insight Ohio had a members' deficiency, the
accompanying financial statements do not include a minority interest liability
for Insight Holdings' 75% common equity interest in Insight Ohio for any period
prior to August 8, 2000.
As a result of the sale of its common equity interest and change in voting
interest, the Company no longer consolidates the accounts of Insight Ohio
subsequent to August 8, 2000 and consequently has no operations.
Investments
Investments consist of 800,000 shares of common stock of Insight Inc. These
securities are classified as available-for-sale under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". In accordance with SFAS No. 115, available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of shareholders' equity.
Investment in Affiliate
In connection with the Contribution Agreement, Insight Ohio issued to the
Company a $140.0 million Series A preferred equity interest ("Series A Preferred
Interest") and a $30.0 million Series B preferred equity interest ("Series B
Preferred Equity Interest") (the "Preferred Interests"). These voting Preferred
Interests provide for distributions to the Company and indirectly to Phoenix and
Coaxial LLC in amounts equal to the payments required on the Senior Notes and
the Senior Discount Notes issued by
F-25
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Coaxial LLC due in August 2008 with a maturity value of $55.9 million. The
accreted value of the Senior Discount Notes was $51.8 million as of December 31,
2002. Additionally, the Preferred Interests have liquidation preferences equal
to the investment in affiliate balance.
Fair Value of Financial Instruments
The carrying amounts of current assets (excluding investments which are carried
at fair value) and liabilities approximate their fair market value because of
the immediate or short-term maturity of these financial instruments. The fair
value of the Senior Notes was $122.8 million and $143.5 million as of December
31, 2002 and 2001, respectively.
Revenue Recognition
Prior to 2001, revenue included service, connection and launch fees. Service
fees were recorded in the month cable television and pay television services
were provided to subscribers. Connection fees were charged for the hook-up of
new customers and were recognized as current revenues. Launch fees were deferred
and amortized over the period of the underlying contract.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees, associated with the Senior Notes. These costs are being
amortized over the life of the Senior Notes.
Marketing and Promotional Costs
Prior to 2001, marketing and promotional costs were expensed as incurred.
Marketing and promotional expense, primarily for campaign and
telemarketing-related efforts, was $758,000 for the year ended December 31,
2000.
In-Substance Allocation of Note Proceeds
Since both Phoenix and the Company are severally and jointly liable, the Senior
Notes, deferred financing costs and associated interest expense are reflected in
the Company's financial statements as well as a charge to the equity section
representing an in-substance allocation of the proceeds from Phoenix's portion
of the Senior Notes. The Company accrues interest on the total Senior Note
balance. When Phoenix makes interest payments, the Company reduces accrued
interest payable and records an in-substance contribution to equity.
F-26
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss)
The Company owns common stock that is classified as available-for-sale and
reported at market value, with unrealized gains and losses recorded as
accumulated other comprehensive income or loss in the accompanying balance
sheets.
Income Taxes
The Company is a Subchapter S corporation. Therefore, each shareholder reports
their distributive share of income or loss on their respective income tax
return. As a result, the Company does not provide for federal or state income
taxes in its accounts. In the event that the Subchapter S corporation election
is terminated, deferred taxes related to book and tax temporary differences
would be required to be reflected in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Under the Company's franchise agreements, it was obligated to pay to local
franchising authorities a percentage of its revenue derived from providing cable
and other services the majority of which are passed through to customers. The
Company had historically recorded revenue net of franchise fees charged to its
customers. Staff Announcement D-103, issued by the FASB in November 2001,
specifies that reimbursements received from a customer should be reflected as
revenues and not as a reduction of expenses. This Staff Announcement applies to
financial reporting periods beginning after December 15, 2001. Upon application
of this Staff Announcement, comparative financial statements for prior periods
are required to be reclassified to comply with the guidance in this Staff
Announcement. Consequently, the Company has reclassified the prior period
amounts in the accompanying consolidated statements of operations to reflect
franchise fees on a gross basis with reimbursements as revenue and payments as
expense. The effect on the prior period statements of operations was to increase
both revenue and selling, general and administrative costs by $824,000 for the
period from January 1, 2000 through August 8, 2000.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
F-27
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 401(k) Plan
Insight Ohio sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. Insight Ohio's
contributions to the Plans, which were equal to a portion of the employees'
contributions up to 5% of the employees' wages, were $75,000 for the year ended
December 31, 2000.
4. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of Insight Ohio
under an operating agreement dated August 21, 1998 that provided for a
management fee equal to 3% of Insight Ohio's revenues. In connection with the
purchase of the Company's 25% common equity interest in Insight Ohio, Insight
Ohio's operating agreement was amended to provide for Insight LP to serve as
manager of Insight Ohio. Fees under this operating agreement were $870,000 for
the year ended December 31, 2000.
5. Notes Payable
On August 21, 1998, the Company and Phoenix Associates completed an offering of
$140.0 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to the Company.
Interest is payable in cash semi-annually on each February 15 and August 15
through 2006. Interest payments commenced on February 15, 1999. The Senior Notes
are secured by the outstanding Series A Preferred Interest in Insight Ohio and
contain certain financial and other debt covenants.
