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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, 1998
COMMISSION FILE NUMBERS: 333-64449-02
333-64449-01
333-64449
COAXIAL LLC
COAXIAL FINANCING CORP.
INSIGHT COMMUNICATIONS OF CENTRAL OHIO LLC
(Exact name of registrants as specified in their respective charters)
Delaware
Delaware
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
c/o Insight Communications Company, L.P.
126 East 56/th/ Street
New York, NY 10022
(212) 371-2266
(Address and telephone number of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes_____ No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Not Applicable
State the aggregate market value of the common equity held by non-
affiliates of the registrants: Not Applicable
Indicate the number of shares outstanding of the registrants' common stock:
Not Applicable
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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), including,
in particular, the likelihood of the System's success given its new management
by Insight Holdings of Ohio, LLC ("IHO"). All statements other than statements
of historical fact included in this annual report regarding Coaxial LLC, Coaxial
Financing Corp. and Insight Communications of Central Ohio, LLC ("Insight Ohio")
or any of the transactions described in this report, including the timing,
financing, strategies and effects of such transactions, are forward-looking
statements. Such forward-looking statements are based upon a number of
assumptions and estimates, which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of Coaxial
LLC, Coaxial Financing Corp. and Insight Ohio, and reflect future business
decisions which are subject to change. Although Coaxial LLC, Coaxial Financing
Corp. and Insight Ohio believe that the expectations reflected in such forward-
looking statements are reasonable, they can give no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from expectations include, without limitation:
. the ability of Coaxial LLC, Coaxial Financing Corp. to make scheduled
payments with respect to the Senior Discount Notes (as defined below) will
depend on the financial and operating performance of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is
required to be dedicated to the payment of principal and interest on its
indebtedness and the required distributions with respect to its Series A
Preferred Interests and its Series B Preferred Interests, thereby reducing
the funds available to Insight Ohio for its operations and future business
opportunities;
. Coaxial LLC, Coaxial Financing Corp. have no significant assets other than
the common equity of Coaxial Communications of Central Ohio, Inc.
("Coaxial") owned by Coaxial LLC and notes issued by Coaxial DJM LLC (an
owner of 22.5% of the common equity of Coaxial) and Coaxial DSM LLC (an
owner of 10.0% of the common equity of Coaxial) to Coaxial LLC; and
. the indenture governing the terms of the Senior Discount Notes imposes
restrictions on Coaxial LLC, Coaxial Financing Corp. and Insight Ohio and
the Senior Credit Facility of Insight Ohio imposes restrictions on Insight
Ohio.
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not intend to update
these forward-looking statements.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Insight Ohio was formed to own and operate, as part of the "Financing Plan"
described below, Coaxial's cable television system in the Columbus, Ohio
metropolitan area (the "System"). As of December 31, 1998, the System passed
approximately 171,753 homes and served approximately 87,637 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. IHO, a wholly-owned
subsidiary of Insight Communications Company, L.P. ("Insight"), serves as the
manager of the System. Insight is currently the 18th largest cable television
operator in the United States, based on customers served.
Coaxial LLC, Coaxial Financing Corp., Coaxial, Phoenix and Insight Ohio
consummated the following Financing Plan on August 21, 1998:
. Coaxial contributed the System to Insight Ohio;
. Insight Ohio issued to Coaxial a 25% non-voting common membership interest
in Insight Ohio as well as voting Series A Preferred Interests and Series B
Preferred Interests in Insight Ohio (together, the "Preferred Interests");
. IHO contributed $10.0 million in cash to Insight Ohio;
. Insight Ohio issued to IHO a 75% non-voting common membership interest in
Insight Ohio;
. Coaxial LLC and Coaxial Financing Corp. effected a private offering of
$55,869,000 aggregate principal amount at maturity of their 12 7/8% Senior
Discount Notes due 2008 (the "Senior Discount Notes");
. Coaxial and Phoenix Associates, an affiliate of Coaxial ('Phoenix"),
effected a private offering of $140,000,000 aggregate principal amount of
their 10% Senior Notes due 2006 (the "Senior Notes");
. Insight Ohio conditionally guaranteed the Senior Discount Notes and the
Senior Notes;
. a portion of the existing bank indebtedness of Coaxial LLC and Coaxial
Financing Corp. and certain of their affiliates was repaid and the balance
was purchased by CIBC Oppenheimer and restructured in accordance with an
agreement among the parties; and
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. IHO became the manager of Insight Ohio, Coaxial LLC, Coaxial DJM LLC and
Coaxial DSM LLC. Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC
(together, the "Individual LLCs") are the only shareholders of Coaxial.
As a result of the Financing Plan:
. Insight Ohio is the owner and operator of the System;
. IHO, through management agreements, has effective control of the management
and affairs of Insight Ohio, Coaxial and the three Individual LLCs;
. Coaxial LLC and Coaxial Financing Corp. have only nominal assets except for
the common equity of 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
. Coaxial LLC and Coaxial Financing Corp. do not conduct any business.
Insight Ohio entered into a $25 million senior credit facility (the "Senior
Credit Facility") on October 7, 1998 for the purpose of financing its future
working capital requirements, including the upgrade of the System's cable plant
and the introduction of new video services.
Coaxial LLC and Coaxial Financing Corp. consummated an exchange of
registered Senior Discount Notes for their privately issued Senior Discount
Notes on February 16, 1999.
THE SYSTEM
As of December 31, 1998, the System passed approximately 171,753 homes and
served approximately 87,637 basic customers from a single headend. The System is
located in the eastern portion of the City of Columbus and the surrounding
suburban communities. The City of Columbus is the 34th largest designated market
area ("DMA") in the United States, is the capital of Ohio and is the home of The
Ohio State University. Besides the state government and university, the Columbus
economy is well diversified with a significant presence of prominent companies
such as The Limited, Merck, Wendy's, Nationwide Insurance, Borden and
Worthington Industries. The area's strong economy provides for a well-paid
employment base with an unemployment rate of 2.9%. The median household income
of the System's service area is approximately $47,809 per year, while the median
family income is approximately $57,024 per year.
The System enjoys a high level of population growth in the suburban
communities east of Columbus. Over the past three years, more than 14,600 homes
passed have been added to the System through new plant extensions, primarily in
new housing developments. This represents a 3.1% compound annual growth rate of
homes passed for the System.
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Portions of the System operate in a competitive environment. Customers in
those areas have access to two wired cable television providers -- Insight Ohio
and a cable subsidiary of Ameritech Corporation, the telephone local exchange
carrier in Columbus. The System also competes with direct broadcast satellite
television systems ("DBS") and multipoint multichannel distribution systems
("MMDS"). The areas of the System served by both Insight Ohio and Ameritech pass
approximately 122,440 homes, representing 71% of the System's total homes
passed. Even in this competitive environment, the System's basic customers
increased from approximately 86,000 at the end of 1995, prior to Ameritech's
entry into the marketplace, to approximately 87,637 as of December 31, 1998.
As of December 31, 1998, the System had approximately 973 miles of 490 MHz
plant and approximately 1,675 miles of 468 MHz plant. There also were
approximately 165 miles of fiber optic cable deployed in the System. Insight
Ohio is upgrading the technical capability initially in the majority of the
System by increasing its bandwidth to 870 MHz and activating its reverse plant.
The increase in bandwidth will allow the System to deliver new services such as
digital cable, high-speed Internet connections, two-way data and other
telecommunications services. Insight Ohio expects to complete its initial phase
of the rebuild encompassing 1,200 miles by the end of the first quarter of 2000.
The System has developed an award winning local-origination and production
team which has created a firm foundation for its position in the community as a
"good citizen." An impressive list of awards has further enhanced the System's
strong local presence, including:
. 1997 OCTA Excellence in Community Service
. 1997 OCTA Image Award: System Marketing
. 1997 OCTA Image Award: Advertising
. 1997 OCTA Image Award: Sports Programming
. 1996 Pinnacle Award: Women In Cable & Telecommunications
. 1996 OCTA Image Award: Best Overall Commitment to the Community
. 1996 OCTA Image Award: Excellence in Local Programming
. 1996 OCTA Image Award: Excellence Community Service
. 1996 OCTA Image Award: Sports Programming
THE MANAGER
IHO, the manager of Insight Ohio, is a wholly-owned subsidiary of Insight.
Insight is currently the 18th largest cable television operator in the United
States based on customers served. Insight owns, operates and manages cable
television systems serving over 500,000 customers in six states, with over 93%
of its customers clustered in Ohio, Illinois, Indiana. Such customers, as of
December 31, 1998, included approximately 321,000 customers served by a joint
venture between Insight and TCI, approximately 87,637 customers served by
Insight Ohio and approximately 96,000 customers served directly by Insight.
Insight was co-founded in 1985 by Sidney R. Knafel, Chairman of Insight,
and Michael S. Willner, President and Chief Executive Officer of Insight, both
of whom have been active in
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the cable business since the early 1970's. Kim D. Kelly joined Insight in 1990
as Executive Vice President and Chief Financial Officer and recently was named
Chief Operating Officer. In addition to many years of conventional cable
television experience, Insight's management team has been intimately involved in
the development and deployment of full service telecommunications networks. In
1989, through an affiliated entity, Insight Communications Company U.K., L.P.,
Insight entered the U.K. cable television market, where today modern hybrid
fiber-coaxial networks are deployed widely. Messrs. Knafel and Willner remain on
the board of NTL, Inc., the publicly traded successor to the Insight U.K.
affiliate and one of the three major cable television operators in the
competitive U.K. market with franchises covering over five million homes,
including pending acquisitions.
A series of swaps, acquisitions and a joint venture have recently been
executed resulting in the current composition of Insight. The largest of these
transactions was the equal partnership between Insight and TCI, the largest MSO
in the United States, in which, among other things, on October 31, 1998, the two
companies contributed most of their Indiana cable systems into a joint venture
serving approximately 321,000 customers in the State of Indiana, making the
joint venture the largest operator in the state. As of December 31, 1998,
Insight owned and managed cable systems serving over 500,000 customers located
in six states including those in its joint venture, with TCI serving
approximately 321,000 customers in Indiana and approximately 87,637 customers
served in Columbus, as well as another approximately 96,000 customers served by
systems 100% owned by Insight.
On January 8, 1999, Insight and AT&T announced their intent to enter into a
joint venture whereby the joint venture will provide telecommunication services
to residents and small businesses served by Insight's cable systems, including
the System, under the AT&T brand. Insight expects to enter into a definitive
agreement with AT&T by the third quarter of 1999, with delivery of service by
early 2000. Insight will invest up to 49% in the joint venture under a plan
which will include, among other things, a cash payment to the cable partner for
telephone capable plant, reimbursements for maintenance, monthly fees to the
cash partner for the cable license and revenue sharing above certain levels.
INSIGHT BUSINESS STRATEGY
Two years ago, Insight initiated a strategic plan designed to augment its
core business of delivering multi-channel video. The strategy calls for:
. the upgrade of plant to a minimum of 750 MHz hybrid fiber-coaxial platforms
from which to deploy new value-added services such as high-speed data
access, digital video and telephony services;
. the reconfiguration of existing systems in a series of swaps to achieve
customer clusters with a strong market presence; and
. an acquisition plan focused on markets with attractive demographics and a
high ratio of customers to headends.
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The contribution of the System to Insight Ohio 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.
SYSTEM OPERATING STRATEGY
The System fits the profile of cable television systems that Insight seeks
to own and operate. The System is large enough to have a significant market
presence and all customers are serviced from one headend. In addition, Columbus
is geographically proximate to other Insight cable systems with a customer
universe having the type of demographic profile that Insight believes will
widely accept new telecommunications offerings. IHO intends to aggressively
implement Insight's upgrade strategy in Columbus.
Insight is in the process of rebuilding the majority of the System to 870
MHz. This rebuild is expected to be completed by the first quarter of 2000.
Management expects to increase revenues as the System upgrade is completed by
adding new services such as digital cable, high-speed modems and other newly
developing telecommunications services. Insight already has a national
affiliation agreement with @Home to provide high-speed Internet connections over
its cable television system infrastructure. Management either will extend that
agreement to the System or will affiliate the System with Time Warner's Road
Runner Internet service which is presently available in Time Warner's Columbus
cable system.
With respect to programming, Management believes it can effectively
repackage the channel offerings to more advantageously compete without reducing
revenue per customer. Management's strategy is to compete in the marketplace
with its exclusive local programming, higher quality local service and increased
new technology offerings as opposed to promotional discounts.
Due to its relationship with MediaOne (formerly Continental Cablevision),
Insight will provide programming discounts to the System through November 1999.
After such date, Insight believes that through its strategic alliances with
other major multiple system operators ("MSOs"), utilizing programming
cooperatives or through its own purchasing power, it will be able to continue to
obtain programming for the System at a cost lower than that previously available
to Coaxial.
OVERBUILD
In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus. Ameritech has built its citywide franchise, both in our
service area and in the Time Warner service area on the west side of Columbus.
Insight Ohio and Time Warner service virtually distinct areas and therefore do
not compete with one another. The areas of the System served by both Insight
Ohio and Ameritech pass approximately 122,440 homes, representing 71% of the
System's total homes passed. Presently, Ameritech is pursuing an additional
franchise with approximately 13,000 homes through an ordinance.
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Insight Ohio is currently rebuilding the System to 870 MHz. Management
expects to begin servicing customers from the rebuilt network by June 1999.
Insight Ohio will begin launching digital service, on a node by node basis,
including a video-on-demand service and an interactive information service, by
the end of the second quarter of 1999. Management expects to launch a high-speed
data service during the third quarter of 1999.
When the System was contributed to Insight Ohio, it implemented a strategy
to end deep discounting in order to achieve rate stability in the market.
Management believed that a relatively small customer loss, caused by
discontinuing discounts, would be preferable in exchange for achieving rate
integrity and increasing the average monthly revenue per customer. As a result
of this strategy, from June 30, 1998 to December 31, 1998, the average monthly
revenue per customer increased from $43.30 to $46.85, while the number of
customers decreased from 91,088 to 87,637. Management believes rates are
stabilizing; most recently, Ameritech announced a $1.75 increase in the price of
their standard cable service and a $0.26 increase in the price of pay-per-view
movies, effective March 1, 1999.
TECHNOLOGICAL DEVELOPMENTS
Management believes that in order to achieve consistently high levels of
customer service, maintain a strong competitive posture and deploy important new
technologies, a robust technical platform needs to be maintained. Presently the
System is comprised of approximately 2,644 miles of plant passing approximately
171,753 homes resulting in a density of 65 homes per mile. Approximately 37% of
the plant has been expanded to 490 MHz and approximately 63% is built at 468
MHz. The System is 100% addressable, with approximately 84% of the basic
customers having addressable converters.
The System's deployment of fiber optic cable began in 1989. Its use was
originally for two main purposes: to improve end-of-the-line performance and to
increase reach for service of areas as yet uncabled. In addition, the fiber
program created a redundant network allowing for automatic backup in case of
system failure. Presently, 72 nodes are active, allowing for narrow casting and
differentiation of channel lineups from the single headend.
Insight Ohio plans to further enhance the technical platform of the System
by upgrading the plant serving the majority of customers. The capability for
high-speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Insight Ohio is well along its plan to upgrade a majority of the System by the
first quarter of 2000.
All of the System's basic customers currently have access to addressable
technology and approximately 84% have addressable converters in their homes.
Addressable technology enables the System to electronically control the cable
television services being delivered to the customer's home. As a result, the
System can electronically upgrade or downgrade services to a customer
immediately, from its customer service center, without the delay or expense
associated
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with dispatching a technician to the customer's home. Addressable technology
also reduces premium service theft, is an effective enforcement tool in the
collection of delinquent payments and enables the System to offer pay-per-view
services, including movies and special events.
Management believes that active use of fiber optic technology as an
alternative to coaxial cable is expected to play a major role in expanding
channel capacity and improving the performance of the System. Fiber optic
strands are capable of carrying hundreds of video, data and voice channels over
extended distances without the extensive signal amplification typically required
for coaxial cable. The System will continue to deploy fiber optic cable further
reducing amplifier cascades while improving picture quality and system
reliability.
Recently, high-speed cable modems and set-top boxes using digital
compression technology have become commercially viable. These developments allow
for the introduction of high-speed data services and Internet access and will
increase the programming services available to customers. Digital compression
technology provides for a significant expansion of channel capacity with up to
12 digital channels to be carried in the bandwidth of one analog channel. In
three markets, Insight plans to go commercial with its @Home high-speed Internet
service during April 1999. Insight Ohio intends to install two-way capability in
the System rebuild and a wide-spread rollout for a high-speed Internet service
is planned for late 1999.
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
techniques 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 and pay-per-view. Using a
skilled team of marketing professionals, the System has competed by supporting
an innovative variety of marketing activities, including the following:
Promotion. The System's marketing team functions as an in-house ad agency
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handling graphic design, art direction, television scripting and radio scripting
at significant savings over outside agencies. Using state-of-the-art software
packages, the marketing team is able to produce direct mail, video, print and
collateral marketing materials in-house. In addition, sophisticated in-house
capabilities allow for the quick and inexpensive production of promotional and
competitive educational spots to air on any of 20 channels for which the System
has inserted advertising spots. Management zones the System's service areas into
two regions: competitive and non-competitive. This zoning provides separate and
distinct channel line-ups to customers in the competitive and non- competitive
regions of the System. The System also has its CableData homes passed database
zoned similarly. This provides a significant advantage by delivering a
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customized "competitive" message to only those customers in the zoned
competitive area. The System has run an average of 15,000 marketing commercials
per month, fully utilizing any unsold advertising spots.
Telemarketing. The System's in-house telemarketing operation consists of an
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eight-person team including a supervisor and an order-entry person. A Telecorp
predictive dialer is used which allows the telemarketing group to achieve better
sales calls results. The telemarketing group also collects customer surveys and
provides additional phone capacity to customer service representatives during
peak periods such as heavy media campaigns.
Guide. The System produces a 200-page monthly programming guide. The guide
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features extensive custom features including the cover, pay-per-view, sports
calendars, VCR+ Codes and a 16-page advertiser supported coupon section. The
guide also gives the System a vehicle to provide customer notifications and any
technical information that is traditionally delivered via more expensive bill
inserts or direct mail. It is also customized and zoned to competitive and non-
competitive areas. The guide is profitable with a 64% penetration.
Apartment Management. Approximately 37% of the System's customers reside in
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apartment housing units or Multiple Dwelling Units ("MDUs"). Management believes
that in a competitive environment, the management of the MDU market and the
apartment owners will grow in importance. The apartment group provides support
for the entire MDU customer base. The group works with apartment managers
throughout the System to manage move-in and move-out lists in an effort to
maximize penetration within the market. It has developed strong working
relationships with key apartment owners and managers and is an active member in
The Greater Columbus Apartment Association. As of December 31, 1998, the group
had executed exclusive contracts with apartment complexes representing 15% of
the System's homes passed, providing a significant competitive advantage in the
overbuilt market.
Network Spot Sales. In addition to customer fees, the System derives a
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modest amount of revenue from the sale of local spot advertising time on locally
originated and satellite-delivered programming. The advertising sales operation
currently inserts advertising spots on the following 20 channels: A&E, BET,
Comedy Central, CNN, Discovery, ESPN, ESPN-2, Fox Family Channel, Fox Sports,
Golf, Headline News, Home & Garden, Lifetime, MTV, Nickelodeon, TBS, TNN, TNT,
TV Land and USA. The System utilizes digital insertion technology supplied by
SeaChange Digital. As a result of the latest insertion equipment and an
experienced and talented advertising team, the System generates approximately
$40.21 of total advertising revenue per customer on an annual basis, placing it
near the top of the industry in spot sales revenue.
Home Shopping. The System also derives a modest amount of revenue from
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affiliations with home shopping services (which offer merchandise for sale to
customers and compensate system operators with a percentage of their sales
receipts). Utilizing two full-time networks and one part-time network, the
System generated home shopping revenues of $3.89 per customer in 1998.
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Other Advertising Sales. The System has also developed a classified channel
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designed both to attract new advertising clients as well as to create value-
added programs which enhance customer satisfaction. Among the System's
programming are several real estate programs, a career search program, leased
access and a membership marketing program called "Cable Saver" which offers
discounts at local merchants to customers, thus helping customers partially
offset their cable bills. The System expects to generate approximately $6.13 per
customer on an annual basis from classifieds. When combined with network spot
sales, the System's strong advertising business affords it the top spot among
MSOs when ranked by gross advertising revenue per basic customer.