The Series A Preferred Interest pays distributions in an amount equal to the
interest payments on the Senior Notes. The Series A Preferred Interest is owned
by the Company and is pledged to Bank of New York, as trustee, for the benefit
of the holders of the Senior Notes. The Company utilizes cash distributions made
by Insight Ohio on the Series A Preferred Interest to make debt service payments
on the Senior Notes. The ability of Phoenix and the Company to make scheduled
debt service payments with respect to the Senior Notes depends on the financial
and operating performance of Insight Ohio. The Company, as joint and several
issuer with Phoenix of the Senior Notes, provides the funding which allows
Phoenix to repay it's share of the Senior Notes, as Phoenix has no operations.
In connection with the issuance of the Senior Notes, the Company incurred
financing fees of $5.0 million that are being amortized over the life of the
Senior Notes. Amortization expense for these deferred financing costs was
$628,000 for each of the years ended December 31, 2002, 2001 and 2000.
F-28
Report of Independent Auditors
The General Partners
Phoenix Associates
We have audited the accompanying balance sheets of Phoenix Associates (the
"Company") as of December 31, 2002 and 2001, and the related statements of
operations, changes in partners' deficit and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, the Company has no operations. Its ability to satisfy
debt and other obligations is dependent upon funding from related entities,
which are under the common control of the owners of the Company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2002 and 2001 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 25, 2003
F-29
PHOENIX ASSOCIATES
BALANCE SHEETS
(in thousands)
December 31, December 31,
2002 2001
---------------------- ----------------------
Assets
Interest receivable $ - $ 531
Due from related party - 406
Notes receivable - related parties - 550
---------------------- ----------------------
Total current assets - 1,487
Deferred financing costs, net of accumulated amortization of $2,740
and $2,112 as of December 31, 2002 and 2001, respectively 2,287 2,915
---------------------- ----------------------
Total assets $ 2,287 $ 4,402
====================== ======================
Liabilities and partners' deficit
Accrued interest $ 5,250 $ 5,250
---------------------- ----------------------
Total current liabilities 5,250 5,250
Senior notes, including $34.4 million to be paid by Coaxial Communications of
Central Ohio, Inc. 140,000 140,000
---------------------- ----------------------
Total liabilities 145,250 145,250
Commitments and contingencies
Partners' deficit:
In-substance allocation of proceeds related to senior notes to be paid by
Coaxial Communications of Central Ohio, Inc (19,433) (22,877)
Partners' accumulated deficit (123,530) (117,971)
---------------------- ----------------------
Total partners' deficit (142,963) (140,848)
---------------------- ----------------------
Total liabilities and partners' deficit $ 2,287 $ 4,402
====================== ======================
See accompanying notes
F-30
PHOENIX ASSOCIATES
STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31,
2002 2001 2000
----------------------------------------------------------
Expenses:
Amortization $ (628) $ (628) $ (628)
Interest income (expense):
Interest income-related parties 132 158 158
Interest expense (14,000) (14,000) (14,000)
----------------------------------------------------------
Total interest expense, net (13,868) (13,842) (13,842)
Gain on settlement of notes receivable from related parties 1,917 - -
----------------------------------------------------------
Net loss $ (12,579) $ (14,470) $ (14,470)
==========================================================
See accompanying notes
F-31
PHOENIX ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands)
In-substance
contributions
(allocations)
related to Partners'
senior accumulated Total partners'
notes deficit deficit
-----------------------------------------------------------
Balance, January 1, 2000 $ (29,765) $ (110,143) $ (139,908)
Capital contributions - 10,556 10,556
Interest payments made by Coaxial
Communications of Central Ohio, Inc. on senior
notes 3,444 - 3,444
Net loss - (14,470) (14,470)
-----------------------------------------------------------
Balance, December 31, 2000 (26,321) (114,057) (140,378)
Capital contributions - 10,556 10,556
Interest payments made by Coaxial Communications
of Central Ohio, Inc. on senior notes 3,444 - 3,444
Net loss - (14,470) (14,470)
-----------------------------------------------------------
Balance, December 31, 2001 (22,877) (117,971) (140,848)
Capital contributions - 10,556 10,556
Capital distributions - (3,536) (3,536)
Interest payments made by Coaxial Communications
of Central Ohio, Inc. on senior notes 3,444 - 3,444
Net loss - (12,579) (12,579)
-----------------------------------------------------------
Balance, December 31, 2002 $ (19,433) $ (123,530) $ (142,963)
===========================================================
See accompanying notes
F-32
PHOENIX ASSOCIATES
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2002 2001 2000
------------------- ------------------ ------------------
Operating activities:
Net loss $ (12,579) $ (14,470) $ (14,470)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred financing costs 628 628 628
Interest expense assumed by affiliate 3,444 3,444 3,444
Changes in operating assets and liabilities:
Interest receivable 531 (158) (158)
Notes receivable 550 - -
Due from related parties 406 - -
------------------- ------------------ ------------------
Net cash used in operating activities (7,020) (10,556) (10,556)
------------------- ------------------ ------------------
Financing activities:
Capital contributions 10,556 10,556 10,556
Capital distributions (3,536) - -
------------------- ------------------ ------------------
Net cash provided by financing activities 7,020 10,556 10,556
------------------- ------------------ ------------------
Net change in cash - - -
Cash, beginning of year - - -
------------------- ------------------ ------------------
Cash, end of year $ - $ - $ -
=================== ================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,556 $ 10,556 $ 10,556
Supplemental disclosure of significant non-cash financing activities:
In-substance contribution related to senior notes to be paid by Coaxial
Communications of Central Ohio, Inc. $ 3,444 $ 3,444 $ 3,444
See accompanying notes
F-33
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Phoenix Associates (the "Company") is a Florida general partnership originally
organized for the purpose of purchasing promissory notes, mortgages, deeds of
trust, debt securities and other types of securities and purchasing and
acquiring rights in any loan agreements or other documents relating to those
securities. The Company has no operations. The Company's ability to satisfy debt
and other obligations is dependent upon funding from related entities, which are
under the common control of the Company's owners. The Company is a co-issuer and
joint and several obligor of the debt described in Note 4, along with an
affiliate, Coaxial Communications of Central Ohio, Inc. ("Coaxial Inc.").
The Company consists of three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with the Company include Coaxial LLC, Coaxial
Financing Corp., Insight Communications of Central Ohio, LLC ("Insight Ohio"),
Coaxial Associates of Columbus I ("Columbus I") and Coaxial Associates of
Columbus II ("Columbus II").
On August 21, 1998, Coaxial Inc. and Insight Communications Company, L.P.
("Insight LP") entered into a contribution agreement (the "Contribution
Agreement") pursuant to which Coaxial Inc. contributed substantially all of the
assets and liabilities comprising its cable system to a newly formed subsidiary,
Insight Ohio, and Insight Holdings of Ohio, LLC ("Insight Holdings"), a wholly
owned subsidiary of Insight LP, contributed $10.0 million in cash to Insight
Ohio. As a result of this Contribution Agreement, Coaxial Inc. owned 25% of the
non-voting common equity and Insight Holdings owned 75% of the non-voting common
equity of Insight Ohio.
On August 8, 2000, Insight Ohio purchased Coaxial Inc.'s 25% non-voting common
equity interest in Insight Ohio. The purchase price was 800,000 shares of common
stock of Insight LP's general partner, Insight Communications Company, Inc. with
a value of $10.4 million and cash in the amount of $2.6 million. In connection
with the purchase, Insight Ohio's operating agreement was amended to, among
other things, remove certain participating rights of the principals of Coaxial
Inc. and certain of its affiliates (the "Coaxial Entities"). Additionally, the
agreement was amended to incorporate 70% of Insight Ohio's total voting power
into the common equity interests of Insight Ohio and 30% of Insight Ohio's total
voting power into the Preferred Interests of Insight Ohio.
Coaxial Inc. also owns a $140.0 million Series A preferred equity interest in
Insight Ohio (the "Series A Preferred Interest"). The Series A Preferred
Interest provides for distributions to Coaxial Inc. equal in amount to the debt
service payments on the Senior Notes discussed in Note 4. Coaxial Inc. will make
distributions that will enable the Company to fund the required debt service
payments on the Senior Notes.
F-34
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees, associated with the Senior Notes. These costs are being
amortized over the life of the Senior Notes.
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their fair
market value because of the immediate or short-term maturity of these financial
instruments. The fair value of the Senior Notes was $122.8 million and $143.5
million as of December 31, 2002 and 2001, respectively.
In-Substance Allocation of Note Proceeds
Since both Coaxial Inc. and the Company are severally and jointly liable, the
Senior Notes, deferred financing costs and associated interest expense are
reflected in the Company's financial statements as well as a charge to the
equity section representing an in-substance allocation of the proceeds from
Coaxial Inc.'s allocated portion of the Senior Notes. The Company accrues
interest on the total Senior Note balance. When Coaxial Inc. makes interest
payments, the Company reduces accrued interest payable and records an
in-substance contribution to equity.
Income Taxes
The Company is a general partnership. Therefore, each partner reports its
distributive share of income or loss on its respective income tax returns. As a
result, the Company does not provide for Federal or State income taxes in its
financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
F-35
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Related Party Transactions
Due From Related Party
Due from related party of $406,000 as of December 31, 2001 represents advances
to Columbus I. Interest accrued on these advances at an annual rate of 5.5%.
Interest income recorded on these advances for each of the years ended December
31, 2002, 2001 and 2000 was $19,000, $22,000 and $22,000, respectively. The
amount due from related party, including related accrued interest, was repaid to
the Company on October 31, 2002.
Notes Receivable
The Company had the following notes receivable from related parties at December
31, 2001 (in thousands):
Columbus I $ 2,349
Columbus II 118
------------
Total face amount of notes receivable 2,467
Less: Amounts in excess of purchase price (1,917)
------------
Notes receivable, net $ 550
============
Columbus I
- ----------
The $2,349,000 due from Columbus I represents a note, including past due
interest that was added to the principal, which was purchased from CNA Financial
Corporation on November 24, 1982. The Company recognized interest income, at an
annual rate of 5.5%, of $108,000 for the year ended December 31, 2002 and
$129,000 for each of the years ended December 31, 2001 and 2000. As discussed
below, the principal and related accrued interest was repaid to the Company on
October 31, 2002.