Central Ohio Sport! Television. In early 1998, the System teamed up with
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the local Time Warner cable system to develop a local sports programming package
under the brand "Sport!". This exclusive package is not available to Ameritech's
cable customers. "Sport!" features as its cornerstone 31 Ohio State University
games including women's basketball, men's ice hockey, women's volleyball, men's
baseball and the annual Spring Football Game. In addition "Sport!" will offer 40
to 50 additional professional, collegiate and high school sporting events on the
same exclusive basis.
Production. The System produces all of the local programming for Central
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Ohio Sport! Television, as well as other events as varied as harness racing and
marching band competitions. The System has a state-of-the-art commercial
production facility, including a 1996 mobile production vehicle, electronic
field production ("EFP") equipment and an on-line edit suite. The combination of
the mobile truck, EFP equipment and the edit suite allow the vast majority of
commercial production work to be done in-house at significant cost savings over
outside production facilities.
High Speed Internet Access. In May 1998, the System began offering high-
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speed Internet access via asymmetrical (telephone return) cable modems under the
brand name Coaxial Express as an interim measure until a more robust two-way
service is available following the rebuild. The service is provided in a
"turnkey" fashion under an agreement with Frontier Global Center. As of December
31, 1998, the System had approximately 240 customers subscribing to this
service.
Programming
The System 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. Due to its relationship with MediaOne (formerly
Continental Cablevision), Insight will provide programming discounts to the
System at MediaOne's rate card through November 1999. After such date, Insight
believes that through its strategic alliances with other major MSOs, utilizing
programming cooperatives or through its own purchasing power, it will be able to
continue to obtain programming for the System at a cost lower than that
presently available to Coaxial.
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Some program suppliers provide volume discount pricing structures or offer
marketing 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 programming costs are expected
to increase in the future due to additional programming being provided to its
customers, increased costs to purchase programming, inflationary increases and
other factors affecting the cable television industry. The System also has
various retransmission consent arrangements with commercial broadcast stations
which generally expire in December 1999 and beyond. None of these consents
require payment of fees for carriage; however, the System has entered into
agreements with certain stations to carry satellite-delivered cable programming
which is affiliated with the network carried by those stations.
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
offers, for a monthly fee, an expanded basic tier of various satellite-
delivered, non- broadcast channels (such as CNN, MTV, USA, ESPN and TNT). In
addition to these services, the System provides premium services such as HBO,
Cinemax, Showtime, The Movie Channel and Starz!, which are combined in different
formats to appeal to the 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 plans to upgrade the System using fiber optic
technology, which will allow the System to expand the number of multiplexed
premium screens (additional channels such as Showtime 2 and HBO Family)
providing greater value for the customer. The upgrade will also give the System
the ability to use "tiered" packaging strategies for marketing premium services
and promoting niche programming services. Management believes that this ability
will increase basic and premium penetration as well as revenue per basic
customer. The System also provides five pay-per-view services purchased from
independent suppliers such as Viewer's Choice and Showtime Event Television.
These services are satellite-delivered channels, consisting principally of
feature films, adult movies, live sporting events, concerts and other special
events, usually presented without commercial interruption. Such pay-per-view
services are offered by the System on a "per viewing" basis, with customers only
paying for programs which they select for viewing.
Rates
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of December 31, 1998, the
System's stated monthly basic service rate for residential customers was $11.47,
the System's monthly expanded basic
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service rates for residential customers ranged from $14.93 to $18.65, and per-
channel premium service rates (not including special promotions) ranged from
$5.95 to $12.95 per service.
A one-time installation fee, which the System may wholly or partially waive
during a promotional period, is charged to new customers. The System charges
monthly fees for converters and remote control devices. The System also charges
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. Multiple dwelling unit 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 Coaxial challenging the certification of the City of Columbus was
granted by the FCC. This petition effectively revoked the City of Columbus'
right to regulate the System's basic cable and equipment rates.
EMPLOYEES
As of December 31, 1998, the System employed approximately 191 full-time
equivalent employees, none of whom are represented by a union or covered by a
collective bargaining agreement. Management believes that its relations with its
employees are good. Approximately 50% of the full-time employees have tenure of
five years or longer. Although the Columbus area has relatively low unemployment
and competition in hiring is intense, Management believes that it will continue
to be successful in attracting and retaining highly qualified employees and
maintaining good working relationships with its current employees.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
The System is dedicated to quality customer service. Plans to make
significant system improvements are designed in part to strengthen customer
service through greater system reliability and the introduction of new services.
Management seeks a high level of customer satisfaction by also employing a well-
trained staff of customer service representatives and experienced field
technicians.
Overall, the System employs 56 customer service representatives, an average
of one for every 1,565 customers, who answer phone calls and handle walk-in
traffic. The System utilizes an automated response unit system to track and
monitor customer calls, which allows customers to perform common functions such
as checking account balances, recent payments or scheduled appointments using a
touch-tone phone, without talking to a customer service representative.
Customers can also use the automated response unit system to instantly upgrade
premium services or order pay-per-view movies and events, as well as report
service problems. All newly hired customer service representatives and
technicians are trained in-house. Programmers and vendors provide training and
product updates via representatives who visit the System office on a continual
basis. Technicians are on call 24 hours per day, 365 days per year. All on-call
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technicians are equipped with pagers and two-way radios. During the work day,
technicians communicate with the System office via business radios. The majority
of re-connects and new connects or drop replacements are performed by in-house
personnel. All disconnects are performed in-house.
During December 1998, the System converted its billing system from the
Cable Data system to the Convergys system. Management believes the Convergys
billing system has several advantages including the ability to conduct metered
and bundled billing. In addition, Insight uses the Convergys billing system for
all of its cable television systems. With a uniform billing system, Insight can
consolidate after hours calls into one call center achieving efficiencies while
retaining strong customer service.
In addition, 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, strong United Way support and Red Cross Blood Drive donations.
The System also installs and provides free cable television service and Internet
access to public schools, government buildings and not-for-profit hospitals in
its franchise areas. Management believes that its relations with the communities
in which the System operates are generally excellent.
FRANCHISES
Cable television systems are generally operated under non-exclusive
franchises granted by local governmental authorities. These franchises typically
contain many conditions, such as:
. time limitations on commencement and completion of construction;
. conditions of service, including number of channels, types of programming
and the provision of free service to schools and certain other public
institutions; and
. the maintenance of insurance and indemnity bonds.
The provisions of local franchises are subject to federal regulation under
the Communications Act of 1934, as amended (the "Communications Act")
The System provides cable television service to residents of 41
governmental jurisdictions. Within each of these governmental jurisdictions, the
System operates under authority granted by the local community or the State of
Ohio. Actual franchise agreements are maintained with the 28 jurisdictions that
possess the legal basis to grant such franchises consistent with federal and
state law. These franchises, which are non-exclusive, provide for the payment of
fees to the issuing authority. In the System, such franchise fees are passed
through directly to the customers. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the Cable Communication
Policy Act of 1984 (the "1984 Cable Act" and, together with the 1992 Cable Act,
the "Cable Acts") prohibit franchising
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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 date of expiration of the authority to
operate and presents the approximate number and percentage of basic customers
for each group as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Percentage of Percentage of Total
Year of Franchise Expiration Franchises Total Franchises Basic Customers
- ---------------------------- ---------- ---------------- ---------------
<S> <C> <C> <C>
1999 through 2001................ 6 15% 14%
2002 and thereafter.............. 35 85% 86%
-- --- ---
Total......................... 41 100% 100%
== === ===
</TABLE>
The Cable Acts provide, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by such
franchise. In addition, the Cable Acts established comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications.
Management believes that it generally has good relationships with its
franchising communities. The System has never had a franchise revoked or failed
to have a franchise renewed. In addition, all of the franchises of the System
eligible for renewal have been renewed or extended at or prior to their stated
expirations, and no franchise community has refused to consent to a franchise
transfer to the System.
THE CABLE TELEVISION INDUSTRY
The cable television industry developed in the United States in the late
1940's and early 1950's in response to the needs of residents in predominantly
and mountainous areas of the country where the quality of off-air
television reception was inadequate due to factors such as topography and
remoteness from television broadcast towers. In the late 1960's, cable
television systems also developed in small and medium-sized cities and suburban
areas that had a limited availability of clear off-air television station
signals. All of these markets are regarded within the cable industry as
"classic" cable television station markets. In more recent years, cable
television systems have been constructed in large urban cities and nearby
suburban areas, where good off-air reception from multiple television stations
usually is already available, in order to provide the numerous, satellite-
delivered channels carried by cable television systems which are not otherwise
available via broadcast television reception. A cable television system receives
television, radio and data signals that are transmitted to the system's headend
site by means of
15
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off-air antennas, microwave relay systems and satellite earth
stations. These signals are then modulated, amplified and distributed, primarily
through coaxial, and in some instances, fiber optic cable, to customers who pay
a fee for this service. Cable television systems may also originate their own
television programming and other information services for distribution through
the system. Cable television systems generally are constructed and operated
pursuant to non- exclusive franchises or similar licenses granted by local
governmental authorities for a specified term of years, generally for extended
periods of up to 15 years.
Cable television systems offer customers various levels (or "tiers") of
cable television services consisting of:
. off-air television signals of local network, independent and educational
stations;
. various satellite-delivered, non-broadcast channels (such as CNN, MTV, USA
Network, ESPN and TNT);
. certain programming originated locally by the cable television system (such
as public, governmental and educational access programs); and
. informational displays featuring news, weather, stock market and financial
reports and public service announcements.
For an extra monthly charge, cable television systems also offer premium
television services to their customers. These services (such as Home Box Office,
Showtime and regional sports networks) are satellite-delivered channels
consisting principally of feature films, live sports events, concerts and other
special entertainment features, usually presented without commercial
interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic and premium television services and for other services (such as
the rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenue for cable television operators. In
addition to customer revenue from these services, cable television operators
generate revenue from additional fees paid by customers for pay-per- view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. Cable television
operators frequently also offer to their customers home shopping services, which
pay the systems a share of revenue from sales of products in the systems'
service areas.
COMPETITION
The major source of competition for the System is the wireline overbuild by
Ameritech. Ameritech has overbuilt approximately 122,440 homes passed in the
System's service area, or approximately 71% of the total homes in the service
territory as of December 31, 1998.
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive online computer
services and home video products, including videotape
16
<PAGE>
cassette recorders. The extent to which a cable television system is competitive
depends, in part, upon that system's ability to provide, at a reasonable price
to customers, a greater variety of programming and other communications services
than those which are available off-air or through other alternative delivery
sources and upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises granted
on a non-exclusive basis. The 1992 Cable Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable television systems. Well-financed
businesses from outside the cable television industry (such as the public
utilities that own the poles to which cable is attached) may become competitors
for franchises or providers of competing services. Competition from other video
service providers exists in areas served by the System. In a number of the
franchise areas served by the System, the System faces direct competition from
other franchised cable television operators. There can be no assurance, however,
that additional cable television systems will not be constructed in other
franchise areas of the System.
Cable television operators also face competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. SMATV systems offer
both improved reception of local television stations and many of the same
satellite-delivered program services offered by franchised cable television
systems. SMATV operators often enter into exclusive agreements with building
owners or homeowners associations, although some states have enacted laws that
authorize franchised cable television operators access to such private
complexes. These laws have been challenged in the courts with varying results.
In addition, some companies are developing and/or offering to these private
residential and commercial developments packages of telephony, data and video
services. Under the Telecommunications Act of 1996 (the "1996 Telecom Act"),
SMATV systems can interconnect non-commonly owned buildings without having to
comply with local, state and federal regulatory requirements that are imposed on
cable television systems providing similar services, as long as they do not use
public rights-of-way. For instance, while a franchised cable television system
typically is obligated to extend service to all areas of a community regardless
of population density or economic risk, a SMATV system may confine its operation
to small areas that are easy to serve and are more likely to be profitable. The
System passes over 430 MDU complexes within its service territory and currently
has entry agreements, either exclusive or non-exclusive, with complexes totaling
approximately 26,000 MDUs. The System currently provides programming to just
over 14,000 of these MDUs, or 55% of the total MDUs passed. The ability of the
System to compete for customers in residential and commercial developments
served by SMATV operators is uncertain.
The FCC has recently allocated a sizable amount of spectrum in the 27 to 31
GHz band for use by a new wireless service, Local Multipoint Distribution
Service ("LMDS"), which, among other uses, can deliver over 100 channels of
programming directly to consumers' homes. The FCC completed an auction of this
spectrum to the public in March 1998, in which the participation of cable
television operators and local telephone companies was restricted. The extent to
which the winning licensees in this service will use this spectrum in particular
regions
17
<PAGE>
of the country to deliver multichannel video programming and other services to
customers, and therefore provide competition to franchised cable television
systems, is uncertain at this time.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered broadcast and non-broadcast
program services formerly available only to cable television customers. Most
satellite-distributed program signals are electronically scrambled so as to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. The 1992 Cable Act enhances the right of satellite distributors
and other competitors to purchase non-broadcast satellite- delivered
programming. The fastest growing method of satellite distribution is by high-
powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite with
significantly higher capacity available if multiple satellites are placed in the
same orbital position. DBS service can be received virtually anywhere in the
United States through the installation of a small rooftop or side-mounted
antenna. DBS service is presently being heavily marketed on a nationwide basis
by three service providers. The 1996 Telecom Act and FCC regulations preempt
certain local restrictions on the location and use of DBS and other satellite
receiver dishes.
DBS systems currently have certain advantages over cable television systems
with respect to programming and digital quality, as well as disadvantages that
include high upfront costs and a lack of local programming, service and
equipment distribution. One DBS provider, EchoStar, has announced plans to offer
some local signals in a limited number of markets. A review by the U.S.
Copyright Office is underway to determine if such offerings are permissible
under the copyright law. In addition, legislation has been introduced in
Congress to include carriage of local signals by DBS providers under the
copyright law. The ability of DBS to deliver local signals would eliminate a
significant advantage that cable television operators currently have over DBS
providers. The System will magnify its competitive service price points and seek
to maintain programming parity with DBS by selectively increasing channel
capacities of the System and introducing new premium channels, pay-per-view and
other services. Management estimates that there are approximately 6,800 DBS
customers in the System's service area as of December 31, 1998. Management
believes that DBS erosion will be minimal due to the marketing department's
ability to properly educate customers regarding pricing and packaging and
offering high value-added channel line-ups.
Cable television systems also compete with wireless program distribution
services such as MMDS, which uses low-power microwave frequencies to transmit
video programming over the air to customers. Wireless distribution services
generally provide many of the programming services provided by cable television
systems, and digital compression technology is likely to increase significantly
the channel capacity of their systems.
MMDS service requires unobstructed "line of sight" transmission paths. In
the majority of the System's franchise service areas, prohibitive topography and
"line of sight" access have and are likely to continue to limit competition from
MMDS systems. Moreover, in the majority of the System's franchise areas MMDS
operators face significant barriers to growth since the
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<PAGE>
lower population densities make these areas less attractive. Management is not
aware of any significant MMDS operation currently within its cable television
franchise service areas. American Telecasting Inc. ("ATI") is an MMDS operator
providing service in the Columbus area and covering most of the System's service
areas. The System has run numerous competitive ad campaigns educating consumers
regarding the shortfalls of the ATI product, such as the limited number of
channels, the massive antennae required and service issues. Management estimates
that ATI has built a customer base of less than 500 customers in the System's
service areas.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The 1996
Telecom Act directed the FCC to establish, and the FCC has adopted, regulations
and policies for the issuance of licenses for digital television ("DTV") to
incumbent television broadcast licensees. DTV is expected to deliver high
definition television pictures, multiple digital-quality program streams, as
well as CD-quality audio programming and advanced digital services, such as data
transfer or subscription video. The FCC also has authorized television broadcast
stations to transmit textual and graphic information useful both to consumers
and businesses. The FCC also permits commercial and noncommercial FM stations to
use their subcarrier frequencies to provide nonbroadcast services including data
transmissions. The FCC established an over-the-air Interactive Video and Data
Service that will permit two-way interaction with commercial and educational
programming along with informational and data services. LECs and other common
carriers provide facilities for the transmission and distribution to homes and
businesses of video services, including interactive computer-based services like
the Internet, data and other nonvideo services.
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 financial resources, electric utilities could be
formidable competitors to traditional cable television systems.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environments are constantly occurring. Thus,
it is not possible to predict the effect that ongoing or future developments
might have on the cable industry or on the operations of the System.
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 the System and the cable television industry. 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. Management believes that the regulation of its industry remains
a matter of interest to Congress, the FCC and other
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<PAGE>
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 the System.
Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a host of rulemakings to implement the 1996 Telecom Act, the
final outcome of which cannot yet be determined.
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 nonbasic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the FCC
to be subject to effective competition. The 1992 Cable Act substantially changed
the previous statutory and FCC rate regulation standards. The 1992 Cable Act
replaced the FCC's old standard for determining effective competition, under
which most cable television systems were not subject to rate regulation, with a
statutory provision that resulted in nearly all cable television systems
becoming subject to rate regulation of basic service. The 1996 Telecom Act
expands the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except DBS. Satisfaction of this test deregulates all rates. Additionally, the
1992
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<PAGE>
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 ("CPST") (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 doing so; 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 CPST rates to
franchising authorities only, after first receiving two rate complaints from
local basic customers, and ended FCC regulation of CPST rates immediately for
small systems owned by small cable operators and on March 31, 1999 for all other
cable television systems. The System is not a "small cable operator" under the
1996 Telecom Act.
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
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable television operator adds or deletes channels. There is also
a streamlined cost-of-service methodology available to justify a rate increase
on the basic tier for "significant" system rebuilds or upgrades.
As a further alternative, in 1995 the FCC adopted a simplified cost-of-
service methodology which can be used by "small cable systems" owned by "small
cable companies" (the "small system rules"). A "small system" is defined as a
cable television system which has, on a headend basis, 15,000 or fewer basic
customers. A "small cable company" is defined as an entity serving a total of
400,000 or fewer basic customers that is not affiliated with a larger cable
television company (i.e., a larger cable television company does not own more
than a 20 percent equity share or exercise de jure control). This small system
rate-setting methodology almost always results in rates which exceed those
produced by the cost-of-service rules applicable to larger cable television
operators. Once the initial rates are set they can be adjusted periodically for
inflation and external cost changes as described above. When an eligible "small
system" grows larger than 15,000 basic customers, it can maintain its then
current rates but it cannot increase its rates in the normal course until an
increase would be warranted under the rules applicable to systems that have more
than 15,000 customers. When a "small cable company" grows larger than 400,000
basic customers, the qualified systems it then owns will not lose their
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small system eligibility. If a small cable company sells a qualified system, or
if the company itself is sold, the qualified systems retain that status even if
the acquiring company is not a small cable company. The System was a "small
cable company" prior to the October 30, 1998 consummation by Insight of the TCI
transaction but it no longer enjoys this status.
On February 11, 1997, a Petition for Determination of Effective Competition
filed by Coaxial challenging the certification of the City of Columbus was
granted by the FCC. This petition revoked the City of Columbus' right to
regulate the System's basic cable and equipment rates, and the FCC's right to
regulate the System's CPST rates.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
Carriage of Broadcast Television Signals
----------------------------------------
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system (i.e., the system is located in the station's Area of Dominant Influence)
to elect every three years whether to require the cable television system to
carry the station, subject to certain exceptions, or whether the cable
television system will have to negotiate for "retransmission consent" to carry
the station. The next election between must-carry and retransmission consent
will be October 1, 1999. 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 retransmission consent requirements of the 1992 Cable Act. Local
non-commercial television stations are also given mandatory carriage rights,
subject to certain exceptions, within the larger of: (i) a 50 mile radius from
the station's city of license; or (ii) the station's Grade B contour (a measure
of signal strength). Unlike commercial stations, noncommercial stations are not
given the option to negotiate retransmission consent for the carriage of their
signal. In addition, cable television systems have to obtain retransmission
consent for the carriage of all "distant" commercial broadcast stations, except
for certain "superstations" (i.e., 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
the System, although this result may change in the future depending on such
factors as market conditions, channel capacity and similar matters when such
arrangements are renegotiated. The FCC has initiated a rulemaking proceeding on
the carriage of television signals in high definition and digital formats. The
outcome of this proceeding could have a material effect on the number of
services that a cable operator will be required to carry.
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Franchise Fees
--------------
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
---------------------
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal and to provide specific grounds for franchising authorities to consider
in making renewal decisions, including a franchisee's performance under the
franchise and community needs. Even after the formal renewal procedures are
invoked, franchising authorities and cable television operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
Similarly, if a franchising authority's consent is required for the purchase or
sale of a cable television system or franchises, such authority may attempt to
impose burdensome or onerous franchise requirements in connection with a request
for such consent. Historically, franchises have been renewed for cable
television operators that have provided satisfactory services and have complied
with the terms of their franchises. At this time, Management is not aware of any
current or past material failure on its part to comply with its franchise
agreements. Management believes that it has generally complied with the terms of
its franchises and has provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a cable
television operator seeks to enforce his 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."
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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.
Competing Franchises
--------------------
Questions concerning the ability of municipalities to impose certain
franchise restrictions upon cable television companies have been considered in
several recent federal appellate and district court decisions. These decisions
have been somewhat inconsistent and, until the U.S. Supreme Court rules
definitively on the scope of cable television's First Amendment protections, the
legality of the franchising process and of various specific franchise
requirements is likely to be in a state of flux. It is not possible at the
present time to predict the constitutionally permissible bounds of cable
franchising and particular franchise requirements. However, the 1992 Cable Act,
among other things, prohibits franchising authorities from unreasonably refusing
to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.
Ownership
---------
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers ("LECs") 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, LECs may provide video service as broadcasters,
common carriers, or cable operators. In addition, LECs and others may also
provide video service through "open video systems" ("OVS"), a regulatory regime
that may give them more flexibility than traditional cable television systems.
OVS operators (including LECs) may operate open video systems without obtaining
a local cable franchise, although they can be required to make payments to local
governmental bodies in lieu of cable franchise fees. In general, OVS 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 OVS, two-thirds of the
channels must be made available to programmers unaffiliated with the OVS
operator.
The 1996 Telecom Act generally prohibits LECs from purchasing cable
television systems (i.e, any ownership interest exceeding 10%) located within
the LEC's telephone service area, prohibits cable operators from purchasing LECs
whose service areas are located within the cable operator's franchise area, and
prohibits joint ventures between operators of cable television
24
<PAGE>
systems and LECs operating in overlapping markets. There are some statutory
exceptions, including a rural exemption that permits buyouts in which the
purchased cable television system or LEC 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 cases where: (i) the operator of a cable television system
or the LEC would be subject to undue economic duress if such provisions were
enforced; (ii) the system or facilities would not be economically viable in the
absence of a buyout or a joint venture; or (iii) the anticompetitive effects of
the proposed transaction are clearly outweighed by the transaction's effect in
light of community needs. The respective local franchising authority must
approve any such waiver.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable television systems which a single cable television operator can own. In
general, no cable television operator can have an attributable interest in cable
television systems which pass more than 30% of all homes nationwide.
Attributable interests for these purposes include voting interests of 5% or more
(unless there is another single holder of more than 50% of the voting stock),
officerships, directorships and general partnership interests. The FCC has
recently initiated a Notice of Proposed Rulemaking reviewing these cable
attribution rules, including whether various corporate, financial, partnership
or business relationships that confer influence or control over an entity
engaged in provision of cable services should be subject to regulation. The FCC
has stayed the effectiveness of these rules pending the outcome of the appeal
from the U.S. District Court decision holding the multiple ownership limit
provision of the 1992 Cable Act unconstitutional. The FCC has also recently
issued a Notice of Proposed Rulemaking seeking comment on possible further
revisions to this rule.
The FCC has also adopted rules which limit the number of channels on a
cable television system which can be occupied by national video programming
services in which the entity which owns the cable television system has an
attributable interest. The limit is 40% of the first 75 activated channels.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
---------------------
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators over competitors
and requires such programmers to sell their programming to other multichannel
video distributors. This provision limits the ability of vertically integrated
cable programmers to offer exclusive programming to cable companies.
25
<PAGE>
Equal Employment Opportunities
------------------------------
The 1984 Cable Act includes provisions to ensure that minorities and women
are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable television system operators with more than five
full-time employees. Pursuant to the requirements of the 1992 Cable Act, the FCC
has imposed more detailed annual Equal Employment Opportunities reporting
requirements on cable operators and has expanded those requirements to all
multichannel video service distributors. Failure to comply with the Equal
Employment Opportunities requirements can result in the imposition of fines
and/or other administrative sanctions, or may, in certain circumstances, be
cited by a franchising authority as a reason for denying a franchisee's renewal
request.
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 were found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements were strengthened to require
that cable television operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
Franchise Transfers
-------------------
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after receipt
of all information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
Technical Requirements
----------------------
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee ("NTSC")
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.
26
<PAGE>
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, inter alia, generally
prohibit cable television operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable television systems, and to
rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC has adopted
rules to assure the competitive availability to consumers of customer premises
equipment, such as converters, used to access the services offered by cable
television systems and other multichannel video programming distributors
("MVPD"). Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their MVPD 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, MVPDs (other than DBS operators) are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using component
security modules obtained from the MVPD with set-top units purchased or leased
from retail outlets. As of January 1, 2005, MVPDs will be prohibited from
distributing new set-top equipment integrating both security and non- security
functions to their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
Emergency Alert System ("EAS"). The rules require all cable television systems
to provide an audio and video EAS message on at least one programmed channel and
a video interruption and an audio alert message on all programmed channels. The
audio alert message is required to state which channel is carrying the full
audio and video EAS message. The FCC rules permit cable television systems
either to provide a separate means of alerting persons with hearing disabilities
of EAS messages, such as a terminal that displays EAS messages and activates
other alerting mechanisms or lights, or to provide audio and video EAS messages
on all channels. Cable television systems with 10,000 or more basic customers
per headend were required to install EAS equipment capable of providing audio
and video EAS messages on all programmed channels by December 31, 1998. Cable
television systems with 5,000 or more but fewer than 10,000 basic customers per
headend will have until October 1, 2002 to comply with that requirement. Cable
television systems with fewer than 5,000 basic customers per headend will have a
choice of providing either a national level EAS message on all programmed
channels or installing EAS equipment capable of providing audio alert messages
on all programmed channels, a video interrupt on all channels, and an audio and
video EAS message on one programmed channel. This must be accomplished by
October 1, 2002.
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. Ohio, the state in which the
System operates, has 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.
27
<PAGE>
Pursuant to the 1996 Telecom Act, the FCC has adopted a new rate formula for any
attaching party, including cable television systems, which offer
telecommunications services. This new formula will result in higher attachment
rates than at present, but they will apply only to cable television systems
which elect to offer telecommunications services. Any increases pursuant to this
new formula will not begin until 2001, and will be phased in by equal increments
over the five ensuing years. The FCC recently ruled that the provision of
Internet service will not, in and of itself, trigger use of the new formula. The
FCC has also initiated a proceeding to determine whether it should adjust
certain elements of the current rate formula. If adopted, these adjustments
could increase rates for pole attachments and conduit space.
Other FCC Matters
-----------------
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; nonduplication of network programming;
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 recently adopted new procedural guidelines governing the
disposition of home run wiring (a line running to an individual customer's unit
from a common feeder or riser cable) in MDUs. MDU owners can use these new rules
to attempt to force cable television operators without contracts to either sell,
abandon or remove home run wiring and terminate service to MDU customers unless
operators retain rights under common or state law to maintain ownership
rights in the home run wiring.
The 1996 Telecom Act requires video programming distributors to employ
technology to restrict the reception of programming by persons not subscribing
to those channels. In the case of channels primarily dedicated to sexually-
oriented programming, the distributor must fully block reception of the audio
and video portion of the channels; a distributor that is unable to comply with
this requirement may only provide such programming during a "safe harbor" period
when children are not likely to be in the audience, as determined by the FCC.
With respect to other kinds of channels, the 1996 Telecom Act requires that the
audio and video portions of the channel be fully blocked, at no charge, upon
request of the person not subscribing to the channel.
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
28
<PAGE>
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 ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now 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. Cable television industry
negotiations with ASCAP, BMI and SESAC, Inc. (a smaller performing rights
organization) are in progress.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises, and
allows franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or
29
<PAGE>
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, Ohio, the state in which
the System currently operates, has not enacted state level regulation.
The foregoing does not purport to describe all 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 the
System can be predicted at this time.
ITEM 2. PROPERTIES
The System's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headend and distribution systems and customer house drop equipment for
its cable television systems. The signal receiving apparatus includes a tower,
antenna, ancillary electronic equipment and earth stations for reception of
satellite signals. The headend, consisting of associated electronic equipment
necessary for the reception, amplification and modulation of signals, is located
near the receiving devices. Most basic customers of the System utilize
converters that can be addressed by sending coded signals from the headend
facility over the cable network. The System's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
The System owns parcels of real property for signal reception sites (one
antenna tower and one headend). The System also leases one small office and one
hub location. Management believes that its properties, both owned and leased,
are in suitable condition adequate for the System's operations.
The System's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The physical
components of the System require periodic upgrading to improve system
performance and capacity.
30
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which any of the
Registrants is a party or to which any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the holders of the Senior
Discount Notes during the three months ended December 31, 1998.
31
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the equity of Coaxial LLC, Coaxial
Financing Corp. and Insight Ohio. There are one, one and two holders of the
equity of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio, respectively.
32
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998. As
such, these entities were not in existence for the historical periods presented
in the following tables. The historical information of Coaxial Communications of
Central Ohio, Inc. for the years ended December 31, 1997, 1996, 1995 and 1994 is
shown as it represents the predecessor entity which has been consolidated by
Coaxial LLC as of and for the year ended December 31, 1998. The following tables
present selected historical financial data for Coaxial LLC and Phoenix
Associates as of and for the five years ended December 31, 1998 and selected
historical financial data for Insight Ohio and Coaxial Financing Corp. as of and
for the period ended 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.
COAXIAL LLC
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 47,956 $ 48,229 $ 50,418 $ 46,831 $ 43,546
Operating expenses:
Service and administrative......................... 27,832 27,391 25,236 21,920 20,830
Severance and transaction structure costs................... 4,822 - - - -
Management fee..................................... 493 - - - -
Home office........................................ 1,370 1,498 1,697 1,695 1,316
Depreciation and amortization...................... 5,311 5,256 5,350 4,837 4,010
-------- -------- -------- -------- --------
Total operating expenses.................. 39,828 34,145 32,283 28,452 26,156
Operating income............................................ $ 8,128 $ 14,084 $ 18,135 $ 18,379 $ 17,390
Interest expense, net.............................. 2,678 1,230 426 1,033 864
Other expense...................................... 421 271 248 251 261
-------- -------- -------- -------- --------
Net income before
extraordinary item................................. $ 5,029 $ 12,583 $ 17,461 $ 17,095 $ 16,265
Extraordinary item - loss on debt retirement....... (847) - - - (130)
-------- -------- -------- -------- --------
Net income.................................................. $ 4,182 $ 12,583 $ 17,461 $ 17,095 $ 16,135
======== ======== ======== ======== ========
FINANCIAL RATIOS AND OTHER DATA:
System Cash Flow (1)........................................ $ 20,124 $ 20,838 $ 25,182 $ 24,911 $ 22,716
System Cash Flow margin..................................... 42.0% 43.2% 49.9% 53.2% 52.2%
Operating Cash Flow (2)..................................... 18,261 19,340 23,485 23,216 21,400
Capital expenditures........................................ 7,369 5,570 5,998 5,724 5,486
Net cash provided by operating activities................... 13,050 18,622 24,369 21,895 5,266
Net cash used in investing activities....................... 3,470 15,242 19,551 19,914 5,441
Net cash used in financing activities....................... 1,446 3,712 4,582 1,623 525
OPERATING DATA: (AT END OF PERIOD, EXCEPT
AVERAGE AND ANNUALIZED DATA)
Homes passed (3)............................................ 171,753 166,306 161,018 156,613 152,562
Basic subscribers (4)....................................... 87,637 91,873 88,056 86,041 82,166
Basic penetration (5)....................................... 51.0% 55.2% 54.7% 54.9% 53.9%
Premium service units (6)................................... 90,032 80,013 68,720 74,087 74,529
Premium penetration (7)..................................... 102.7% 87.1% 78.0% 86.1% 90.7%
Average monthly revenue per basic subscriber (8)............ $ 44.52 $ 44.67 $ 48.27 $ 46.40 $ 44.70
System Cash Flow per basic subscriber....................... $ 224.21 $ 231.62 $ 289.28 $ 296.20 $ 279.78
BALANCE SHEET DATA: (AT THE END OF THE
PERIOD)
Total assets................................................ $ 56,532 $109,655 $102,099 $ 87,946 $ 71,677
Total debt.................................................. 67,204 47,236 50,442 40,375 34,123
Total liabilities........................................... 77,233 55,328 59,767 50,927 44,062
Total member's equity (deficit)............................. (20,701) 54,327 42,332 37,019 27,615
</TABLE>
33
<PAGE>
PHOENIX ASSOCIATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Home office.......................... $ - $ - $ - $ - $ 4
--------- --------- --------- --------- ---------
Total operating expenses........... - - - - 4
Operating loss........................ - - - - (4)
Interest expense, net.............. $ 12,350 $ 12,094 $ 12,490 $ 12,362 $ 7,265
Other expense...................... 61 89 106 120 167
--------- --------- --------- --------- ---------
Net loss before extraordinary item.... (12,411) (12,183) (12,596) (12,482) (7,436)
Extraordinary item-(loss) gain........ 100 3,315 - - (755)
--------- --------- --------- --------- ---------
Net loss.............................. $ (12,311) $ (8,868) $ (12,596) $ (12,482) $ (8,191)
========= ========= ========= ========= =========
BALANCE SHEET DATA: (AT END OF PERIOD)
Total assets.......................... $ 4,413 $ 7,954 $ 9,218 $ 8,592 $ 8,105
Total debt............................ 105,565 178,365 170,762 157,448 144,514
Total liabilities..................... 109,406 178,366 170,762 157,540 144,572
Total partners' deficit............... (104,993) (170,412) (161,544) (148,948) (136,466)
</TABLE>
COAXIAL FINANCING CORP.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
BALANCE SHEET DATA:
<S> <C>
Total assets........................... $1,000
Total debt (to be paid by Coaxial LLC). -
Total liabilities...................... -
Total shareholders' equity............. 1,000
</TABLE>
34
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM AUGUST 21, 1998
STATEMENT OF OPERATIONS DATA: TO DECEMBER 31, 1998
--------------------
<S> <C>
Revenues.............................................................................. $ 17,276
Operating Expense:
Service and administrative............................................................ 8,912
Management fee............................................................... 493
Depreciation and amortization......................................................... 1,899
--------
Total operating expenses.............................................................. $ 11,304
Operating income...................................................................... 5,972
Interest income, net.................................................................. 25
Other income.......................................................................... 11
--------
Net Income............................................................................ $ 6,008
Accrual of Preferred Interests........................................................ (6,649)
--------
Loss on Common Interest............................................................... $ (641)
========
FINANCIAL RATIOS AND OTHER DATA:
System Cash Flow(1)................................................................... $ 8,364
System Cash Flow margin............................................................... 48.4%
Operating Cash Flow(2)................................................................ 7,871
Capital expenditures.................................................................. 3,620
Net cash provided by operating activities............................................. 8,868
Net cash used in investing activities................................................. 3,909
Net cash used in financing activities................................................. 1,749
OPERATING DATA:
(AT END OF PERIOD, EXCEPT AVERAGE AND ANNUALIZED DATA)
Homes passed(3)....................................................................... 171,753
Basic subscribers(4).................................................................. 87,637
Basic penetration(5).................................................................. 51.0%
Premium service units(6).............................................................. 90,032
Premium penetration(7)................................................................ 102.7%
Average monthly revenue per basic subscriber(8)....................................... $ 44.81
Annualized System Cash Flow per basic subscriber(9)................................... $ 244.99
BALANCE SHEET DATA: (AT THE END OF THE PERIOD)
Total assets.......................................................................... $ 41,968
Total debt............................................................................ 1,257
Preferred Interests................................................................... 170,000
Total liabilities and preferred interests............................................. 186,686
Total members' deficit................................................................ (144,719)
</TABLE>
The financial statements of Insight Communications of Central Ohio, LLC as
of December 31, 1998 and for the period from August 21, 1998 to December 31,
1998 are included in the consolidated financial statements of Coaxial
Communications of Central Ohio, Inc.
35
<PAGE>
NOTES TO SELECTED FINANCIAL AND OPERATING DATA
(1) Represents Operating Cash Flow (as defined below in Note 2) plus home office
expense for periods prior to the acquisition of the System, and Operating Cash
Flow plus management fees for periods after or which give effect to the
acquisition of the System. Management believes that System Cash Flow is a
meaningful measure of performance because it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, System Cash
Flow is not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net income
as an indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles. System Cash Flow, as computed by management, is not necessarily
comparable to similarly titled amounts of other companies. See the financial
statements, including the Statements of Cash Flows, included elsewhere in this
Report.
(2) Represents earnings before depreciation, amortization, severance and
transaction structure costs, interest expense, other expenses, and extraordinary
item. Management believes that Operating Cash Flow is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, Operating Cash Flow is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
Operating Cash Flow, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including the Statements of Cash Flows included elsewhere in this Report.
(3) Refers to estimates by management of the approximate number of dwelling
units in a particular community that can be connected to the System.
(4) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an equivalent
basic unit basis in which the total monthly bill for the account is divided by
the basic monthly charge for a single outlet in the area.
(5) Calculated as basic subscribers as a percentage of homes passed.
(6) Includes only single channel services offered for a monthly fee per channel
and does not include tiers of channels offered as a package for a single monthly
fee. A subscriber may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(7) Calculated as premium service units as a percentage of basic subscribers.
36
<PAGE>
(8) Represents revenues of the System during the respective period divided by
the months in the period divided by the average number of basic subscribers
(beginning of period plus end of period divided by two) for such respective
period.
(9) Represents Annualized System Cash Flow during the respective period divided
by the average number of basic subscribers (beginning of period plus end of
period divided by two) for such respective period.
37
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
PRIVATE OFFERING OF 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 Senior Discount Notes in connection with
the Financing Plan discussed under "Liquidity and Capital Resources," which
included the contribution of the System to Insight Ohio. 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, which are secured by the remaining 32.5% of the common stock of
Coaxial. The Senior Discount Notes are guaranteed on a conditional basis by
Insight Ohio.
As part of the Financing Plan, Coaxial and Phoenix Associates, an
affiliated general partnership, completed a private offering (the "Senior Notes
Offering") of $140,000,000 aggregate principal amount of their Senior Notes. The
Senior Notes are also guaranteed on a conditional basis by Insight Ohio. The
conditional guarantee of the Senior Discount Notes is subordinated to the
conditional guarantee of the Senior Notes. As a result of the Financing Plan,
Coaxial has only nominal assets except for its ownership of 25% of the non-
voting common membership interests in Insight Ohio and 100% of the voting
Preferred Interests.
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series B Preferred
Interests 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 Interests will be used to pay interest
and principal on the Senior Notes. Distributions by Insight Ohio will be subject
to certain financial covenants and other conditions set forth in its Senior
Credit Facility.
Coaxial LLC and Coaxial Financing Corp. do not conduct any business and are
dependent upon the cash flow of Insight Ohio to meet their obligations under the
Senior Discount Notes. Coaxial and Phoenix do not conduct any business and are
dependent upon the cash flow of Insight Ohio to meet their obligations under the
Senior Notes. IHO, a wholly-owned subsidiary of Insight Communications Company,
L.P., serves as the manager of the System.
The following discussion relates to the historical operations of Coaxial
LLC for the year ended December 31, 1998 compared to the historical operations
of Coaxial for the years ended December 31, 1997 and 1996. On August 21, 1998,
all of the assets and liabilities comprising the System were contributed to
Insight Ohio. Subsequent to the consummation of the Financing Plan, (i) Insight
Ohio was deemed to be a subsidiary of Coaxial and, as such, the financial
statements of Insight Ohio are consolidated into the financial statements of
Coaxial and (ii)
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Coaxial was deemed to be a subsidiary of Coaxial LLC and, as such, the financial
statements of Coaxial are consolidated into the financial statements of Coaxial
LLC. Financial results related to historical information reflect the operation
and management of the System by Coaxial through August 21, 1998 and by IHO from
August 21, 1998 to December 31, 1998. The historical operating results of
Coaxial LLC presented below reflect the actual results of the System in addition
to certain financing activities unrelated to the operation of the System. These
financing activities relate primarily to the offering of the Senior Discount
Notes and Senior Notes discussed above as well as certain borrowings and
repayments of debt with affiliated companies. These activities resulted in
related financing and interest costs. The historical results of Coaxial LLC
presented below appear elsewhere in this report under the heading "Coaxial LLC."
OVERVIEW
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, other revenues are derived from installation and reconnection fees
charged to basic customers to commence or discontinue service, pay-per-view
charges, late payment fees, franchise fees, advertising revenues and commissions
related to the sale of goods by home shopping services.