Columbus II
- -----------
The $118,000 due from Columbus II represents a note, including past due interest
that was added to the principal, which was purchased from CNA Financial
Corporation on November 24, 1982. The Company recognized interest income, at an
annual rate of 5.5%, of $5,000 for the year ended December 31, 2002 and $6,500
for each of the years ended December 31, 2001 and 2000. As discussed below, the
principal and related accrued interest was repaid to the Company on October 31,
2002.
On October 31, 2002, the Company received approximately $3.5 million as payment,
in full, for all related party receivables, including accrued interest. The
Company recorded a gain of approximately $1.9 million in connection with this
transaction representing the realized amount in excess of the net carrying value
of the notes receivable. Additionally, the Company made a capital distribution
to its partners on October 31, 2002 of approximately $3.5 million.
F-36
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Notes Payable
On August 21, 1998, Coaxial Inc. and the Company completed an offering of $140.0
million 10% Senior Notes ("Senior Notes") due in August 2006. The proceeds of
the Senior Notes were allocated $105.6 million to the Company and $34.4 million
to Coaxial Inc. Interest payments commenced on February 15, 1999. Interest is
payable in cash semi-annually on each February 15 and August 15. The Senior
Notes contain certain financial and other debt covenants.
The Senior Notes are secured by the outstanding Series A Preferred Interest in
Insight Ohio. The Series A Preferred Interest has a liquidation preference of
$140.0 million and pays distributions in an amount equal to the interest
payments on the Senior Notes. The Series A Preferred Interest is owned by
Coaxial Inc. and is pledged to the Bank of New York, as trustee, for the benefit
of the holders of the Senior Notes. Coaxial Inc. utilizes cash distributions
made by Insight Ohio on the Series A Preferred Interest to make debt service
payments on the Senior Notes, including distributions to the Company. The
ability of Coaxial Inc. and the Company to make scheduled debt service payments
with respect to the Senior Notes depends on the financial and operating
performance of Insight Ohio. Although the Company is a co-issuer of the Senior
Notes, it has no substantial assets or any operations and will not have access
to additional sources of cash flow other than contributions from Coaxial Inc.
In connection with the issuance of the Senior Notes, Coaxial Inc. and the
Company incurred financing fees of $5.0 million that are being amortized over
the life of the Senior Notes.
F-37
Report of Independent Auditors
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheets of Insight Communications of
Central Ohio, LLC (the "Company") as of December 31, 2002 and 2001, and the
related statements of operations and changes in members' deficit and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 25, 2003
F-38
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEETS
(in thousands)
December 31, December 31,
2002 2001
--------------------------------------------
Assets
Cash and cash equivalents $ 994 $ 2,158
Trade accounts receivable, net of allowance for doubtful accounts
of $50 and $158 as of December 31, 2002 and December 31, 2001,
respectively 2,360 2,599
Launch funds receivable 72 1,327
Prepaid expenses and other assets 813 401
--------------------------------------------
Total current assets 4,239 6,485
Fixed assets, net 107,399 91,673
Intangible assets, net 676 499
--------------------------------------------
Total assets $ 112,314 $ 98,657
============================================
Liabilities and members' deficit
Accounts payable $ 4,091 $ 5,689
Accrued expenses and other liabilities 1,495 1,331
Accrued programming costs 2,631 2,194
Deferred revenue 518 1,219
Debt - current portion 5,000 -
Interest payable 171 232
Preferred interest distribution payable 5,250 5,250
Due to affiliates 5,927 5,890
--------------------------------------------
Total current liabilities 25,083 21,805
Deferred revenue 662 1,559
Debt 20,000 25,000
--------------------------------------------
Total liabilities 45,745 48,364
Commitments and contingencies
Preferred interests 191,820 185,713
Members' deficit (125,251) (135,420)
--------------------------------------------
Total liabilities and members' deficit $ 112,314 $ 98,657
============================================
See accompanying notes
F-39
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(in thousands)
Year ended December 31,
2002 2001 2000
--------------------------------------------------------
Revenue $ 63,140 $ 57,019 $ 51,116
Operating costs and expenses:
Programming and other operating costs 22,268 22,129 19,509
Selling, general and administrative 12,367 12,270 11,436
Management fees 1,895 1,664 1,493
Depreciation and amortization 17,987 13,397 10,882
--------------------------------------------------------
Total operating costs and expenses 54,517 49,460 43,320
Operating income 8,623 7,559 7,796
Other income (expense):
Interest expense (949) (1,732) (1,883)
Interest income 22 50 91
Other 80 (279) (274)
--------------------------------------------------------
Total other expense, net (847) (1,961) (2,066)
Net income 7,776 5,598 5,730
Accrual of preferred interests (20,107) (19,432) (18,725)
--------------------------------------------------------
Net loss attributable to common interests (12,331) (13,834) (12,995)
Members' deficit, beginning of period (135,420) (142,086) (149,491)
Capital contributions 22,500 20,500 20,400
--------------------------------------------------------
Members' deficit, end of period $ (125,251) $ (135,420) $ (142,086)
========================================================
See accompanying notes
F-40
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2002 2001 2000
----------------------------------------------------
Operating activities:
Net income $ 7,776 $ 5,598 $ 5,730
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17,987 13,397 10,882