System operating expenses consist of service and administrative expenses,
home office expenses and depreciation and amortization. Service and
administrative expenses include direct costs, such as fees paid to programming
suppliers, expenses related to copyright fees, bad debt expense, and franchise
and use fees. Programming fees have historically increased at rates in excess of
inflation due to increases in the number of programming services offered by the
System and improvements in the quality of programming. Service and
administrative expenses also include costs attributable to the operation of the
System, including wages and salaries and other expenses related to plant
operating activities, customer service operations, marketing, billing,
advertising sales and video production. Prior to August 21, 1998, service and
administrative expenses also included costs attributable to finance and
accounting, human resources and other administrative functions. Upon
consummation of the Financing Plan, such expenses were replaced by the
management fee arrangement with IHO.
The System relies on IHO for all of its strategic, managerial, financial
and operational oversight and advice. IHO also centrally purchases programming
and equipment and provides the associated discount to the System. In exchange
for all such services provided to the System and subject to certain restrictions
contained in the covenants with respect to Insight Ohio's Senior Credit
Facility, the Senior Discount Notes and the Senior Notes, IHO is entitled to
receive management fees of 3.0% of gross operating revenues of the System. Such
management fee is payable only after distributions have been made in respect of
the Preferred Interests and only to the extent that such payment would be
permitted by an exception to the restricted payments covenants of the Senior
Discount Notes and the Senior t Notes as well as Insight Ohio's Senior Credit
Facility. Such management fee is included in service and administrative
expenses.
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RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were $48.0 million, compared
to $48.2 million for the year ended December 31, 1997. For the year ended
December 31, 1998, subscribers served averaged 89,755, as compared with 89,965
in 1997. Effective January 1998, Coaxial no longer included franchise fees in
revenue due to a change in Coaxial's financial reporting which caused 1998
revenue to be lower by approximately $1.0 million. On a pro forma basis,
including franchise fees, revenue for the year ended December 31, 1998 was 7.7%
higher than the previous year, primarily reflecting a 22.9% increase in
advertising revenue, which includes production revenue. In addition, revenues
were depressed by the former owner's program of deeply discounting its service
by more than 55% of the System's rate card. The program was initiated in late
July 1997 and continued through June 1998. Therefore, the full impact of the
approximately 16,000 subscribers billed at promotional rates will not be fully
evident until fiscal 1999.
Service and administrative expenses increased to $29.7 million for the year
ended December 31, 1998, compared to $28.9 million in 1997, an increase of
$800,000, or 2.8%. Programming expenses increased by 15.4%, from $10.4 million
in 1997 to $12.0 million in 1998, reflecting additional channels provided in the
competitive areas, an increase in customers and annual increases in programming
rates offset by savings realized through Insight's purchasing discounts. The
System was charged home office expenses that include costs incurred by the
owners of Coaxial and their direct employees relating to the System including
salaries, benefits, legal fees, travel and entertainment, accounting fees and
other office expenses. For the year ended December 31, 1998, such expenses
totaled $1.4 million, an increase of $100,000, or 7.7%, from 1997. Upon
consummation of the Financing Plan, IHO commenced management services to the
System for which it receives a management fee. Service and administrative
expenses, which accounted for 66.1% of total revenue for the period ended August
21, accounted for only 54.5% of total revenue from August 21 through the end of
year reflecting Coaxial's new cost structure. In particular, programming fees
were approximately 6.0% less on a per customer basis due to discounts available
to Coaxial. In addition, on an annualized basis, personnel expenses were less by
approximately 16.7% due to the elimination of duplicative administrative
personnel.
Severance and transaction structure costs of $4.8 million were incurred for
the year ended December 31, 1998 as a result of the Financing Plan and the
related contribution of the System to Insight Ohio. These costs consisted of
severance costs of $960,000 and professional fees of $3.8 million.
Depreciation and amortization remained flat at $5.3 million for the years
1998 and 1997.
Net interest expense increased approximately $1.4 million to $2.7 million
for the year ended December 31, 1998 due primarily to interest on the Senior
Discount Notes from August 21, 1998 through December 31, 1998.
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In 1998, an extraordinary loss of $847,000 was recognized due to the
refinancing of Coaxial's bank debt that existed prior to August 21, 1998.
Net income decreased to $4.2 million for the year ended December 31, 1998
from net income of $12.6 million for the year ended December 31, 1997 for the
reasons set forth above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $48.2 million, compared
to $50.4 million for the year ended December 31, 1996, a decrease of $2.2
million, or 4.4%. Basic, standard and premium revenues accounted for nearly all
of the decrease, declining from $41.3 million in the 1996 period to $39.2
million in the 1997 period, a decrease of $2.1 million, or 5.1%. This decline in
revenue reflects the full impact of the competitive environment for
approximately 23,000 customers who were overbuilt in the last half of 1996, the
addition of approximately 23,000 customers to the overbuilt areas during 1997
and the effect of a promotional campaign used to acquire customers in the last
half of 1997. The overall result of the rate reductions and promotional campaign
was alleviated by customer growth during 1997, from approximately 88,000 at the
end of 1996 to approximately 91,900 at year-end 1997, an increase of 4.4%. Other
revenue declined by $157,000, or 7.2%, to $2.0 million for 1997, from $2.2
million in 1996, primarily due to installation revenues which were lower due to
promotional offerings. Advertising revenues increased to $3.4 million for 1997,
from $3.1 million in 1996, an increase of 9.7%.
Service and administration expenses (including home office) rose to $28.9
million for the year ended December 31, 1997, compared to $26.9 million for the
same period in 1996, an increase of 7.4%. Fees for basic and standard
programming were $6.4 million in 1997, compared to $4.9 million in 1996, an
increase of 30.6%. The increase in programming costs reflected additional
services added in the competitive areas, customer growth and fee increases. Home
office expenses were $1.5 million in 1997, a decrease of $200,000, or 11.8%,
from $1.7 million in 1996. The reduction resulted primarily from the elimination
of salaries for shareholder officers. In addition to programming costs, other
expenses increased from $14.4 million in 1996 to $15.2 million in 1997, an
increase of $800,000, or 5.6%. Of this increase, $500,000 occurred in general
and administrative and personnel accounts due to increases in benefit costs,
legal fees and office rent.
Depreciation and amortization decreased by $100,000, or 1.8%, to a total of
$5.2 million in 1997.
Net interest expense increased approximately $800,000 to $1.2 million for
the year ended December 31, 1997.
Net income decreased to $12.6 million for the year ended December 31, 1997
from $17.5 million for the year ended December 31, 1996 for the reasons set
forth above.
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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. The capital expenditures relating to Coaxial LLC
totaled $7.4 million for the year ended December 31, 1998 and $5.6 million for
the year ended December 31, 1997. These expenditures were primarily for serving
new homes, the rebuild of cable plant, equipment purchases, the upgrade and
replacement of service vehicles and routine maintenance and replacement of cable
plant and related equipment. Prior to August 21, 1998, the capital expenditures
were financed through borrowings under a senior credit facility among Coaxial,
Phoenix, certain of their affiliates, The Chase Manhattan Bank, as agent, and
certain lenders (the "Chase Credit Facility") and cash flows from operations.
Subsequent to August 21, 1998, the capital expenditures were financed by cash
received from the Financing Plan and cash flows from operations.
IHO plans to further enhance the technical platform of the System by
upgrading the plant serving the majority of customers. The capability for high-
speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Capital expenditures are expected to approximate $35.0 million during 1999
to support not only ongoing plant extensions, new customer additions and
maintenance capital, but also to fund an upgrade of a significant portion of the
plant to 870 MHz and to activate plant for 2-way transmission, which is
necessary to facilitate the deployment of interactive services. It costs
approximately $1,500/mile to activate 2-way or reverse plant. IHO expects to
complete the upgrade of the plant with 2-way activation within 16 months. IHO
had originally planned to rebuild the plant to 750 MHz, but upon further review,
decided to expand the plant capacity to 870 MHz. In addition, IHO decided to
enlarge the upgrade by approximately 400 miles. The combination of these changes
will result in incremental capital costs of approximately $8.0 million. In
September 1998, IHO announced that it would fund the additional costs by an
additional infusion of $8.0 million of equity into Insight Ohio.
The Senior Discount Notes Offering was part of the Financing Plan
implemented to facilitate the organization of Insight Ohio, the acquisition of
the System by Insight Ohio and to provide for the System's liquidity and
operational and financial flexibility. Pursuant to the Financing Plan:
. Coaxial contributed to Insight Ohio substantially all of the assets
comprising the System for which Coaxial received a 25% non-voting common
membership interest in Insight Ohio as well as the voting Preferred Interests
in Insight Ohio, which provide for distributions to Coaxial that will be used
to pay interest and principal on the Senior Notes and to pay dividends to the
Individual LLCs that will be used to pay interest and principal on the Senior
Discount Notes;
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. IHO contributed $10.0 million in cash to Insight Ohio for which it received a
75% non-voting common membership interest in Insight Ohio;
. Coaxial LLC and Coaxial Financing Corp. effected the Senior Discount Notes
Offering;
. Coaxial and Phoenix effected the Senior Notes Offering; and
. a portion of the existing bank indebtedness of Coaxial LLC and Coaxial
Financing Corp. and certain of their affiliates was repaid and the balance
was purchased by CIBC Oppenheimer Corp. ("CIBC") and restructured in
accordance with an agreement among the parties.
The gross proceeds received by Coaxial LLC and Coaxial Financing Corp. from
the Senior Discount Notes Offering were approximately $30.0 million. Proceeds
from such private offering were used for the repayment of outstanding
indebtedness (approximately $28.9 million). CIBC purchased certain outstanding
indebtedness (approximately $136.4 million) of Coaxial and Phoenix and
restructured that debt in accordance with the Financing Plan. CIBC funded such
purchase with proceeds from the Senior Notes Offering. The remaining proceeds
from the Senior Discount Notes Offering and the Senior Notes Offering and the
$10.0 million cash contribution from IHO were used for working capital
(approximately $2.9 million), deferred compensation and severance payments
(approximately $3.0 million) and fees and expenses (approximately $8.8 million).
Insight Ohio entered into the Senior Credit Facility on October 7, 1998
with Canadian Imperial Bank of Commerce (which is an affiliate of CIBC), as
agent ("Canadian Imperial Bank"), for the purpose of financing its future
capital expenditures and for working capital and general purposes, including the
planned upgrade of the System's technical capability, as discussed above. The
Senior Credit Facility is a six-year $25 million reducing revolving credit
facility. As of December 31, 1998, no borrowings had been made under the Senior
Credit Facility and $25 million remains available for borrowing.
Coaxial LLC and Coaxial Financing Corp. expect to make interest payments on
the Senior Discount Notes from funds distributed to Coaxial in respect of the
Series B Preferred Interests in Insight Ohio to the extent permitted under the
terms of its Senior Credit Facility. Insight Ohio accrues preferred dividends in
respect of the Series B Preferred Interests. Coaxial and Phoenix expect to make
interest payments on the Senior Notes from funds distributed to Coaxial in
respect of the Series A Preferred Interests in Insight Ohio to the extent
permitted under the terms of its Senior Credit Facility. Insight Ohio accrues
preferred dividends in respect of the Series A Preferred Interests.
Insight Ohio's obligations under the Senior Credit Facility are secured by
substantially all the tangible and intangible assets of Insight Ohio. Loans
under the Senior Credit Facility bear interest, at Insight Ohio's option, at
Canadian Imperial Bank's prime rate or at a Eurodollar rate. In addition to the
index rates, Insight Ohio pays an additional margin percentage tied to its ratio
of total debt to adjusted annualized operating cash flow, in the case of prime
rate loans, 0.75%
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or, if under a 5:1 ratio, 0.25%; and in the case of Eurodollar loans, 2.0% or,
if under a 5:1 ratio, 1.5%.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Discount Notes and the Senior Notes in the event of a payment default under the
Senior Credit Facility, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including with respect to total leverage, interest
coverage and pro forma debt service coverage. Management does not expect that
such covenants will materially impact the ability of Insight Ohio to operate its
business.
The Indentures impose (i) restrictions, that, among other things, limit the
amount of additional indebtedness that may be incurred by Coaxial LLC and
Coaxial Financing Corp. and their subsidiaries (including Insight Ohio) and (ii)
limitations on, among other things, investments, loans and other payments,
certain transactions with affiliates and certain mergers and acquisitions.
The ability of Insight Ohio to comply with the covenants and restrictions
of the Indentures and the Senior Credit Facility can be affected by events
beyond its control, and there can be no assurance that Insight Ohio will achieve
operating results that would permit compliance with such provisions. The breach
of certain provisions of the Senior Credit Facility would, under certain
circumstances, result in defaults thereunder, permitting the lenders thereunder
to prevent distributions with respect to the Preferred Interests and to
accelerate the indebtedness thereunder. If Insight Ohio were unable to repay the
amounts due in respect of the Senior Credit Facility, the lenders thereunder
could foreclose upon the assets pledged to secure such repayment. Any of such
events would adversely affect the ability of Coaxial LLC and Coaxial Financing
Corp. to service the Senior Discount Notes or the ability of Insight Ohio to
comply with the redemption provisions of the Series B Preferred Interests.
Cash provided by operations for the year ended December 31, 1998 was $13.1
million compared to $18.6 million for the same period in 1997. This decrease in
Coaxial's net cash flow from operations is the result of a decrease in net
income primarily due to the $4.8 million paid for severance and transaction
structure cost.
Cash used in investing activities for the years ended December 31, 1998 and
1997 was $3.5 million and $15.2 million, respectively. For the years ended
December 31, 1998 and 1997, Coaxial had capital expenditures of $7.4 million and
$5.6 million, respectively, to build plant and purchase equipment needed to
service customers.
Cash used in financing activities for the year ended December 31, 1998 was
$1.4 million. Cash used in financing activities resulted primarily from the
issuance of the Senior Discount
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Notes, the Senior Notes and the $10 million contribution by IHO which was
subsequently offset by approximately $7.6 million of capital distributions and
funds loaned to Coaxial DSM LLC and Coaxial DJM LLC. For the year ended December
31, 1997, cash used in financing activities was $3.7 million. This cash was used
primarily for capital lease payments.
Management anticipates that cash flows from operations, together with the
announced $8.0 million infusion by IHO and amounts available under Insight
Ohio's Senior Credit Facility, will be sufficient to finance the operating
requirements of the System, debt service requirements, distributions on the
Preferred Interests and anticipated capital expenditures for the next year.
INFLATION AND CHANGING PRICES
Coaxial's costs and expenses are subject to inflation and price
fluctuations. Although changes in costs can be passed through to customers, such
changes may be constrained by competition. Management does not expect inflation
to have a material effect on Coaxial's results of operations.
YEAR 2000
The Year 2000 will pose a unique set of challenges to those industries
reliant on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. Insight
Ohio and other companies in the same business are vulnerable to their dependence
on distribution and communications systems.
Insight Ohio's greatest Year 2000 exposure is presented by its third party
billing system which is responsible for mailing monthly bills to customers and
maintaining customer data. Insight Ohio has recently implemented the Convergys
billing system. Convergys has informed Insight Ohio that testing of the billing
system was completed by the first quarter of 1999.
Management believes that the remaining systems of Insight Ohio will be
fully Y2K compliant by the end of the third quarter of 1999. Insight Ohio has
completed an inventory of all areas which are at risk and is in the process of
replacing and upgrading all equipment and software as needed. Due to Insight's
affiliation with TCI, Insight Ohio is a member of TCI's Year 2000 task force.
This allows Insight Ohio access to TCI's extensive database which details
various vendors', suppliers' and programmers' Year 2000 compliance. Management
estimates that the total cumulative costs relating to its efforts to make its
systems Y2K compliant will be approximately $120,000, of which $20,000 has been
incurred as of December 31, 1998.
Management believes that the expenditures required to bring Insight Ohio's
systems into compliance will not have a materially adverse effect on Insight
Ohio's performance. However, the Year 2000 problem is pervasive and complex and
can potentially affect any computer process. Accordingly, no assurance can be
given that Year 2000 compliance can be achieved
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without additional unanticipated expenditures and uncertainties that might
affect future financial results.
Moreover, to operate its business, Insight Ohio relies on governmental
agencies, utility companies, telecommunications companies, shipping companies,
suppliers and other third party service providers over which it can assert
little control. Insight Ohio's ability to conduct its business is dependent upon
the ability of these third parties to avoid Year 2000 related disruptions.
Insight Ohio is in the process of contacting its third party service providers
about their Year 2000 readiness, but Insight Ohio has not yet received any
assurances from any such third parties about their Year 2000 compliance. If
Insight Ohio's key third party service providers do not adequately address their
Year 2000 issues, Insight Ohio's business may be materially affected, which
could result in a materially adverse effect on Insight Ohio's results of
operations and financial condition.
Insight Ohio has not, as of yet, developed any contingency plans, as such
plans will depend on the responses from its third party service providers, in
the event Insight Ohio or any key third party providers should fail to become
Year 2000 compliant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio do not anticipate the adoption of this statement to have a material impact
on their respective financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not engage in
trading market risk sensitive instruments and do not purchase hedging
instruments or "other than trading" instruments that are likely to expose any of
them to market risk, whether interest rate, foreign currency exchange, commodity
price or equity price risk. Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio have not entered into forward or future contracts, purchased options or
entered into swaps.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages F-1 through F-46 comprising a portion of
this Report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Subsequent to the Financing Plan, IHO, the manager of the System, replaced
Arthur Andersen LLP with Ernst & Young LLP to audit and report on the 1998
financial statements of Coaxial LLC, Coaxial Financing Corp., Coaxial, Phoenix
and Insight Ohio. Coaxial LLC, Coaxial Financing Corp., Coaxial, Phoenix and
Insight Ohio did not have any disagreements with Arthur Andersen LLP on
accounting or financial disclosure matters.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Individual LLCs, Coaxial, Insight Ohio, IHO and
Insight. Insight is the parent of IHO which serves as manager of the Individual
LLCs and Insight Ohio and thereby effectively controls the management and
affairs of the Individual LLCs, Coaxial and Insight Ohio. The executive officers
of Insight are compensated by way of management fees paid by Insight Ohio to
IHO. Sidney R. Knafel serves as the sole director of Insight Communications,
Inc. ("ICI"), which serves as the general partner of ICC Associates, L.P., the
general partner of Insight. Sidney Knafel, Michael Willner and Kim Kelly serve
as the directors of Coaxial. The table also includes the members of the
Management Committee of Insight Ohio, which manage the business of Insight Ohio
and in doing so have delegated broad authority to IHO as manager of the System.
None of the executive officers of Coaxial, Coaxial LLC and Coaxial Financing
Corp. are compensated for their services as such. Coaxial Financing Corp. only
has nominal assets and will not conduct any business.
NAME AGE POSITION
---- --- --------
Sidney R. Knafel 68 Chairman of the Individual LLCs, Coaxial, Insight
Ohio, IHO and Insight; Member of the Management
Committee of Insight Ohio
Michael S. Willner 47 President and Chief Executive Officer of the
Individual LLCs, Coaxial, Insight Ohio, IHO and
Insight; Member of the Management Committee of
Insight Ohio
Kim D. Kelly 42 Executive Vice President and Chief Operating and
Financial Officer of the Individual LLCs,
Coaxial, Insight Ohio, IHO and Insight; Member of
the Management Committee of Insight Ohio
Dennis J. McGillicuddy 57 Member of the Management Committee of Insight
Ohio
Daniel Mannino 39 Vice President and Controller of the Individual
LLCs, Coaxial, Insight Ohio, IHO and Insight
Gregory B. Graff 38 Senior Vice President and General Manager of
Insight Ohio
Sidney R. Knafel has been Chairman of ICI since 1985. He is a director of
NTL, Inc., one of the three largest cable and telecommunications operators in
the United Kingdom. He was the founder, Chairman and an equity holder of Vision
Cable Communications, Inc. ("Vision Cable") 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
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BioReliance Corporation, a biological testing company. He is a director of
Cellular Communications of Puerto Rico, Inc., CoreComm Incorporated, General
American Investors Company, Inc. and IGENE Biotechnology, Inc., as well as
several private companies. Mr. Knafel is a graduate of Harvard College and the
Harvard Graduate School of Business Administration.
Michael S. Willner co-founded and has served as President of ICI and
Insight since 1985. Previously, Mr. Willner served as Executive Vice President
and Chief Operating Officer of Vision Cable from 1979 through 1985, Vice
President of Marketing for Vision Cable from 1977 to 1979 and General Manager of
Vision Cable's Bergen County, New Jersey cable television system from 1975 to
1977. Currently, Mr. Willner is a director of NTL, Inc. He also is a director of
Source Media, Inc., a technology and programming provider of Internet services
on digital cable platforms. He serves on the board of C-SPAN and the National
Cable Television Association where he chairs the association's State and Local
Government Committee. Mr. Willner graduated from Boston University's School of
Communications and serves on the school's Executive Committee.