Provision for losses on trade accounts receivable 1,275 1,352 1,058
Changes in operating assets and liabilities:
Trade accounts receivable (1,036) (1,169) (1,464)
Launch funds receivable 1,255 609 (462)
Prepaid expenses and other assets (412) 36 (190)
Accounts payable and accrued expenses (2,656) 10 (1,202)
Due to affiliates 37 3,190 1,643
----------------------------------------------------
Net cash provided by operating activities 24,226 23,023 15,995
----------------------------------------------------
Investing activities:
Purchase of property and equipment (33,662) (28,409) (35,982)
Purchase of intangible assets (228) (125) (91)
----------------------------------------------------
Net cash used in investing activities (33,890) (28,534) (36,073)
----------------------------------------------------
Financing activities:
Principal payments on capital lease obligations - - (35)
Capital contributions 22,500 20,500 20,400
Preferred interest distribution (14,000) (14,000) (14,000)
Borrowings under senior credit facility - - 14,000
----------------------------------------------------
Net cash provided by financing activities 8,500 6,500 20,365
----------------------------------------------------
Net change in cash and cash equivalents (1,164) 989 287
Cash and cash equivalents, beginning of year 2,158 1,169 882
----------------------------------------------------
Cash and cash equivalents, end of year $ 994 $ 2,158 $ 1,169
====================================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,074 $ 2,395 $ 1,276
See accompanying notes
F-41
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC (the "Company") provides basic and
expanded cable television services to homes in the eastern parts of Columbus,
Ohio and surrounding areas. The Company was formed on July 23, 1998 in order to
acquire substantially all of the assets and liabilities comprising the cable
system of Coaxial Communications of Central Ohio, Inc. ("Coaxial").
On August 21, 1998, Coaxial contributed to the Company all of the assets and
liabilities comprising Coaxial's cable television system (the "System") for
which Coaxial received a 25% non-voting common membership interest as well as
100% of the voting preferred membership interests in the Company (the "Preferred
Interests"). In conjunction therewith, Insight Holdings of Ohio, LLC ("Insight
Holdings"), a wholly-owned subsidiary of Insight Communications Company, L.P.
("Insight LP") contributed $10.0 million in cash to the Company for which it
received a 75% non-voting common membership interest in Insight Ohio.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140.0 million of 10% Senior Notes ("Senior Notes") due in August 2006. The
Senior Notes are non-recourse and are secured by the issued and outstanding
Series A Preferred Interest and are conditionally guaranteed by the Company. On
August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related entities,
issued 12 7/8% Senior Discount Notes due in August 2008 ("Senior Discount
Notes"). The Senior Discount Notes have a face amount of $55.9 million and
resulted in gross proceeds of $30.0 million received upon issuance. The Senior
Discount Notes are non-recourse and are secured by the issued and outstanding
Series B Preferred Interest, 100% of the common stock of Coaxial and the notes
issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC. The Senior
Discount Notes are also conditionally guaranteed by the Company.
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial and indirectly to Phoenix Associates and Coaxial LLC in
amounts equal to the payments required on the Senior Notes and the Senior
Discount Notes. The accreted value of the Senior Discount Notes was $51.8
million as of December 31, 2002. Additionally, the Preferred Interests have
liquidation preferences equal to their carrying value. Distributions by the
Company are subject to certain financial covenants and other conditions set
forth in its Senior Credit Facility.
On August 8, 2000, The Company purchased Coaxial's 25% non-voting common equity
interest in the Company. The purchase price was 800,000 shares of common stock
of Insight LP's general partner, Insight Communications Company, Inc. ("Insight
Inc.") with a value of $10.4 million and cash in the amount of $2.6 million. In
connection with the purchase, the Company's operating agreement was amended to,
among other things, remove certain participating rights of the principals of
Coaxial and certain of its affiliates (the "Coaxial Entities"). Additionally,
the agreement was amended to incorporate 70% of the Company's total voting power
into the common equity interests of the Company and 30% of the Company's total
voting power into the Preferred Interests of the Company.
F-42
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
1. Business Organization and Purpose (continued)
The Company is prohibited by the terms of its indebtedness from making
distributions to Insight Inc. The Company's conditional guarantee of the Senior
Notes and the Senior Discount Notes remains in place. If at any time the Senior
Notes or Senior Discount Notes are repaid or significantly modified, the
principals of the Coaxial Entities may require Insight Inc. to purchase their
preferred interests in the Coaxial Entities for a purchase price equal to the
difference, if any, of $32.6 million less the then market value of 800,000
shares of Insight Inc.'s common stock issued on August 8, 2000. The fair value
of the aforementioned guaranteed security price of $32.6 million compared to the
market value of the 800,000 shares of Insight Inc. common stock as of the date
of acquisition was $7.1 million.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight LP and an indirect subsidiary of AT&T Broadband, LLC
(now known as "Comcast Cable"), completed a series of transactions with Insight
LP and certain subsidiaries of AT&T Corp. (the "AT&T Subsidiaries") for the
acquisition of additional cable television systems valued at approximately $2.2
billion, including the common equity of the Company (the "AT&T Transactions").
As a result of the AT&T Transactions, Insight Midwest acquired all of Insight
LP's wholly owned systems serving approximately 280,000 customers, including the
approximately 85,000 customers served by the Company and including systems which
Insight LP purchased from the AT&T Subsidiaries. At the same time, Insight
Midwest acquired from the AT&T Subsidiaries systems serving approximately
250,000 customers.
The Company is prohibited by the terms of its indebtedness from making
distributions to Insight Midwest. Insight Midwest remains equally owned by
Insight LP and Comcast Cable, and Insight LP continues to serve as the general
partner of Insight Midwest and manages and operates the Insight Midwest systems.
Although the financial results of the Company are consolidated into Insight
Midwest as a result of the AT&T Transactions, for financing purposes, the
Company is an unrestricted subsidiary under the indentures of Insight Midwest
and Insight Inc. The Company's conditional guarantee of the Senior Notes and the
Senior Discount Notes remains in place.
In November 2002, AT&T Broadband and Comcast Corporation merged their respective
cable systems and certain other assets. The transaction did not result in any
direct change in our ownership structure.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is earned from customer fees for cable television programming services
including premium, digital and pay-per-view services and ancillary services,
such as rental of converters and remote control devices, installations and from
selling advertising. In addition, the Company earns revenue from providing
high-speed data services and from facilitating the delivery of telephone
services as well as from commissions for products sold through home shopping
networks. Revenue is recorded in the month the related services are rendered.
F-43
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. The Company had no significant
concentrations of credit risk as of December 31, 2002 or 2001.
Fixed Assets
Fixed assets are stated at cost and include costs capitalized for labor and
overhead incurred in connection with the installation of cable system
infrastructures, including those providing high-speed data and telephone
services. In addition, we capitalize labor and material costs associated with
installations related to new services on customer premises. Depreciation for
buildings, cable system equipment, furniture, fixtures and office equipment is
calculated using the straight-line method over estimated useful lives ranging
from 2 to 30 years. Building improvements are amortized using the straight-line
method over the shorter of the remaining terms of the leases or the estimated
lives of the improvements.
The carrying value of fixed assets is reviewed if facts and circumstances
suggest that they may be impaired. If this review indicates that the carrying
value of the fixed assets will not be recovered from undiscounted future cash
flows generated from such assets, an impairment loss would be recognized for the
amount that the asset's carrying value exceeds its fair value. We believe that
no impairment of fixed assets existed as of December 31, 2002 or 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which became
effective for us beginning January 1, 2002. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion
F-44
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
No. 30. The adoption of SFAS No. 144 had no impact on our consolidated financial
position or results of operations.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal and bank facility
fees, incurred in securing bank loans and other sources of financing. These
costs are amortized over the life of the applicable debt.
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their fair
market value because of the immediate or short-term maturity of these financial
instruments.
Income Taxes
The Company is a limited liability corporation and does not provide for federal
or state income taxes in its financial statements. In the event that the limited
liability corporation election is terminated, deferred taxes related to book and
tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
members is limited to their respective investments.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. Marketing and
promotional expense, primarily for campaign and telemarketing-related efforts,
was $272,000, $796,000 and $1.3 million for the years ended December 31, 2002,
2001 and 2000, respectively.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Disposal
Obligations", which became effective for us beginning January 1, 2003. SFAS No.
146 supersedes EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 addresses the accounting for
and disclosure of costs to terminate an existing contractual obligation
(including but not limited to operating leases), incremental direct and other
costs associated with the related disposal activity and termination benefits
(severance pay) provided to employees pursuant to a one-time benefit arrangement
that does not constitute a preexisting or newly-created ongoing benefit plan.
The adoption of SFAS No. 146 had no impact on our consolidated financial
position or results of operations.
F-45
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Reclassifications
Under the Company's franchise agreements, it is obligated to pay to local
franchising authorities a percentage of its revenue derived from providing cable
and other services the majority of which are passed through to customers. The
Company has historically recorded revenue net of franchise fees charged to its
customers. Staff Announcement D-103, issued by the FASB in November 2001,
specifies that reimbursements received from a customer should be reflected as
revenues and not as a reduction of expenses. This Staff Announcement applies to
financial reporting periods beginning after December 15, 2001. Upon application
of this Staff Announcement, comparative financial statements for prior periods
are required to be reclassified to comply with the guidance in this Staff
Announcement. Consequently, the Company has reclassified the prior period
amounts in the accompanying consolidated statements of operations to reflect
franchise fees on a gross basis with reimbursements as revenue and payments as
expense. The effect on the prior period statements of operations was to increase
both revenue and selling, general and administrative costs by $1.5 million for
the year ended December 31, 2001 and $1.4 million for the year ended December
31, 2000.