Kim D. Kelly has been Executive Vice President, Finance of ICI and
Executive Vice President and Chief Financial Officer of Insight since 1990. Ms.
Kelly has also been Chief Operating Officer of Insight since January 1998. Prior
thereto, she served from 1982 to 1990 with Marine Midland Bank, becoming its
Senior Vice President in 1988, with primary responsibility for media lending
activities. Ms. Kelly serves as a member of the National Cable Television
Association ("NCTA") Subcommittee for Telecommunications Policy, as well as the
NCTA Subcommittee for Accounting. Ms. Kelly is a graduate of George Washington
University.
Dennis J. McGillicuddy co-founded Coaxial in 1968 and served as Chairman of
the Board of Directors of Coaxial until the consummation of the System
Acquisition. Mr. McGillicuddy also serves as Chairman of CCX, Inc., a
manufacturer of building products, and is a director of Benz Research and
Development Corp. Mr. McGillicuddy served as a member of the Board of CCX, Inc.
at the time a petition under Federal bankruptcy laws was filed by CCX in 1994.
Daniel Mannino joined ICI as Controller in 1989 and became Vice President
and Controller in 1991. Previously, Mr. Mannino was employed by Vision Cable
from 1983 to 1989, becoming its Controller in 1986.
Gregory B. Graff has served as Senior Vice President, Marketing,
Programming and Advertising of Coaxial since 1997. He joined Coaxial as Vice
President, Marketing and Sales in 1995. Prior to joining Coaxial, Mr. Graff was
Director of Marketing for KBLCOM's Paragon Cable operation in San Antonio,
Texas. He began his cable television career in 1984 with Continental
Cablevision.
MANAGEMENT AND MANAGEMENT COMMITTEE
The Operating Agreement of Insight Ohio provides for the establishment of a
four-member Management Committee. The Management Committee is responsible for
the
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management of the business of Insight Ohio. IHO, through its effective control
of Coaxial, is entitled to designate three of the members of the Management
Committee. The remaining member is designated by the principals of the
Individual LLCs. The Management Committee has delegated broad authority to IHO
in its capacity as manager of Insight Ohio.
ITEM 11. EXECUTIVE COMPENSATION
Coaxial LLC and Coaxial Financing Corp. do not make any payments in respect
of compensation to any of their executive management personnel. Rather,
executive management personnel of Coaxial LLC and Coaxial Financing Corp.
receive compensation from Insight. Accordingly, IHO utilizes its management fees
from Insight Ohio to pay for all of its operating expenses for managing the day-
to-day affairs of the System, as well as executive management salaries, benefits
and overhead.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The outstanding shares of common stock of Coaxial are owned by the
Individual LLCs as described in the table below. All of the outstanding shares
of common stock of Coaxial Financing Corp. and all of the outstanding
partnership interests of Phoenix are wholly-owned directly or indirectly by the
individuals indicated in the footnotes to the table in the same ownership
percentages as the respective Individual LLCs' ownership in Coaxial. IHO is the
manager of each of the Individual LLCs and thereby effectively controls the
business of each of such Individual LLCs and Coaxial. Accordingly, IHO and
members of its executive management may be deemed to beneficially own (as
defined by Rule 13d-3 under the Exchange Act) all of the outstanding shares of
common stock of Coaxial.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER PERCENTAGE OWNERSHIP
------------------------------------ ---------------------
<S> <C>
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%
</TABLE>
_____________
(1) Wholly-owned by Barry Silverstein.
(2) Wholly-owned by Dennis J. McGillicuddy.
(3) Wholly-owned by D. Stevens McVoy.
50
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with the Operating Agreement of Insight Ohio, IHO is entitled
to be paid management fees for managing the day-to-day operations of Insight
Ohio. Pursuant to the Operating Agreement, subject to certain covenants in the
Indentures, IHO is entitled to receive management fees of 3.0% of gross revenues
of Insight Ohio. For the period between August 21, 1998 and December 31, 1998,
IHO received management fees in the amount of $493,000. On a pro forma basis,
IHO would have been paid management fees of approximately $1.4 million for the
year ended December 31, 1998.
IHO is entitled to reimbursement from Insight Ohio for all direct, out-of-
pocket expenses incurred by or on behalf of IHO that directly relate to its
management of the business and operations of Insight Ohio, including any such
expenses incurred in connection with the management of Coaxial LLC and Coaxial
Financing Corp. However, IHO is not entitled to reimbursement from Insight Ohio
for corporate overhead (including employee bonuses and health, welfare,
retirement, and other employee benefits and overhead expenses of its corporate
office management, development, internal accounting, and finance management
personnel). For the period between August 21, 1998 and December 31, 1998,
Insight Ohio reimbursed IHO for out-of-pocket expenses in the amount of
approximately $21,000.
Due to its relationship with MediaOne (formerly Continental Cablevision),
Insight expects to continue to provide programming discounts to the System
through November 1999. After such date, Insight believes that through its
strategic alliances with other major MSOs, utilizing programming cooperatives or
through its own purchasing power, it will be able to continue to obtain
programming for the System at a cost lower than that presently available to
Coaxial.
COAXIAL AND PHOENIX
All of the outstanding shares of Coaxial's capital stock and all of the
outstanding partnership interests in Phoenix are held indirectly by the same
three individuals, Barry Silverstein, Dennis J. McGillicuddy and D. Stevens
McVoy. Coaxial and Phoenix were co-obligors (along with certain other
affiliates) with respect to the Chase Credit Facility. Coaxial and Phoenix
continue to be co-obligors with respect to the Senior Notes.
COAXIAL
Tierra Associates
Coaxial leased office space in a building located at 3770/3776 East
Livingston Avenue, Columbus, Ohio. The building was owned by Tierra Associates,
an Ohio general partnership that was owned by the principals of the Individual
LLCs. Coaxial paid Tierra Associates $108,000 annually pursuant to the lease for
such space. Pursuant to the terms of the Contribution
51
<PAGE>
Agreement, Coaxial acquired title to this building and contributed it to Insight
Ohio upon consummation of the System Acquisition.
MetroComm AxS L.P. ("MetroComm")
MetroComm provides competitive telephone service in the Columbus market.
MetroComm is 50% owned by Time Warner AxS of Columbus L.P. and 50% owned by
MetroComm Inc. (which is owned by Barry Silverstein, Dennis McGillicuddy and D.
Stevens McVoy, who are the sole members of each of their respective Individual
LLCs, and Dan Coy, the chief executive officer of MetroComm). MetroComm
contracted with Coaxial to build the necessary fiber plant needed by MetroComm
to service its customers that were in Coaxial's service area. Coaxial then
leased the fiber plant to MetroComm at a contracted price. In 1997, Coaxial
received $187,180 in fiber lease revenues from MetroComm. MetroComm bought-out
its lease with Coaxial as of June 29, 1998 for approximately $347,000, which was
the remaining balance under the five year lease. The fiber plant continues to be
used by MetroComm under a new 30-year Indefeasible Right of Use Agreement
whereby Coaxial licenses to MetroComm exclusive use of all capacity on specified
fiber optic facilities in exchange for payment to Coaxial of certain maintenance
and other costs. The amount paid by MetroComm to Coaxial for such maintenance
and other costs during the period from June 29, 1998 to December 31, 1998 was
approximately $10,700. The terms of the agreement are typical of arrangements of
competitive telephone service providers that are owned by cable operators. Such
terms may not be comparable to what they would be if the agreement were between
Coaxial and an unrelated third party. Coaxial also provided accounting services
for MetroComm. In 1997, Coaxial received $35,276 for such services. As of
December 31 1998, MetroComm owed Coaxial approximately $26,100.
Paxton Cable Television Inc.
Paxton Cable Television Inc. had a note payable to Coaxial for $2,448,141
(as of June 30, 1998) which accrued interest at the average interest rate
charged by The Chase Manhattan Bank to Coaxial for its long-term financing.
Principal and interest was not due until June 30, 2000. This note was
distributed by Coaxial to its shareholders (the principals of the Individual
LLCs) upon the consummation of the System Acquisition and was not assumed by
Insight Ohio. The distribution of the note to Coaxial's shareholders resulted in
a zero receivable balance from Paxton as of December 31, 1998.
Coaxial Communications of Southern Ohio, Inc.
Coaxial allocated certain management costs to Coaxial Communications of
Southern Ohio, Inc., which is wholly-owned by the principals of the Individual
LLCs. The total amount allocated for 1998 was approximately $102,000. Under a
related party account, $18.5 million was owed by Coaxial to Southern Ohio as of
June 30, 1998. This amount was accumulated over the years as Coaxial borrowed
funds from Southern Ohio for Coaxial's cable system. Upon the contribution of
the System to Insight Ohio, this account was repaid in part and the balance was
settled by a distribution of the account by Southern Ohio to its shareholders
who then contributed
52
<PAGE>
the account to Coaxial, which resulted in a zero payable balance to Southern
Ohio as of December 31, 1998.
Coaxial Associates of Columbus I, Coaxial Associates of Columbus II and
Phoenix
Coaxial Associates of Columbus I ("Columbus I"), Coaxial Associates of
Columbus II ("Columbus II") and Phoenix are non-operating partnerships which
share common ownership and which were co-borrowers and co-obligors under the
Chase Credit Facility. The three entities exist due to several debt and tax
obligations which existed among these entities and former limited partners of
Columbus I and Columbus II. Coaxial funded the debt obligations of these
entities, which do not conduct operations. The result was a series of related
party notes and receivables/payables to and between Coaxial, Columbus I,
Columbus II and Phoenix. These notes and related party receivables/payables with
Coaxial were settled prior to the consummation of the System Acquisition.
Phoenix was a co-issuer of the Senior Notes and Phoenix owns none of the Senior
Notes collateral. All notes and related party receivables/payables with Phoenix
were settled upon the consummation of the System Acquisition excluding certain
amounts and notes due from Columbus I, Columbus II and the partners of Phoenix
(the "Excluded Assets").
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.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Coaxial LLC Report of Independent Auditors - Ernst & Young LLP........................... F-1
Financial Statements:
Coaxial LLC Balance Sheet as of December 31, 1998................................... F-2
Coaxial LLC Statement of Operations and Changes in Member's Equity (Deficit)
for the year ended December 31, 1998................................................ F-3
Coaxial LLC Statement of Cash Flows for the year ended December 31, 1998............ F-4
Coaxial LLC Notes to Consolidated Financial Statements.............................. F-5
Coaxial Financing Corp. Report of Independent Auditors - Ernst & Young LLP............... F-13
Financial Statements:
Coaxial Financing Corp. Balance Sheet as of December 31, 1998....................... F-14
Coaxial Financing Corp. Notes to Balance Sheet...................................... F-15
Coaxial Communications of Central Ohio Report of Independent Public Accountants -
Arthur Andersen LLP...................................................................... F-16
Coaxial Communications of Central Ohio, Inc. Report of Independent Auditors -
Ernst & Young LLP........................................................................ F-17
Financial Statements:
Coaxial Communications of Central Ohio, Inc. Consolidated Balance Sheets at
December 31, 1998 and December 31, 1997............................................. F-18
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of
Operations and Changes in Stockholder's Equity (Deficit) for the years ended
December 31, 1998, 1997, and 1996................................................... F-19
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Cash
Flows for the years ended December 31, 1998, 1997, and 1996......................... F-20
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
Coaxial Communications of Central Ohio, Inc. Notes to Consolidated Financial
Statements.......................................................................... F-21
Phoenix Associates Report of Independent Public Accountants - Arthur Andersen LLP........ F-29
Phoenix Associates Report of Independent Auditors - Ernst & Young LLP.................... F-30
Financial Statements:
Phoenix Associates Balance Sheets at December 31, 1998
and December 31, 1997............................................................... F-31
Phoenix Associates Statements of Operations and Change in Partner's Deficit for
the years ended December 31, 1998, 1997, and 1996................................... F-32
Phoenix Associates Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996................................................................ F-33
Phoenix Associates Notes to Financial Statements.................................... F-34
Insight Communications of Central Ohio, LLC Report of Independent Auditors -
Ernst & Young LLP........................................................................ F-39
Financial Statements:
Insight Communications of Central Ohio, LLC Balance Sheet at December 31,
1998................................................................................ F-40
Insight Communications of Central Ohio, LLC Statements of Operations and
Changes in Members' Deficit for the period from August 21, 1998 (date of
inception) through December 31, 1998................................................ F-41
Insight Communications of Central Ohio, LLC Statements of Cash Flows for the
period from August 21, 1998 (date of inception) through December 31, 1998........... F-42
Insight Communications of Central Ohio, LLC Notes to Consolidated Financial
Statements.......................................................................... F-43
</TABLE>
The following consolidated financial statement schedule of Coaxial LLC is
included in item 14(d):
Report of Independent Auditors - Ernst & Young LLP
Schedule II Valuation and Qualifying Accounts
55
<PAGE>
(B) REPORTS ON FORM 8-K:
None.
(C) EXHIBITS
2.1 Contribution Agreement by and between Insight Holdings of Ohio, LLC, as
assignee of Insight Communications Company, L.P., and Coaxial
Communications of Central Ohio, Inc. dated as of June 30, 1998 (the
"Contribution Agreement")*
2.2 Amendment to Contribution Agreement dated as of July 15, 1998*
2.3 Second Amendment to Contribution Agreement dated as of August 21, 1998*
3.1 Certificate of Incorporation of Coaxial Financing Corp., filed July 24,
1998*
3.2 By-Laws of Coaxial Financing Corp.*
3.3 Certificate of Formation of Insight Communications of Central Ohio, LLC
filed July 23, 1998*
3.4 Operating Agreement of Insight Communications of Central Ohio, LLC dated
August 21, 1998*
3.5 Certificate of Formation of Coaxial LLC filed July 24, 1998*
3.6 Operating Agreement of Coaxial LLC dated August 21, 1998*
3.7 Certificate of Formation of Coaxial DSM LLC filed July 24, 1998*
3.8 Operating Agreement of Coaxial DSM LLC dated August 21, 1998*
3.9 Certificate of Formation of Coaxial DJM LLC filed July 24, 1998*
3.10 Operating Agreement of Coaxial DJM LLC dated August 21, 1998*
4.1 Purchase Agreement among Coaxial LLC, Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC and CIBC Oppenheimer Corp. dated
August 21, 1998*
4.2 Senior Discount Notes Registration Rights Agreement among Coaxial LLC,
Coaxial Financing Corp., Insight Communications of Central Ohio, LLC and
CIBC Oppenheimer Corp. dated August 21, 1998*
4.3 Indenture among Coaxial LLC, Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC and Bank of Montreal Trust Company
dated August 21, 1998*
56
<PAGE>
4.4 Securities Pledge Agreement between Coaxial Communications of Central
Ohio, Inc. and Bank of Montreal Trust Company dated August 21, 1998*
4.5 Securities Pledge Agreement between Coaxial LLC and Bank of Montreal
Trust Company dated August 21, 1998*
4.6 Securities Pledge Agreement between Coaxial DSM LLC and Coaxial LLC
dated August 21, 1998*
4.7 Securities Pledge Agreement between Coaxial DJM LLC and Coaxial LLC
dated August 21, 1998*
4.8 Mirror Note of Coaxial DJM LLC payable to the order of Coaxial LLC dated
August 21, 1998*
4.9 Mirror Note of Coaxial DSM LLC payable to the order of Coaxial LLC dated
August 21, 1998*
10.1 Close Corporation Agreement of Coaxial Communications of Central Ohio,
Inc. dated August 21, 1998 among Coaxial LLC, Coaxial DSM LLC, Coaxial
DJM LLC and Coaxial Communications of Central Ohio, Inc.*
10.2 Management Agreement of Coaxial LLC dated August 21, 1998 among Insight
Holdings of Ohio, LLC, Coaxial LLC and Barry Silverstein*
10.3 Management Agreement of Coaxial DSM LLC dated August 21, 1998 among
Insight Holdings of Ohio, LLC, Coaxial DSM LLC and D. Stevens McVoy*
10.4 Management Agreement of Coaxial DJM LLC dated August 21, 1998 among
Insight Holdings of Ohio, LLC, Coaxial DJM LLC and Dennis J.
McGillicuddy*
10.5 Management Agreement between Coaxial Communications of Central Ohio,
Inc. and Insight Communications of Central Ohio, LLC dated August 21,
1998*
10.6 Assignment Agreement dated as of August 21, 1998 among CIBC Oppenheimer
Corp., the lenders who were a party to the Chase Credit Facility, The
Chase Manhattan Bank, as agent for such lenders, Coaxial Communications
of Central Ohio, Inc., Phoenix Associates, Coaxial Associates of
Columbus I, Coaxial Associates of Columbus II and Coaxial Associates of
Southern Ohio, Inc.*
10.7 Revolving Credit Agreement dated as of October 7, 1998 among Insight
Communications of Central Ohio, LLC, several banks and financial
institutions or entities, and Canadian Imperial Bank of Commerce, as
administrative agent*
16.1 Letter from Arthur Andersen LLP
27.1 Financial Data Schedule for Coaxial LLC
27.2 Financial Data Schedule for Coaxial Financing Corp.
57
<PAGE>
27.3 Financial Data Schedule for Insight Communications of Central Ohio, LLC
27.4 Financial Data Schedule for Coaxial Communications of Central Ohio, Inc.
27.5 Financial Data Schedule for Phoenix Associates
_____________
* Denotes document filed as an exhibit to Registrants' Registration Statement
on Form S-4 (File Nos. 333-64449-02, 333-64449-01 and 333-64449) and
incorporated herein by reference.
58
<PAGE>
Report of Independent Auditors
The Member
Coaxial LLC
We have audited the accompanying balance sheet of Coaxial LLC as of December 31,
1998, and the related statements of operations and member's equity (deficit) and
cash flows for year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coaxial LLC at December 31,
1998, and the results of its operations and its cash flows for year then ended,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
April 5, 1999
F-1
<PAGE>
Coaxial LLC
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................................................................. $ 8,708,553
Subscriber receivables, less allowance for doubtful accounts of $306,000.............................. 1,185,646
Other accounts receivable, less allowance for doubtful accounts of $145,000........................... 1,520,301
Prepaid expenses and other current assets............................................................. 166,347
------------
Total current assets.................................................................................. 11,580,847
PROPERTY AND EQUIPMENT, at cost:
Land and Land Improvements............................................................................ 260,000
CATV systems.......................................................................................... 71,031,956
Equipment............................................................................................. 7,102,002
Furniture............................................................................................. 333,026
Leasehold improvements................................................................................ 71,360
------------
78,798,344
Less-Accumulated depreciation and amortization........................................................ (46,898,251)
------------
Total property and equipment, net..................................................................... 31,900,093
INTANGIBLE ASSETS, at cost:
Franchise costs....................................................................................... 7,385,000
Deferred financing costs and other.................................................................... 2,712,240
------------
10,097,240
Less-Accumulated amortization......................................................................... (7,436,251)
------------
Total intangible assets, net.......................................................................... 2,660,989
Note Receivable Coaxial DJM LLC....................................................................... 6,750,000
Note Receivable Coaxial DSM LLC....................................................................... 3,000,000
Due from related parties.............................................................................. 640,113
------------
Total Other Assets.................................................................................... 13,051,102
------------
Total assets.......................................................................................... $ 56,532,042
============
LIABILITIES AND MEMBER'S DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations.......................................................... $ 123,187
Accounts payable...................................................................................... 3,229,719
Accrued interest...................................................................................... 1,249,889
Accrued liabilities................................................................................... 4,404,317
------------
Total current liabilities............................................................................. 9,007,112
NOTES PAYABLE:
Senior Discount Notes................................................................................. 31,510,665
Senior Notes.......................................................................................... 34,435,092
------------
Total notes payable................................................................................... 65,945,757
Capital Lease Obligations............................................................................. 105,271
Other liabilities..................................................................................... 1,145,867
Due to related parties................................................................................ 1,029,369
------------
Total liabilities..................................................................................... 77,233,376
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT...................................................................................... (20,701,334)
------------
Total liabilities and member's deficit............................................................... $ 56,532,042
============
</TABLE>
See accompanying notes
F-2
<PAGE>
Coaxial LLC
Statement of Operations and Changes in Member's Equity (Deficit)
For the year ended December 31, 1998
<TABLE>
<S> <C>
REVENUES.................................................... $ 47,955,737
OPERATING EXPENSES:
Service and administrative.................................. 29,694,622
Severance and transaction structure costs................... 4,822,078
Depreciation and Amortization............................... 5,311,198
-------------
Total operating expenses.................................... 39,827,898
-------------
OPERATING INCOME............................................ 8,127,839
OTHER EXPENSES.............................................. (421,420)
INTEREST INCOME (EXPENSE), net
Interest income--related parties............................ 3,337,630
Interest income............................................. 34,919
Interest expense--related parties........................... (1,019,299)
Interest expense............................................ (5,031,166)
-------------
Total interest expense, net................................. (2,677,916)
-------------
NET INCOME BEFORE EXTRAORDINARY LOSS........................ 5,028,503
-------------
Extraordinary Loss on Extinguishment of Debt................ 846,641
-------------
NET INCOME.................................................. 4,181,862
MEMBER'S EQUITY, beginning of year.......................... 54,326,906
MEMBER DISTRIBUTIONS........................................ (101,772,993)
MEMBER CONTRIBUTIONS........................................ 22,562,891
-------------
MEMBER'S DEFICIT, end of year............................... $ (20,701,334)
=============
</TABLE>
See accompanying notes
F-3
<PAGE>
Coaxial LLC
Statement of Cash Flows
For the year ended December 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 4,181,862
Adjustments to reconcile Net Income to
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and Amortization......................................................... 5,531,861
Extraordinary loss on refinancing of debt............................................. 846,641
Accretion of original issue discount on Senior Discount Notes......................... 1,510,665
Changes in certain assets and liabilities.............