Additionally, certain other prior year amounts have been reclassified to conform
to the current year's presentation.
3. Long-Lived Assets
Fixed Assets
Fixed assets consist of:
December 31,
2002 2001
-----------------------------------
(in thousands)
Land, buildings and improvements $ 1,427 $ 1,418
Cable equipment 201,557 167,922
Furniture, fixtures and office equipment 515 496
-----------------------------------
203,499 169,836
Less accumulated depreciation and amortization (96,100) (78,163)
-----------------------------------
Total fixed assets $ 107,399 $ 91,673
===================================
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
$17.9 million, $13.3 million and $10.9 million, respectively.
F-46
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. Long-Lived Assets (continued)
Intangible Assets
We recorded amortization expense of $52,000, $75,000 and $31,000 for the years
ended December 31, 2002, 2001 and 2000. We estimate aggregate amortization
expense to be approximately $60,000 for each of the five succeeding fiscal
years, primarily relating to other intangible assets.
4. Credit Facility
The Company has a Senior Credit Facility ("Senior Credit Facility") that
provides for revolving credit loans of up to $25.0 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity from the date of borrowings, with
reductions to the amount of the commitment commencing after three years. The
amount available for borrowing is reduced by any outstanding letter of credit
obligations. The Company's obligations under the Senior Credit Facility are
secured by substantially all the assets of the Company.
The Senior Credit Facility requires the Company to meet certain financial and
other debt covenants. Loans under the Senior Credit Facility bear interest, at
the Company's option, at the prime rate or at a Eurodollar rate. In addition to
the index rates, the Company pays an additional margin percentage tied to its
ratio of total debt to adjusted annualized operating cash flow.
Interest expense including fees paid to the lender was $949,000, $1.7 million
and $1.9 million for the years ended December 31, 2002, 2001, and 2000,
respectively. The weighted average interest rate in effect as of December 31,
2002 and 2001 was 3.6% and 4.3%, respectively.
5. Related Party Transactions
Management Fees
Through August 8, 2000, Insight Holdings managed the operations of the Company
under an operating agreement dated August 21, 1998 that provided for a
management fee equal to approximately 3% of the Company's revenues. In
connection with the purchase of Coaxial's 25% common equity interest in the
Company, the Company's operating agreement was amended to provide for Insight LP
to serve as manager of the Company.
F-47
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. Related Party Transactions (continued)
Programming
The Company purchases the majority of its programming through affiliates of AT&T
Broadband (now known as Comcast Cable). Although the Company has the ability to
purchase substantially all its programming through Comcast Cable, it purchases
certain programming directly from programmers for strategic and/or cost
purposes. Charges for such programming, including a 1 1/2% administrative fee,
were $7.5 million and $6.2 million for the years ended December 31, 2002 and
2001. As of December 31, 2002 and 2001, $1.4 million and $1.6 million of accrued
programming costs were due to affiliates of AT&T Broadband. The company believes
that the programming rates charged through these affiliates are lower than those
available from independent parties.
Telephone Agreements
In July 2000, to facilitate delivery of telephone services, Insight LP entered
into a ten-year agreement with AT&T Broadband (now known as Comcast Cable) that
allows the Company to deliver to its customers local telephone service. Under
the terms of the agreement, the Company leases for a fee certain capacity on its
network to AT&T Broadband. The Company provides certain services and support for
which it receives additional payments. The Company began providing telephone
services to a limited number of its customers in 2002. Revenue earned from
leased network capacity used in the provision of telephone services was $53,000
in the year ended December 31, 2002. The capital required to deploy telephone
services over the Company's network is shared, with AT&T Broadband responsible
for switching and transport facilities. AT&T is also required to pay the Company
for installations, marketing and billing support that amounted to $377,000 for
the year ended December 31, 2002.
6. 401(k) Plan
The Company sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employees' contribution
up to 5% of the employees' wages. Effective April 1, 2001, 50% of the Company's
matching contribution to the Plan is in the form of Insight Inc. common stock.
Company contributions to the Plans were $234,000, $176,000, and $129,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.
F-48
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. Commitments and Contingencies
Programming Contracts
The Company enters into long-term contracts with third parties who provide
programming for distribution over the Company's cable television systems. These
programming contracts are a significant part of our business and represent a
substantial portion of our operating costs. Since future fees under such
contracts are based on numerous variables, including number and type of
customers, the Company has not recorded any liabilities with respect to such
contracts.
Operating Lease Agreements
Future minimum rental commitments required under non-cancelable operating leases
as of December 31, 2002 were (in thousands):
2003 $ 17
2004 7
2005 7
2006 7
2007 7
Thereafter 91
------------
Total $ 136
============
Litigation
The Company is party in or may be affected by various matters under litigation
in the normal course of business. Management believes that the ultimate outcome
of these matters will not have a significant adverse effect on the Company's
future results of operations or financial position.