Subscriber receivables................................................................ (524,463)
Other accounts receivable, prepaid expenses and other current assets.................. (422,804)
Accounts payable and accrued liabilities.............................................. 1,926,643
------------
Net cash provided by operating activities............................................. $ 13,050,405
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property and equipment...................................... $ 11,315
Capital expenditures for property and equipment....................................... (7,369,406)
Due from related parties.............................................................. 3,887,871
------------
Net cash used in investing activities................................................. $ (3,470,220)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note Receivable, Coaxial DSM LLC...................................................... (3,000,000)
Note Receivable, Coaxial DJM LLC...................................................... (6,750,000)
Proceeds from issuance of notes payable............................................... 64,435,092
Principal payments on notes payable................................................... (26,807,817)
Deferred Financing Costs.............................................................. (2,712,241)
Payments on capital lease obligations................................................. (178,839)
Capital contributions................................................................. 12,000,000
Due to related parties................................................................ (19,482,780)
Capital distributions................................................................. (18,949,111)
------------
Net cash used in financing activities................................................. $ (1,445,696)
------------
NET INCREASE IN CASH.................................................................. 8,134,489
CASH, beginning of year............................................................... 574,064
CASH, end of year..................................................................... $ 8,708,553
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for interest................................................................ $ 3,924,241
</TABLE>
See accompanying notes
F-4
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS ORGANIZATION AND PURPOSE
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67.5% of the common stock of Coaxial
Communications of Central Ohio, Inc. ("Coaxial"). The Company has an individual
as its sole member.
Coaxial, an Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio ("Insight Ohio"), operates a cable television
system which provides basic and expanded cable television services to homes in
Columbus, Ohio and surrounding areas. In connection with the contribution of
Coaxial's cable system to Insight Ohio described below, the issuance of the
senior notes described in Note 6, and the issuance of the senior discount notes
by the Company during 1998, the three individuals who previously owned the
outstanding stock of Coaxial contributed their stock to three separate limited
liability companies including the Company. Accordingly, effective August 21,
1998, the Company owns 67 1/2% of the outstanding stock of Coaxial. The Company
has accounted for the aforementioned contribution in a manner similar to a
pooling-of-interests, which is in accordance with Interpretation No. 39 to APB
Opinion No. 16 "Business Combinations". Accordingly, the accompanying financial
statements reflect the contribution of Coaxial as if it had occured as of
January 1, 1998.
Other related entities owned or controlled by the majority shareholder of the
Company include Phoenix Associates ("Phoenix"), Coaxial Communications of
Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of Columbus I
("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"), Paxton Cable
Television, Inc. ("Paxton Cable") and Paxton Communications, Inc. ("Paxton
Communications").
On June 30, 1998, Coaxial and Insight Communications Company, L.P. ("Insight")
entered into a contribution agreement (the "Contribution Agreement") pursuant to
which on August 21, 1998, Coaxial contributed substantially all of the assets
and liabilities comprising its cable system to a newly formed, subsidiary,
Insight Ohio. In connection therewith, Insight Holdings of Ohio, LLC ("IHO"), a
wholly owned subsidiary of Insight, contributed $10 million in cash to Insight
Ohio. As a result of this Contribution Agreement, Coaxial owns 25% of the non-
voting common equity and Insight owns 75% of the non-voting common equity of
Insight Ohio. Coaxial also owns two separate series of voting preferred equity
(a $140 million preferred equity interest and a $30 million preferred equity
interest) of Insight Ohio. The voting preferred equity interest will provide for
distributions to Coaxial, Phoenix and the Company in amounts equal to the
payments required on the senior and senior discount notes described in Note 6.
IHO serves as the manager of Insight Ohio.
As a result of the transaction described above, Coaxial incurred severance costs
and transaction structure costs totaling $4,822,078, which have been reflected
in the accompanying statements of operations.
The Company and Coaxial Financing Corp. are co-issuers of notes payable
described in Note 6(e). Coaxial and Phoenix are co-issuers of the notes payable
described in Note 6(b). The ability of Coaxial Financing Corp., the Company,
Coaxial, and Phoenix to make scheduled payments with respect to the senior and
senior discount notes is dependent on the financial and operating performance of
Insight Ohio. The required distributions on the Series A and Series B Preferred
Interests to Coaxial are designed to provide the cash flow necessary to service
the debt service requirements on the senior and senior discount notes.
F-5
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company,
Coaxial, and Insight Ohio. All intercompany balances have been eliminated in
consolidation. At December 31, 1998, Coaxial had a shareholders' deficiency and
Insight Ohio had a members' deficiency. Accordingly, the accompanying financial
statements do not include any minority interest liabilities.
CASH
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUES
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on and off balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current asset and
liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
At December 31, 1998, the carrying value of the notes receivable from Coaxial
DJM LLC and Coaxial DSM LLC and the senior and senior discount notes approximate
their fair value.
REVENUE RECOGNITION
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1998, the
Company had no significant concentrations of credit risk.
F-6
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
At December 31, 1998 the Company had net assets held under capital leases of
$228,458.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate primarily to legal fees and bank facility fees
incurred to negotiate and secure long term financing (see Note 6). These costs
are being amortized on a straight-line basis over the life of the applicable
loans. In connection with the issuance of the senior and senior discount notes
(see note 6), the Company repaid the outstanding indebtedness under its prior
debt facility. Accordingly, the accompanying statement of operations for the
year ended December 31, 1998 includes an extraordinary loss of $846,641 on early
extinguishment of such debt. The Company amortized to interest expense deferred
financing costs of approximately $88,000 in 1998.
HOME OFFICE EXPENSES
Home office expenses of approximately $1,371,000 (included in selling and
administrative expenses) includes billings for legal fees, management fees,
salaries, travel and other management expenses for services provided by an
affiliated services company. Effective August 21, 1998, IHO provides such
services for which it earns a management fee (see note 5).
F-7
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $2,152,000 for the
year ended December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
3. INCOME TAXES
The Company is a limited liability company. Therefore, its sole member reports
the income or loss on his income tax return. As a result, the Company does not
provide for Federal or state income taxes in its accounts. In the event that the
limited liability company election is terminated, deferred taxes related to book
and tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
member is limited to his respective investment.
4. 401(K) PLAN
The Company sponsors various 401(k) Plan (the "Plans") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employee's wages. Company
contributions to the Plans approximated $145,000 for the year ended 1998.
5. RELATED PARTY TRANSACTIONS
Effective August 21, 1998, Insight Ohio entered into a management agreement with
IHO which will allow IHO to manage the operations of Insight Ohio. The
management fee is 3% of gross operating revenues. Fees under this management
agreement were approximately $493,000 for the period from August 21, 1998 to
December 31, 1998.
The Company also pays rent to a partnership owned by Coaxial's shareholders for
two facilities. Total charges for rent was $63,000 for the year ended December
31, 1998.
The Company had a receivable from a related party at December 31, 1997 of
$98,584 relating to the leasing of fiber optic facilities. On June 29, 1998, the
related party bought out the lease for approximately $347,000.
F-8
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS (CONTINUED)
At December 31, 1997, Coaxial had advanced funds to related entities, totaling
$76,261,666, and received advances from related entities, totaling $17,088,121,
for working capital and debt service requirements. During August 1998, in
connection with the contribution of the System to Insight Ohio and the issuance
of the senior and senior discount notes described in Note 6, these amounts were
settled. Coaxial recognized interest income of approximately $2,846,304 for the
year ended December 31, 1998. Coaxial recognized interest expense of
approximately $1,019,300 for the year ended December 31, 1998.
In connection with the issuance of the senior discount notes described in Note
6(e), The Company loaned $9,750,000 of the proceeds from the senior discount
notes to two related entities. The terms of the notes receivable mirror the
terms of the senior discount notes.
Other related party transactions are described in Note 6.
6. NOTES PAYABLE
Notes payable at December 31, 1998 and December 31, 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------
Lender
------
<S> <C> <C>
Columbus I(a) - $ 2,467,137
Columbus II(a) - 466,099
---------------------------------------------
Total related parties - 2,933,236
Banks(c) - 24,760,937
Retired officer(d) - 2,046,880
Senior Notes(b) $34,435,092 -
Senior discount notes(e) 31,510,665 -
---------------------------------------------
Total all notes payable $65,945,757 $29,741,053
=============================================
</TABLE>
_______
(a) In November, 1982, Columbus I and Columbus II exchanged all of their assets
and certain liabilities with Coaxial for common stock and notes. These
notes bore interest at a rate of 20% and had been scheduled to mature on
October 31, 1997. A portion of these notes ($5,066,764) had been assigned
and was payable to the former Limited Partners of Columbus I and Columbus
II as part of their consideration when they sold their partnership interest
to the General Partners. The maturity date of the remaining notes (payable
to Columbus I and Columbus II) was extended to October 31, 2002. Interest
expense was approximately $375,300 for the year ended December 31, 1998
related to the notes payable. During 1998, these notes payable were
settled.
F-9
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE (CONTINUED)
(b) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15, commencing
on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interests in Insight Ohio. The Series A Preferred
Interests have a liquidation preference of $140.0 million and pay
distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are owned by Coaxial and are
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions
made by Insight Ohio on the Series A Preferred Interests to make payments
on the Senior Notes. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to: incur additional indebtedness; pay
dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the Senior Notes or Discount Notes, respectively; and swap
assets. In connection with the issuance of the Senior Notes, the Company
incurred financing fees of $1,147,193 that are being amortized over the
life of the Senior Notes. Coaxial, as joint and several issuer, with
Phoenix, of the Senior Notes, provides the funding that will allow Phoenix
to repay its share of the notes payable, as Phoenix has no operations.
Amortization expense for deferred financing costs related to the Senior
Notes at December 31, 1998 was $51,945. Interest expense on Coaxial's
portion of the Senior Notes was $1,249,889 for the year ended December 31,
1998.
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
group of banks and other financial institutions. The Senior Credit Facility
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the
upgrade of the System's cable plant and for the introduction of new video
services. The Senior Credit Facility has a six-year maturity, with
reductions to the amount of the commitment commencing after three years.
The amount available for borrowing is reduced by any outstanding letter of
credit obligations. Insight Ohio's obligations under the Senior Credit
Facility are secured by substantially all the tangible and intangible
assets of Insight Ohio. Loans under the Senior Credit Facility bear
interest, at Insight Ohio's option, at the prime rate or at a Eurodollar
rate. In addition to the index rates, Insight Ohio pays an additional
margin percentage tied to its ratio of total debt to adjusted annualized
operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including distributions on the Preferred Interests that are required to pay
the Senior Notes and the Discount Notes in the event of a payment default
under the Senior Credit Facility, create liens on assets, make investments,
make acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
certain activities. In addition, the Senior Credit Facility requires
compliance with certain financial ratios, including with respect to total
leverage, interest coverage and pro forma debt service coverage.
F-10
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE (CONTINUED)
Management does not expect that such covenants will materially impact the
ability of Insight Ohio to operate its business. As of December 31, 1998,
no amounts were drawn on the Senior Credit Facility.
(c) On November 15, 1994, Coaxial, Phoenix, Southern Ohio, Columbus I and
Columbus II (collectively referred to as the borrowers), executed a loan
agreement with a lead bank and several other financial institutions. In
connection with the Senior Note issuance the Company repaid all the
outstanding balances under the loan agreement and recognized an
extraordinary loss of $846,641 relating to the refinancing of debt.
Amortization expense for deferred financing costs related to this bank debt
for the year ended December 31, 1998 was $442,840. Interest expense on this
facility was approximately $1,537,100 for the year ended December 31, 1998.
The funds borrowed under the loan agreement were allocated to the following
entities as of December 31,1997:
<TABLE>
<CAPTION>
Revolving
Entity Term Loan Loan
-----------------------------------------------------------------------------
<S> <C> <C>
Coaxial $ 16,760,937 $ 8,000,000
Phoenix 105,925,208 -
Southern Ohio 20,568,238 8,000,000
Columbus I 2,385,682 -
Columbus II 1,359,935 -
---------------------------------
Total $147,000,000 $16,000,000
=================================
</TABLE>
(d) In January 1996, Coaxial issued an unsecured note payable to a key officer
for deferred compensation. The officer retired in 1997. The related note
payable was paid during 1998 pursuant to the Contribution Agreement.
(e) On August 21, 1998, the Company and Coaxial Financing Corp., a related
entity, issued senior discount notes ("Senior Discount Notes") due 2008.
The Senior Discount Notes have a face amount of $55,869,000 and
approximately $30 million of gross proceeds were received upon issuance.
Approximately $19.5 million of the gross proceeds were contributed by the
sole member of the Company to certain related entities to repay the
indebtedness. Approximately, $9,750,000 was loaned to two related entities
by the Company, which then contributed that amount to certain other related
entities to repay indebtedness. The debt discount of $25,868,000 is being
amortized over five years (until August 15, 2003). Thereafter, interest on
the Senior Discount Notes accrues at 12 7/8% and is payable semi-annually.
All of the Senior Discount Notes were allocated to the Company.
The Senior Discount Notes are non-recourse, secured by all of the common
stock of Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM
LLC to the Company and conditionally guaranteed by Insight Ohio, a
subsidiary of Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. Coaxial Financing Corp.,
and the Company were in compliance with these covenants as of December 31,
1998.
F-11
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE (CONTINUED)
(e) (continued)
The ability of Coaxial Financing Corp., and the Company to make scheduled
payments with respect to the Senior Discount Notes will depend on the
financial and operating performance of Insight Ohio. The required payments
on the Series B Preferred Interests equal the distributions to be made by
Coaxial to the Company to service the Senior Discount Notes.
7. OPERATING LEASE AGREEMENTS
The Company leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $105,700 for the year
ended 1998. These amounts exclude year-to-year utility pole leases of $191,100
which provide for payments based on the number of poles used.
Minimum rental commitments required under non-cancelable operating leases are as
follows:
<TABLE>
<S> <C>
1999 $38,400
2000 26,400
2001 and thereafter 200
-----------
$65,000
===========
</TABLE>
8. CAPITAL LEASE AGREEMENTS
Coaxial leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under the leases are as follows:
<TABLE>
<CAPTION>
For the years ending December 31,
<S> <C>
1999 $ 138,909
2000 81,174
2001 30,225
2002 3,003
-----------
253,311
Less: Amount representing interest (24,853)
Less: Current portion of capital lease obligations (123,187)
-----------
Long-term capital lease obligations $ 105,271
===========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company is party or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
of financial position.
F-12
<PAGE>
Report of Independent Auditors
The Shareholders
Coaxial Financing Corp.
We have audited the accompanying balance sheet of Coaxial Financing Corp. as of
December 31, 1998. The balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on the balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Coaxial Financing Corp. at December
31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
April 5, 1999
F-13
<PAGE>
COAXIAL FINANCING CORP.
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Cash $1,000
--------
Total Assets $1,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior Discount Notes (to be paid by $ -
Coaxial LLC - See Note 2)
--------
Total Liabilities -
Common stock, $.01 par value; 1,000 shares authorized, 1,000 shares issued and outstanding 10
Additional paid-in capital 990
--------
Total liabilities and shareholders' equity $1,000
========
</TABLE>
See accompanying notes
F-14
<PAGE>
COAXIAL FINANCING CORP.
NOTES TO BALANCE SHEET
DECEMBER 31, 1998
1. Nature of Business
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on
July 24, 1998 for the sole purpose of being a co-issuer of the discount notes
described in Note 2, which allows certain investors the ability to be holders of
the debt. The Company has no operations. Three individuals own the outstanding
shares of the Company.
2. NOTES PAYABLE
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior
Discount Notes ("Discount Notes") due 2008. The Discount Notes have a face
amount of $55,869,000 and approximately $30 million of gross proceeds were
received upon issuance. Approximately $19.5 million of the gross proceeds were
contributed by the sole member of Coaxial LLC to certain related entities to
repay indebtedness. Approximately $9,750,000 was loaned to two related entities
("Coaxial DJM LLC" and "Coaxial DSM LLC") by Coaxial LLC, which then contributed
that amount to certain other related entities to repay indebtedness. The debt
discount of $25,869,000 is being amortized over five years (until August 15,
2003). Interest on the Discount Notes accrues at 12 7/8% and is payable semi-
annually. All of the Discount Notes were allocated to Coaxial LLC.
The Discount Notes are non-recourse, secured by all of the common stock of
Coaxial Communications of Central Ohio, Inc. ("Coaxial") and the notes issued by
Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally guaranteed
by Insight Communications of Central Ohio, LLC ("Insight Ohio"), a subsidiary of
Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. The Company and Coaxial LLC
were in compliance with these covenants as of December 31, 1998.
The ability of the Company and Coaxial LLC to make scheduled payments with
respect to the Discount Notes will depend on the financial and operating
performance of Insight Ohio.
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheet of Coaxial Communications of
Central Ohio, Inc. (an Ohio operation) as of December 31, 1997, and the related
statements of operations and changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Coaxial Communications of
Central Ohio, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998
F-16
<PAGE>
Report of Independent Auditors
The Shareholders
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheet of Coaxial Communications of
Central Ohio, Inc. as of December 31, 1998, and the related statements of
operations and shareholder's deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coaxial Communications of
Central Ohio, Inc. at December 31, 1998, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
New York, New York
April 5, 1999
F-17
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash............................................................................... $ 8,708,553 $ 574,064
Subscriber receivables, less allowance for doubtful accounts
of $306,000 and $202,000 in 1998 and 1997.......................................... 1,185,646 661,183
Other accounts receivable, less allowance for doubtful accounts
of $145,000 and $172,000 in 1998 and 1997.......................................... 1,520,301 1,040,582
Prepaid expenses and other current assets.......................................... 166,347 223,262
------------ ------------
Total current assets............................................................... 11,580,847 2,499,091
PROPERTY AND EQUIPMENT, at cost:
Land and Land Improvements......................................................... 260,000 -
CATV systems....................................................................... 71,031,956 64,949,357
Equipment.......................................................................... 7,102,002 7,082,619
Furniture.......................................................................... 333,026 246,232
Leasehold improvement.............................................................. 71,360 220,231
------------ ------------
78,798,344 72,498,439
Less-Accumulated depreciation and amortization..................................... (46,898,251) (42,699,293)
------------ ------------
Total property and equipment, net.................................................. 31,900,093 29,799,146
INTANGIBLE ASSETS, at cost:
Franchise costs.................................................................... 7,385,000 7,385,000
Deferred financing costs and other................................................. 1,447,334 2,661,399
------------ ------------
8,832,334 10,046,399
Less-Accumulated amortization...................................................... (7,399,733) (8,951,090)
------------ ------------
Total intangible assets, net....................................................... 1,432,601 1,095,309
DUE FROM RELATED PARTIES........................................................... 149,321 76,261,666
------------ ------------
Total assets....................................................................... $ 45,062,862 $109,655,212
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable................................................... $ - $ 369,860
Current portion of capital lease obligations....................................... 123,187 213,103
Accounts payable................................................................... 3,229,719 2,804,766
Accrued interest................................................................... 1,249,889 1,690,147
Accrued liabilities................................................................ 4,404,317 3,596,922
------------ ------------
Total current liabilities.......................................................... 9,007,112 8,674,798
NOTES PAYABLE:
Senior Notes....................................................................... 34,435,092 -
Affiliated entities................................................................ - 2,933,236
Other.............................................................................. - 26,437,957
------------ ------------
Total notes payable................................................................ 34,435,092 29,371,193
Capital Lease Obligations.......................................................... 105,271 194,194
Other Liabilities.................................................................. 1,145,867 -
Due to related parties............................................................. 1,029,369 17,088,121
------------ ------------
Total liabilities.................................................................. 45,722,711 55,328,306
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 1998 and 1997; $1 par value.............................. 1,080 1,080
Paid-in capital.................................................................... 11,501,170 9,501,170
Retained earnings (deficit)........................................................ (12,162,099) 44,824,656
------------ ------------
Total shareholders' equity (deficit)............................................... (659,849) 54,326,906
Total liabilities and shareholders' equity (deficit)............................... $ 45,062,862 $109,655,212
============ ============
</TABLE>
See accompanying notes
F-18
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Operations and Changes in Shareholder's Equity
(Deficit)
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
TOTAL REVENUES.......................... 47,955,737 48,229,487 50,417,825
OPERATING EXPENSES:
Service and administrative.............. 29,694,622 28,889,394 26,932,679
Severance and transaction structure
costs.................................. 4,822,078 - -
Depreciation and amortization........... 5,311,198 5,256,142 5,349,810
-------------------------------------------------------------
Total operating expenses................ 39,827,898 34,145,536 32,282,489
-------------------------------------------------------------
OPERATING INCOME........................ 8,127,839 14,083,951 18,135,336
OTHER EXPENSES.......................... (421,420) (321,732) (320,456)
OTHER INCOME............................ - 50,276 72,072
INTEREST INCOME (EXPENSE), net..........