F-49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Coaxial LLC
Date: March 28, 2003 By: /s/ Kim D. Kelly
---------------------------
Kim D. Kelly , President, Chief Executive
Officer and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- -----
/s/ Michael S. Willner Chairman March 28, 2003
- ----------------------
Michael S. Willner
/s/ Kim D. Kelly President, Chief Executive Officer and Chief March 28, 2003
- ---------------- Operating Officer (Principal executive
Kim D. Kelly officer)
/s/ Dinesh C. Jain Senior Vice President and Chief Financial March 28, 2003
- --------------------- Officer (Principal Financial Officer)
Dinesh C. Jain
/s/ Daniel Mannino Senior Vice President and Controller March 28, 2003
- --------------------- (Principal Accounting Officer)
Daniel Mannino
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Coaxial Financing Corp.
Date: March 28, 2003 By: /s/ Kim D. Kelly
---------------------------------
Kim D. Kelly, President, Chief Executive
Officer and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Director March 28, 2003
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner Chairman and Director March 28, 2003
- ----------------------
Michael S. Willner
/s/ Kim D. Kelly President, Chief Executive Officer, Chief March 28, 2003
- ---------------- Operating Officer and Director
Kim D. Kelly (Principal executive officer)
/s/ Dinesh C. Jain Senior Vice President and Chief Financial March 28, 2003
- ------------------- Officer (Principal Financial Officer)
Dinesh C. Jain
/s/ Daniel Mannino Senior Vice President and Controller March 28, 2003
- ------------------ (Principal Accounting Officer)
Mannino Daniel
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Insight Communications of Central Ohio, LLC
Date: March 28, 2003 By: /s/ Kim D. Kelly
---------------------------
Kim D. Kelly, President, Chief Executive
Officer, Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Michael S. Willner Chairman March 28, 2003
- ----------------------
Michael S. Willner
/s/ Kim D. Kelly President, Chief Executive Officer and Chief March 28, 2003
- ---------------- Operating Officer (Principal executive
Kim D. Kelly officer)
/s/ Dinesh C. Jain Senior Vice President and Chief Financial March 28, 2003
- ------------------ Officer (Principal Financial Officer)
Dinesh C. Jain
/s/ Daniel Mannino Senior Vice President and Controller March 28, 2003
- ------------------ (Principal Accounting Officer)
Mannino Daniel
CERTIFICATIONS
I, Kim D. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial LLC (the
"registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Kim D. Kelly
---------------------------
Kim D. Kelly
President, Chief Executive Officer and Chief
Operating Officer
Coaxial LLC
March 28, 2003
I, Dinesh C. Jain, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial LLC (the
"registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) the Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
Coaxial LLC
March 28, 2003
I, Kim D. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial Financing Corp.
(the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Kim D. Kelly
----------------------------
Kim D. Kelly
President, Chief Executive Officer and Chief
Operating Officer
Coaxial Financing Corp.
March 28, 2003
I, Dinesh C. Jain, certify that:
1) I have reviewed this annual report on Form 10-K of Coaxial Financing Corp.
(the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
Coaxial Financing Corp.
March 28, 2003
I, Kim D. Kelly, certify that:
1) I have reviewed this annual report on Form 10-K of Insight Communications
of Central Ohio, LLC (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Kim D. Kelly
------------------------
Kim D. Kelly
President, Chief Executive Officer and Chief
Operating Officer
Insight Communications of Central Ohio, LLC
March 28, 2003
I, Dinesh C. Jain, certify that:
1) I have reviewed this annual report on Form 10-K of Insight Communications
of Central Ohio, LLC (the "registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for he registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report; and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
Insight Communications of Central Ohio, LLC
March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kim D. Kelly, hereby certify that the annual report on Form 10-K of Coaxial
LLC (the "registrant"), for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the registrant.
/s/ Kim D. Kelly
---------------------------
Kim D. Kelly
President, Chief Executive Officer and Chief
Operating Officer
Coaxial LLC
March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dinesh C. Jain, hereby certify that the annual report on Form 10-K of Coaxial
LLC (the "registrant"), for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the registrant.
/s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
Coaxial LLC
March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kim D. Kelly, hereby certify that the annual report on Form 10-K of Coaxial
Financing Corp. (the "registrant"), for the year ended December 31, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that the information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the registrant.
/s/ Kim D. Kelly
--------------------------
Kim D. Kelly
President, Chief Executive Officer and Chief
Operating Officer
Coaxial Financing Corp.
March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dinesh C. Jain, hereby certify that the annual report on Form 10-K of Coaxial
Financing Corp. (the "registrant"), for the year ended December 31, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and that the information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the registrant.
/s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
Coaxial Financing Corp.
March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kim D. Kelly, hereby certify that the annual report on Form 10-K of Insight
Communications of Central Ohio, LLC (the "registrant"), for the year ended
December 31, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the registrant.
/s/ Kim D. Kelly
----------------------------------
Kim D. Kelly
President, Chief Executive Officer and Chief
Operating Officer
Insight Communications of Central Ohio, LLC
March 28, 2003
CERTIFICATION UNDER SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dinesh C. Jain, hereby certify that the annual report on Form 10-K of Insight
Communications of Central Ohio, LLC (the "registrant"), for the year ended
December 31, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the registrant.
/s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
Insight Communications of Central Ohio, LLC
March 28, 2003