Interest income--related parties........ 2,846,304 4,296,510 5,210,678
Interest income......................... 34,919 69,990 29,449
Interest expense--related parties....... (1,019,299) (2,412,417) (2,639,915)
Interest expense........................ (3,483,983) (3,183,800) (3,026,260)
-------------------------------------------------------------
Total interest expense, net............. (1,622,059) (1,229,717) (426,048)
-------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 6,084,360 12,582,778 17,460,904
Extraordinary loss on extinguishment
of debt................................ 846,641 - -
-------------------------------------------------------------
NET INCOME 5,237,719 12,582,778 17,460,904
SHAREHOLDERS' EQUITY, beginning of year 54,326,906 42,332,295 37,018,958
CAPITAL DISTRIBUTIONS................... (82,787,365) (588,167) (12,147,567)
SHAREHOLDER CONTRIBUTIONS............... 22,562,891 - -
-------------------------------------------------------------
SHAREHOLDERS' (DEFICIT) EQUITY, end of
year................................... $ (659,849) $54,326,906 $ 42,332,295
=============================================================
EARNINGS PER COMMON SHARE:
Basic and diluted....................... $ 4,850 $ 11,651 $ 16,168
=============================================================
Weighted average number of common
shares.................................. 1,080 1,080 1,080
=============================================================
</TABLE>
See accompanying notes
F-19
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 5,237,719 $ 12,582,778 $ 17,460,904
Adjustments to reconcile Net Income to
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization....................... 5,531,861 5,805,111 5,857,277
Extraordinary loss on extinguishment of debt........ 846,641 - -
Loss on disposals of property and equipment......... - 77,452 69,187
Changes in operating assets and liabilities.........
Subscriber receivables.............................. (524,463) 182,395 (252,414)
Other accounts receivable, prepaid expenses and other
current assets...................................... (422,804) 324,515 580,500
Accounts payable.................................... 424,953 421,658 (361,633)
Accrued interest.................................... (440,258) 175,521 39,320
Accrued liabilities................................. 1,941,947 (691,513) 1,026,569
Deferred compensation............................... - (255,808) (41,260)
Deferred income..................................... - - (9,613)
----------------- ------------- -------------
Net cash provided by operating activities........... $ 12,595,596 $ 18,622,109 $ 24,368,837
----------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and
equipment........................................... (7,369,406) (5,570,385) (5,998,166)
Proceeds from disposal of property and equipment.... 11,315 25,753 17,667
Due from related parties............................ 3,887,871 (9,697,288) (13,570,306)
----------------- ------------- -------------
Net cash used in investing activities............... $ (3,470,220) $(15,241,920) $(19,550,805)
----------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............. 34,435,092 750,000 5,500,000
Principal payments on notes payable................. (26,807,817) (5,680,764) (2,114,000)
Costs incurred in debt financing.................... (1,447,335) (117,064) -
Principal payments on capital lease obligations..... (178,839) (264,649) (234,630)
Contributions to Capital of Insight Ohio............ 10,000,000 - -
Capital distributions............................... - (588,167) (12,147,567)
Capital contributions......... 2,000,000
(Decrease) Increase in amounts due to related
parties............................................ (18,991,988) 2,188,723 4,414,315
----------------- ------------- -------------
Net cash used in financing activities............... $ (990,887) $ (3,711,921) $ (4,581,882)
----------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH..................... 8,134,489 (331,732) 236,150
CASH, beginning of year............................. 574,064 905,796 669,646
----------------- ------------- -------------
CASH, end of year................................... $ 8,708,553 $ 574,064 $ 905,796
================= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest 3,924,241 $ 2,390,851 $ 2,315,231
Capital Leases - 56,707 198,985
Deferred Compensation - - 2,343,594
</TABLE>
See accompanying notes
F-20
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. BUSINESS ORGANIZATION AND PURPOSE
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio LLC ("Insight Ohio"), operates a cable television
system which provides basic and expanded cable television services to homes in
the eastern parts of Columbus, Ohio and surrounding areas. In connection with
the contribution of the Company's cable system described below, the issuance of
the Senior Notes described in Note 7(b), and the issuance of the Discount Notes
by the Company's majority shareholder, during 1998 the three individuals who
previously owned the outstanding stock of the Company contributed their stock to
three separate limited liability companies. Accordingly, at December 31, 1998,
the Company was a subsidiary of Coaxial LLC, which owns 67 1/2% of its
outstanding stock.
Other related entities affiliated with Coaxial include Coaxial LLC, Coaxial
Financing Corp., Coaxial DJM LLC, Coaxial DSM LLC, Phoenix Associates
("Phoenix"), Coaxial Communications of Southern Ohio, Inc. ("Southern Ohio"),
Coaxial Associates of Columbus I ("Columbus I"), Coaxial Associates of Columbus
II ("Columbus II"), Paxton Cable Television, Inc. ("Paxton Cable") and Paxton
Communications, Inc. ("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to Insight Ohio, a newly formed subsidiary. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns two
separate series of voting preferred equity (a $140 million preferred equity
interest and a $30 million preferred equity interest) of Insight Ohio. The
voting preferred equity interest will provide for distributions to Coaxial,
Phoenix and Coaxial, LLC in amounts equal to the payments required on the senior
and senior discount notes described in Note 7. IHO serves as the manager of
Insight Ohio.
As a result of the transaction described above, the Company incurred severance
costs and transactions structuring costs totaling $4,822,078, which have been
reflected in the accompanying statements of operations.
PRINCIPLES OF CONSOLIDATION
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at December 31, 1998, the accompanying financial statements include the accounts
of Insight Ohio. All intercompany balances have been eliminated in
consolidation. At December 31, 1998, Insight Ohio had a members' deficiency,
accordingly, the accompanying financial statements do not include a minority
interest liability for Insight's 75% common equity interest in Insight Ohio.
CASH
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-21
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on and off balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current asset and
liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
At December 31, 1998, the carrying value of the Senior Notes approximate their
fair value. At December 31,1997, the carrying amounts of the loan agreement
debt, including term loans and revolving credit loans, approximate fair value as
the underlying instruments were at variable rates that re-priced frequently. At
December 31, 1997, the fair value of notes receivable from related parties and
notes payable to related parties cannot be reasonably and practicably estimated
due to the unique nature of the related underlying transactions and terms. Refer
to Notes 6 and 7 for a discussion of the relative terms. However, given the
terms and conditions of these instruments, if these financial instruments were
with unrelated parties, interest rates and payment terms could be substantially
different than the currently stated rates and terms. The majority of the related
party receivables and payables at December 31, 1997 were settled at their face
value in connection with the contribution agreement and issuance of the senior
and senior discount notes during 1998.
REVENUE RECOGNITION
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1998, the
Company had no significant concentrations of credit risk.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
At December 31, 1998 the Company had net assets held under capital leases of
$228,458.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
F-22
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate to costs, primarily legal fees and bank facility
fees incurred to negotiate and secure long term financing (see note 7). These
costs are being amortized on a straight-line basis over the life of the
applicable loans. In connection with the issuance of the Senior Notes (see note
7), the Company repaid the outstanding indebtedness under its prior debt
facility. Accordingly, the accompanying statement of operations for the year
ended December 31, 1998 includes an extraordinary loss of $846,641 on early
extinguishment of such debt. The Company amortized to interest expense deferred
financing costs of approximately $52,000, $549,000 and $508,000 in 1998, 1997,
and 1996, respectively.
HOME OFFICE EXPENSES
Home office expenses of approximately $1,371,000, $1,498,000, and $1,697,000 in
1998, 1997 and 1996 (included in selling and administrative expenses) include
billings for legal fees, management fees, salaries, travel and other management
expenses for services provided by an affiliated services company. Effective
August 21, 1998, IHO provides such services for which it earns a management fee
(see note 6).
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $2,152,000,
$1,025,000, and $1,060,000 in 1998, 1997 and 1996, respectively.
EARNINGS PER SHARE
In 1998, the Company adopted SFAS No. 128, "Earnings per Share" ("SFAS No.
128"), which established new standards for computing and presenting earnings per
share was effective for financial statements issued for periods ending after
December 15, 1997. Prior periods have been restated to reflect the adoption of
SFAS No. 128 which did not have a significant impact upon the Company's earnings
per share.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
F-23
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. INCOME TAXES
Coaxial is a Subchapter S corporation. Therefore, each shareholder reports his
distributive share of income or loss on his respective income tax return. As a
result, the Company does not provide for Federal or State income taxes in its
accounts. In the event that the Subchapter S corporation election is terminated,
deferred taxes related to book and tax temporary differences would be required
to be reflected in the financial statements.
4. 401(K) PLAN
The Company sponsored various 401(k) Plan (the "Plans") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employee's wages. Company
contributions to the Plans approximated $145,000, $133,000 and $111,000 in 1998,
1997 and 1996, respectively.
5. WORKERS' COMPENSATION RESERVES
Coaxial is partially self-insured for workers' compensation benefits. The
amounts charged to expense for workers' compensation were approximately $40,000,
$89,200, and $110,200 for 1998, 1997 and 1996, respectively, and were based on
actual and estimated claims incurred. The liability for workers' compensation
obligations, as of December 31, 1998 and 1997, is approximately $76,000 and
$78,000, respectively.
6. RELATED PARTY TRANSACTIONS
Effective August 21, 1998, the Company entered into a management agreement with
IHO which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues. Fees
under this management agreement of $492,713 for the period from August 21, 1998
through December 31, 1998 are recorded in home office expenses.
Coaxial has a receivable from a related party as of December 31, 1997 of $98,584
relating to the leasing of fiber optic facilities. On June 29, 1998, the related
party bought out the lease for approximately $347,000.
Coaxial pays rent to a partnership owned by Coaxial's shareholders for two
facilities. Total charges for rent were approximately $63,000 in 1998, $99,500
in 1997 and $72,000 in 1996.
At December 31, 1997, Coaxial advanced funds to and received advances from
related entities for working capital and debt service requirements. During
August 1998, in connection with the issuance of the Senior Notes described in
Note 7(b), the amounts relating to debt service requirements were settled.
Coaxial recognized interest income of approximately $2,846,300 in 1998,
$4,296,500 in 1997, $5,210,700 in 1996 and interest expense of approximately
$1,019,300 in 1998 $914,300 in 1997, $1,039,900 in 1996 related to such
advances. During 1998, Coaxial advanced funds to and received advances from
related entities for working capital requirements in the amount of $149,321 and
$1,029,369 respectively.
F-24
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED PARTY TRANSACTIONS (CONTINUED)
Advances to and from related entities as of December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
Advances to:
Southern Ohio $ 102,445 $ -
Phoenix - 72,439,984
Paxton - 2,361,387
Columbus I - 1,357,768
Other 46,876 102,527
----------- -------------
Due from related entities $ 149,321 $ 76,261,666
=========== =============
Advances from:
Insight $ 1,029,369 $ -
Columbus II - 662,178
Southern Ohio - 16,425,943
----------- --------------
Due to related entities $ 1,029,369 $ 17,088,121
=========== ==============
</TABLE>
Southern Ohio, Phoenix, Paxton, Columbus I and Columbus II are under the control
of the shareholders of Coaxial.
Through December 31, 1995, Coaxial had an agreement with a key officer to defer
certain discretionary compensation amounts each year. On January 1, 1996,
Coaxial entered into an unsecured note payable to this officer in the amount of
$2,343,947, which represented all vested deferred compensation at December 31,
1995. During 1996, this officer earned additional discretionary compensation in
the amount of $193,140. This amount was added to the unpaid December 31, 1996
principal balance of the above note and the payment amount was adjusted
accordingly. As of December 31, 1997 the outstanding balance of the note was
$2,046,880. The note was payable in equal monthly installments of $21,322 plus
accrued interest at the prime rate (8.50% at December 31, 1997), and was
scheduled to mature in December 2005. Interest expense on the note was $184,810
in 1997 and $185,005 in 1996. Pursuant to the Contribution Agreement, amounts
outstanding were paid during 1998.
Other related party transactions are described in Note 7.
F-25
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE
Notes payable at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
Lender 1998 1997
------ ------------ ------------
<S> <C> <C>
Columbus I(a) - $ 2,467,137
Columbus II(a) - 466,099
------------ ------------
Total related parties - 2,933,236
Senior Notes(b) $ 34,435,092 -
Banks(c) - 24,760,937
Retired officer(d) - 2,046,880
------------ ------------
34,435,092 29,741,053
Less current portion - 369,860
------------ ------------
Total $ 34,435,092 $ 29,371,193
============ ============
</TABLE>
Notes payable at December 31, 1998, will mature on August 15, 2006.
(a) In November, 1982, Columbus I and Columbus II exchanged all of their assets
and certain liabilities with Coaxial for common stock and notes. These
notes bore interest at a rate of 20% and had been scheduled to mature on
October 31, 1997. A portion of these notes ($5,066,764) had been assigned
and was payable to the former Limited Partners of Columbus I and Columbus
II as part of their consideration when they sold their partnership interest
to the General Partners. The maturity date of the remaining notes (payable
to Columbus I and Columbus II) was extended to October 31, 2002. Interest
expense was approximately $375,300, $1,498,100 and $1,600,000 in 1998, 1997
and 1996, respectively, related to the notes payable. During 1998, these
notes payable were settled pursuant to the Contribution Agreement.
(b) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15, commencing
on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interests in Insight Ohio. The Series A Preferred
Interests have a liquidation preference of $140.0 million and pay
distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are owned by Coaxial and are
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions
made by Insight Ohio on the Series A Preferred Interests to make payments
on the Senior Notes. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to: incur additional indebtedness; pay
dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the Senior Notes or Discount Notes, respectively; and swap
assets. In connection with the issuance of the Senior Notes, the Company
incurred financing fees of $1,147,193 that are being amortized over the
life of the Senior Notes. Coaxial, as joint and several issuer, with
Phoenix, of the Senior Notes, provides the funding that will allow Phoenix
to repay its share of the notes payable, as Phoenix has no operations.
Amortization expense for deferred financing costs related to the Senior
Notes at December 31, 1998 was $51,945. Interest expense on Coaxial's
portion of the Senior Notes was $1,249,889 for the year ended December 31,
1998.
F-26
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE (CONTINUED)
(b) (continued)
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
group of banks and other financial institutions. The Senior Credit Facility
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the
upgrade of the System's cable plant and for the introduction of new video
services. The Senior Credit Facility has a six-year maturity, with
reductions to the amount of the commitment commencing after three years.
The amount available for borrowing is reduced by any outstanding letter of
credit obligations. Insight Ohio's obligations under the Senior Credit
Facility are secured by substantially all the tangible and intangible
assets of Insight Ohio. Loans under the Senior Credit Facility bear
interest, at Insight Ohio's option, at the prime rate or at a Eurodollar
rate. In addition to the index rates, Insight Ohio pays an additional
margin percentage tied to its ratio of total debt to adjusted annualized
operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including distributions on the Preferred Interests that are required to pay
the Senior Notes and the Discount Notes in the event of a payment default
under the Senior Credit Facility, create liens on assets, make investments,
make acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict
certain activities. In addition, the Senior Credit Facility requires
compliance with certain financial ratios, including with respect to total
leverage, interest coverage and pro forma debt service coverage. Management
does not expect that such covenants will materially impact the ability of
Insight Ohio to operate its business. As of December 31, 1998, no amounts
were drawn on the Senior Credit Facility.
(c) On November 15, 1994, Coaxial, Phoenix, Southern Ohio, Columbus I and
Columbus II (collectively referred to as the borrowers), executed a loan
agreement with a lead bank and several other financial institutions. In
connection with the Senior Note issuance the Company repaid all the
outstanding balances under the loan agreement and recognized an
extraordinary loss of $846,641 relating to the refinancing of debt.
Amortization expense for deferred financing related to this bank debt at
December 31, 1998 was $442,840. Interest expense on this facility was
approximately $1,537,100, $2,284,500, and $1,920,500 in 1998, 1997 and
1996, respectively.
The funds borrowed under the loan agreement were allocated to the following
entities as of December 31,1997:
<TABLE>
<CAPTION>
Revolving
Entity Term Loan Loan
-------------------------------------------------------------
<S> <C> <C>
Coaxial $ 16,760,937 $ 8,000,000
Phoenix 105,925,208 -
Southern Ohio 20,568,238 8,000,000
Columbus I 2,385,682 -
Columbus II 1,359,935 -
------------- ------------
Total $ 147,000,000 $ 16,000,000
============= =============
</TABLE>
(d) In January 1996, Coaxial issued an unsecured note payable to a key officer
for deferred compensation. The officer retired in 1997. The related note
payable was paid during 1998 pursuant to the Contribution Agreement.
F-27
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE (CONTINUED)
At December 31, 1997, the borrowers had entered into an interest-rate swap
agreement to modify the interest characteristics of its outstanding debt from a
floating rate to a fixed rate basis. This agreement involved the payment of
fixed rate amounts in exchange for floating rate interest receipts over the life
of the agreement without an exchange of the underlying principal amount. The
differential to be paid or received was accrued as interest rates change and was
recognized as an adjustment to interest expense related to the debt. At December
31, 1997 the borrowers had entered into interest rate swap agreements
effectively fixing the interest rate to 5.87% on $40 million notional value of
debt. These swap agreements were terminated in 1998.
8. OPERATING LEASE AGREEMENTS
The Company leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $105,700 in 1998,
$218,500 in 1997 and $160,500 in 1996. These amounts exclude year-to-year
utility pole leases of $191,100, $186,400, and $182,700, respectively, which
provide for payments based on the number of poles used.
Minimum rental commitments required under non-cancelable operating leases are as
follows:
1999 $38,400
2000 26,400
2001 and thereafter 200
-------
$65,000
=======
9. CAPITAL LEASE AGREEMENTS
Coaxial leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under the leases are as follows:
For the years ending December 31,
1999 $ 138,909
2000 81,174
2001 30,225
2002 3,003
----------
253,311
Less: Amount representing interest (24,853)
Less: Current portion of capital lease obligations (123,187)
----------
Long-term capital lease obligations $ 105,271
==========
10. CONTINGENCIES
The Company is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's results of operation or
financial position.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Phoenix Associates.
We have audited the accompanying balance sheet of Phoenix Associates (a Florida
partnership), as of December 31, 1997, and the related statements of operations
and changes in Partners' deficit and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Associates as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As indicated in Note 1, Phoenix Associates has no operations. Its ability to
satisfy debt and other obligations is dependent upon funding from related
entities, which are under the common control of the owners of Phoenix
Associates.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998
F-29
<PAGE>
Report of Independent Auditors
The General Partners
Phoenix Associates
We have audited the accompanying balance sheet of Phoenix Associates (a Florida
partnership) as of December 31, 1998, and the related statements of operations
and partners' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Associates at December
31, 1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As indicated in Note 1, Phoenix Associates has no operations. Its ability to
satisfy debt and other obligations is dependent upon funding from related
entities, which are under the common control of the owners of Phoenix
Associates.
/s/ Ernst & Young LLP
New York, New York
April 5, 1999
F-30
<PAGE>
Phoenix Associates
Balance Sheets
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ - $ 247
Interest receivable............................................... 56,868
Other accounts receivable......................................... - 1,067
---------------------------------------------
Total current assets.............................................. 56,868 1,314
OTHER ASSETS:
Due from related parties.......................................... 406,222 6,409,505
Notes receivable--related parties................................. 550,297 775,643
Deferred financing fees, net of accumulated amortization
of $159,502..................................................... 3,399,729 -
Advances to partners.............................................. - 768,000
---------------------------------------------
Total other assets................................................ 4,356,248 7,953,148
---------------------------------------------
Total assets...................................................... $ 4,413,116 $ 7,954,462
=============================================
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Current portion of notes payable.................................. $ - $ 720,600
Interest payable.................................................. 3,841,211 -
Accounts payable.................................................. - 973
---------------------------------------------
Total current liabilities......................................... 3,841,211 721,573
---------------------------------------------
NOTES PAYABLE..................................................... 105,564,908 105,204,608
DUE TO RELATED PARTIES............................................ - 72,439,984
---------------------------------------------
Total liabilities................................................. 109,406,119 178,366,165
---------------------------------------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT................................................. (104,993,003) (170,411,703)
---------------------------------------------
Total liabilities and partners' deficit........................... $ 4,413,116 $ 7,954,462
=============================================
</TABLE>
See accompanying notes
F-31
<PAGE>
Phoenix Associates
Statements of Operations and Change in Partners' Deficit
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C>
EXPENSES.................................... $ (61,488) $ (88,879) $ (106,467)
INTEREST INCOME (EXPENSE)
Interest income--related parties............ 640,121 1,785,142 2,034,542
Interest income............................. 1,333 2,826 1,905
Interest expense--related parties........... (2,665,536) (4,025,789) (5,027,565)
Interest expense............................ (10,326,240) (9,856,149) (9,498,874)
----------------- ---------------- ----------------
Total interest expense, net................. (12,350,322) (12,093,970) (12,489,992)
----------------- ---------------- ----------------
Loss Before Extraordinary Item.............. (12,411,810) (12,182,849) (12,596,459)
Extraordinary Item--gain on settlement of former limited
partner notes............................... 100,182 3,315,337 -
----------------- ---------------- ----------------
NET LOSS.................................... (12,311,628) (8,867,512) (12,596,459)
PARTNERS' DEFICIT, beginning of year........ (170,411,703) (161,544,191) (148,947,732)
CAPITAL CONTRIBUTIONS....................... 78,498,328 - -
CAPITAL DISTRIBUTIONS, net.................. (768,000)
----------------- ---------------- ----------------
PARTNERS' DEFICIT, end of year.............. $(104,993,003) $(170,411,703) $(161,544,191)
================= ================ ================
</TABLE>
See accompanying notes
F-32
<PAGE>
Phoenix Associates
Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................................................ $ (12,311,628) $ (8,867,512) $(12,596,459)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
Gain on settlement of former limited partner notes...... (100,182) (3,315,337) -
Amortization of deferred financing fees................. 159,502 - -
Changes in operating assets and liabilities: - -
Interest receivable................................ (56,868) - -
Other accounts receivable.......................... 1,067 (1,067) -
Interest payable................................... 3,841,211 - -
Accounts payable................................... (973) 618 (91,114)
--------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES: $ (8,467,871) $(12,183,298) $(12,687,573)
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in amounts due from related parties. $ 6,003,283 $ (358,820) $ (511,217)
Proceeds from notes receivable.......................... 325,528 4,823,960 -
--------------- ------------- ------------
Net cash provided by (used in)
investing activities.................................... $ 6,328,811 $ 4,465,140 $ (511,217)
--------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable..................... $(105,925,208) $ (745,035) $ (748,625)
Proceeds from issuance of notes payable................. 105,564,908 - -
Contributions from partners, net........................ 78,498,328 - -
(Decrease) increase in amounts due to related parties... (72,439,984) 8,348,350 14,062,505
Increase in deferred financing costs.................... (3,559,231) - -
--------------- ------------- ------------
Net cash provided by financing
activities.............................................. $ 2,138,813 $ 7,603,315 $ 13,313,880
--------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH......................... (247) (114,843) 115,090
CASH, beginning of year................................. 247 115,090 -
--------------- ------------- -------------
CASH, end of year....................................... $ - $ 247 $ 115,090
=============== ============= =============
</TABLE>
See accompanying notes
F-33
<PAGE>
DECEMBER 31, 1998
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix has no operations. Its ability to satisfy debt and other obligations is
dependent upon funding from related entities, which are under the common control
of the owners of Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 5, along with an affiliate, Coaxial Communications
of Central Ohio, Inc.
Phoenix consists of three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial
Financing Corp., Coaxial Communications of Central Ohio, Inc. ("Coaxial"),
Insight Communications of Central Ohio, LLC ("Insight Ohio"), Coaxial
Communications of Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of
Columbus I ("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"),
Paxton Cable Television, Inc. ("Paxton Cable") and Paxton Communications, Inc.
("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a Contribution
Agreement (the "Contribution Agreement") pursuant to which Coaxial contributed
substantially all of the assets and liabilities comprising its cable system to a
newly formed, subsidiary, Insight Ohio, and Insight Holdings of Ohio, LLC
("IHO"), a wholly owned subsidiary of Insight, contributed $10 million in cash
to Insight Ohio. As a result of this Contribution Agreement, Coaxial owns 25% of
the non-voting common equity and IHO owns 75% of the non-voting common equity of
Insight Ohio. Coaxial also owns two separate series (a $140 million preferred
equity interest and a $30 million preferred equity interest of voting preferred
equity) of Insight Ohio. The voting preferred equity interest provides for
distributions to Coaxial equal in amount to the payments on the Senior Notes and
senior discount notes discussed in Note 5. Coaxial will make distributions which
will enable Phoenix to fund the required payments on the Senior Notes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on- and off- balance sheet financial instruments for which it is
practicable to estimate that value. At December 31, 1998 and 1997, the carrying
value of Phoenix's financial instruments approximate fair value.
F-34
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." Statement No.
133 established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Statement No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Phoenix does not anticipate that the
adoption of this Statement will have a material impact on its financial
statements.
3. INCOME TAXES
Phoenix is a general partnership. Therefore, each partner reports its
distributive share of income or loss on its respective income tax returns. As a
result, Phoenix does not provide for Federal or State income taxes in its
accounts.
4. RELATED PARTY TRANSACTIONS
As of December 31, 1997, Phoenix had advances due from two general partners
aggregating $768,000. Such advances were settled during 1998 in accordance with
the Contribution Agreement.
Phoenix had advanced funds to and received advances from related entities for
working capital and for debt service. During August 1998, in connection with the
issuance of the Senior Notes described in Note 5, these amounts were settled. A
portion of these amounts were settled by a net contribution of $74,171,097 from
the partners. Phoenix recognized interest income of approximately $234,200 in
1998 and $358,800 in 1997 and $511,200 in 1996 and interest expense of
approximately $2,665,536 in 1998, $4,025,800 in 1997 and $5,027,600 in 1996
relating to such advances.
Advances to and from related entities as of December 31, 1998 and 1997 are as
follows:
Entity 1998 1997
------ -------------- -------------
Advances to:
Columbus I $ 406,222 $ 1,283,596
Columbus II - 721,869
Southern Ohio - 4,404,040
--------------------------------
Due from related entities $ 406,222 $ 6,409,505
================================
Advances from Coaxial $ - $ 72,439,984
================================
F-35
<PAGE>
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Phoenix has the following notes and accrued interest receivable from related
parties at December 31, 1998 and 1997:
1998 1997
----------------------------
Columbus I(a) $ 2,348,892 $ 2,348,892
Columbus II(b) 118,245 443,773
----------------------------
Total face amount of notes receivable 2,467,137 2,792,665
Less: Amounts in excess of purchase price (1,916,840) (2,017,022)
----------------------------
Net notes and accrued interest receivable $ 550,297 $ 775,643
============================
(a) The $2,348,892 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. Interest was payable to Phoenix
monthly, through August 20, 1998, at an annual rate of 20% of the face
amount of the notes receivable. Effective August 21, 1998 the rate was
amended to an annual rate of 5.5%. Phoenix recognized interest income of
approximately $346,900, $1,138,000, and $1,212,800 in 1998, 1997 and 1996,
respectively, related to the note receivable. The principal is due and
payable to Phoenix on October 31, 2002.
(b) The $118,245 due from Columbus II represents a note, including past due
interest that was added to the principal, which were purchased from CNA
Financial Corporation on November 24, 1982. Interest is payable to Phoenix
monthly at an annual rate of 20% of the face amount of the notes
receivable. Phoenix recognized interest income of approximately $59,000,
$288,300, and $310,600 in 1998, 1997 and 1996, respectively, related to the
note receivable. The principal is due and payable to Phoenix on October 31,
2002. In August 1998, in connection with the issuance of the Senior Notes,
a portion of the notes receivable from Columbus II were settled. The amount
in excess of the purchase price relating to these notes was realized at the
time of the settlement. The financial statements reflect an extraordinary
item for the gain on partial settlement of the notes of $100,182.
Amounts in excess of purchase price represent the difference between the face
amount and the accrued interest receivable on the notes purchased and the price
paid. The amounts in excess of purchase price will be recognized when the
principal due on the notes is received, net of any costs associated with final
settlement.
In 1997, the notes receivable from former Limited Partners of Columbus I and
Columbus II matured. The "amounts in excess of purchase price" relating to these
notes were realized at the time of settlement. The 1997 financial statements
reflect a gain on the settlement of the notes of $3,315,337 (amounts in excess
of purchase price).
These related entities are under the control of the partners of Phoenix. The
partners have represented that substantially all of these amounts will be
settled among the parties.
5. NOTES PAYABLE
Notes payable at December 31, 1998 and 1997 consisted of:
Lender 1998 1997
- ------ ------------------------------------
Senior Notes (a) $ 105,564,908 $ -
Banks(b) - 105,925,208
------------------------------------
Total $ 105,564,908 $105,925,208
====================================
Senior Notes payable at December 31, 1998, will mature on August 15, 2006.
F-36
<PAGE>
5. NOTES PAYABLE (CONTINUED)
(a) On August 21, 1998 Coaxial and Phoenix completed an offering of $140
million 10% Senior Notes ("Senior Notes") due 2006. The proceeds of the
Senior Notes were allocated $105.6 million to Phoenix and $34.4 million to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15, commencing
on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interests in Insight Ohio. The Series A Preferred
Interests have a liquidation preference of $140.0 million and pay
distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are owned by Coaxial and are
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions on
the Series A Preferred Interests to make payments on the Senior Notes
including distributions to Phoenix. The Senior Notes contain covenants
that, among other things, restrict the ability of Coaxial, Phoenix, Insight
Ohio and any of their Restricted Subsidiaries to: incur additional
indebtedness; pay dividends and make distributions; issue stock of
subsidiaries to third parties; make certain investments; repurchase stock;
create liens; enter into transactions with affiliates; enter into sale and
leaseback transactions; create dividend or other payment restrictions
affecting Restricted Subsidiaries; merge or consolidate in a transaction
involving all or substantially all of the assets of Coaxial, Phoenix and
their Restricted Subsidiaries, taken as a whole; transfer or sell assets;
use distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the notes or Discount Notes, respectively; and swap assets. In
connection with the issuance of the Senior Notes, Phoenix incurred
financing fees of $3,559,231 that are being amortized over the life of the
Senior Notes. Amortization expense related to the deferred financing costs
was $159,502 for the year ended December 31, 1998. Interest expense
incurred on the Senior Notes excluding amortization of deferred financing
costs was $3,841,211 during 1998. Phoenix is a co-issuer and joint and
several obligor of the debt, along with an affiliate, Coaxial.
(b) On November 15, 1994, Phoenix, Coaxial, Southern Ohio, Columbus I and
Columbus II (collectively referred to as the borrowers), executed a loan
agreement with a lead bank and several other financial institutions to
replace an existing loan agreement. In connection with the Senior Note
issuance discussed above, on August 21, 1998 the borrowers repaid all
outstanding borrowings under this facility. Interest expense for this
facility for 1998, 1997 and 1996 was $6,325,527, $9,855,120, and
$9,495,420, respectively.
A revolving credit commitment fee of .5% was paid on the average daily
balance available for draw under Phoenix's prior revolving credit loan. The
funds borrowed under the loan agreement were allocated to the following
entities as of December 31, 1997:
Entity Term Loan Revolving Loan
------ ------------- --------------
Phoenix $105,925,208 $ -
Coaxial 16,760,937 8,000,000
Southern Ohio 20,568,238 8,000,000
Columbus I 2,385,682 -
Columbus II 1,359,935 -
--------------------------------
Total $ 147,000,000 $ 16,000,000
================================
At December 31, 1997, the carrying amounts of the notes payable (loan agreement
debt) approximate fair value as the underlying instruments are at variable rates
that re-price frequently. At December 31, 1998, the carrying value of the Senior
Notes payable approximate fair value.
F-37
<PAGE>
5. NOTES PAYABLE (CONTINUED)
At December 31, 1997, Phoenix, with the other borrowers, entered into interest-
rate swap agreements to modify the interest characteristics of its outstanding
debt from a floating rate to a fixed rate basis. These agreements involved the
payment of fixed rate amounts in exchange for floating rate interest receipts
over the life of the agreement without an exchange of the underlying principal
amount. The differential to be paid or received was accrued as interest rates
change and was recognized as an adjustment to interest expense related to the
debt. At December 31, 1997 the borrowers had entered into interest rate swap
agreements effectively fixing the interest rate to 5.87% on $40 million notional
value of debt.
F-38
<PAGE>
Report of Independent Auditors
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheet of Insight Communications of
Central Ohio, LLC as of December 31, 1998, and the related statements of
operations and members' deficit and cash flows for the period from August 21,
1998 (date of inception) through December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insight Communications of
Central Ohio, LLC at December 31, 1998, and the results of its operations and
its cash flows for the period from August 21, 1998 (date of inception) through
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
April 5, 199
F-39
<PAGE>
Insight Communications of Central Ohio, LLC
Balance Sheet
As of December 31, 1998
<TABLE>
<CAPTION>
1998
----------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 6,708,553
Subscriber receivables, less allowance for doubtful
accounts of $306,000............................................. 1,185,646
Other accounts receivable, less allowance for doubtful
accounts of $145,000............................................. 1,520,301
Prepaid expenses and other current assets........................ 166,347
----------------
Total current assets............................................. 9,580,847
PROPERTY AND EQUIPMENT, at cost:
Land and Land Improvements....................................... 260,000
CATV systems..................................................... 71,031,956
Equipment........................................................ 7,102,002
Furniture........................................................ 333,026
Leasehold improvements........................................... 71,360
----------------
78,798,344
Less-Accumulated depreciation and amortization................... (46,898,251)
----------------
Total property and equipment, net................................ 31,900,093
INTANGIBLE ASSETS, at cost:
Franchise costs.................................................. 7,385,000
Other Intangible Assets.......................................... 300,141
Less-Accumulated amortization.................................... (7,347,788)
----------------
Total intangible assets, net..................................... 337,353
DUE FROM RELATED PARTIES......................................... 149,321
Total assets..................................................... $ 41,967,614
================
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations..................... $ 123,187
Accounts payable................................................. 3,229,719
Accrued Liabilities.............................................. 4,403,934
Series Preferred A Dividend Payable.............................. 5,211,111
Series Preferred B Dividend Payable.............................. 1,437,708
----------------
Total Current Liabilities........................................ 14,405,659
Capital Lease Obligations........................................ 105,271
Other Deferred Credits........................................... 1,145,867
Due to related parties........................................... 1,029,369
Preferred A Interest............................................. 140,000,000
Preferred B Interest............................................. 30,000,000
----------------
Total liabilities and preferred interests........................ 186,686,166
Members' deficit................................................. (144,718,552)
----------------
Total liabilities and members' deficit........................... $ 41,967,614
================
</TABLE>
see accompanying notes
F-40
<PAGE>
Insight Communications of Central Ohio, LLC
Statement of Operations and Changes in Members' Deficit
For the Period from August 21 (date of inception) through December 31, 1998
<TABLE>
<S> <C>
REVENUE $ 17,275,582
OPERATING EXPENSES:
Service and administrative...................... 9,405,092
Depreciation and Amortization................... 1,898,951
--------------
Total operating expenses........................ 11,304,043
--------------
OPERATING INCOME................................ 5,971,539
OTHER INCOME.................................... 11,315
INTEREST INCOME................................. 24,768
--------------
NET INCOME...................................... 6,007,622
Accrual of preferred interests.................. (6,648,819)
--------------
Loss on common interests........................ (641,197)
MEMBERS' EQUITY, beginning of period........... -
Member Contributions............................ 34,457,858
Preferred Membership Interest................... (170,000,000)
Capital Distributions........................... (8,535,213)
--------------
Members' Deficit at December 31, 1998........... $(144,718,552)
==============
</TABLE>
see accompanying notes
F-41
<PAGE>
Insight Communications of Central Ohio, LLC
Statement of Cash Flows
For the Period from August 21, 1998 (date of inception) through December 31,
1998
<TABLE>
<CAPTION>
1998
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 6,007,622
Adjustments to reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and amortization............................... 1,898,951
Changes in certain assets and liabilities...................
(Increase) decrease in assets...............................
Subscriber receivables...................................... (1,213,166)
Due from affiliates......................................... (124,886)
Other accounts receivable, prepaid expenses and other
current assets.............................................. (609,117)
Accounts payable and accrued liabilities.................... 1,879,637
Due to affiliates........................................... 1,029,369
-------------------
Net cash provided by operating activities................... $ 8,868,410
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment............. (3,620,389)
Increase in other intangible assets......................... (300,141)
Proceeds from disposal of property and equipment............ 11,315
-------------------
Net cash used in investing activities....................... $(3,909,215)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations............. (52,187)
Capital Contributions....................................... 10,000,000
Capital Distributions....................................... (8,524,710)
Cash used in activities not included in net assets contributed 326,255
to Insight -------------------
Net cash used in financing activities....................... $ 1,749,358
-------------------
CASH, end of period......................................... $ 6,708,553
===================
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the year for: -------------------
Interest, net of amount capitalized $ --
===================
</TABLE>
see accompanying notes
F-42
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS ORGANIZATION AND PURPOSE
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the "Company")
was formed on July 23, 1998 in order to acquire all of the assets and
liabilities comprising the cable television system of Coaxial Communications of
Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television system for which Coaxial received a 25% non-voting common membership
interest in Insight Ohio as well as 100% of the voting preferred membership
interests of Insight Ohio ("Series A and Series B Preferred Interests"). In
conjunction therewith, Insight Holdings of Ohio, LLC ("IHO") contributed $10
million in cash to Insight Ohio for which it received a 75% non-voting common
membership interest in Insight Ohio. Accordingly the accompanying financial
statements include the operations of the cable television system contributed by
Coaxial to Insight Ohio from August 21, 1998. Insight Ohio provides basic and
expanded cable services to homes in Columbus, Ohio and surrounding areas.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior Notes
are non-recourse and are secured by all issued and outstanding Series A
Preferred Interest in Insight Ohio and are conditionally guaranteed by Insight
Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related
entities, issued 12 7/8% Senior Discount Notes due 2008 ("Discount Notes"). The
Discount Notes have a face amount of $55,869,000 and approximately $30 million
of gross proceeds were received upon issuance. The Discount Notes are non-
recourse, secured by 100% of the common stock of Coaxial, and conditionally
guaranteed by Insight Ohio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
Insight Ohio considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent
of direct selling costs incurred. Any fees in excess of such costs are deferred
and amortized to income over the estimated average period that subscribers are
expected to remain connected to the system.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Insight Ohio to concentrations of
credit risk consist principally of trade accounts receivable. Insight Ohio's
customer base consists of a number of homes concentrated in the central Ohio
area. Insight Ohio continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1998, Insight
Ohio had no significant concentrations of credit risk.
F-43
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
Assets held under capital leases at December 31, 1998 were $228,458.
Insight Ohio internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Insight Ohio reviews its property, plant and equipment and other long term
assets when events or changes in circumstances indicate the carrying amounts may
not be recoverable. When such conditions exist, management estimates the future
cash flows from operations or disposition. If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount would be recorded, and an impairment loss would be
recognized. Insight Ohio does not believe that there is an impairment of such
assets.
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the lives of
the related franchises which range from 7 to 15 years.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $302,800, from
August 21, 1998 through December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
F-44
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
Insight Ohio is a limited liability corporation. Therefore, each member reports
his distributive share of income or loss on his respective income tax returns.
As a result, Insight Ohio does not provide for Federal or State income taxes in
its accounts. In the event that the limited liability corporation election is
terminated, deferred taxes related to book and tax temporary differences would
be required to be reflected in the financial statements. As a limited liability
company, the liability of Insight Ohio's members are limited to their respective
investments.
4. 401(K) PLAN
During 1998, the Company sponsored various 401(k) Plan (the "Plans") for the
benefit of its employees. All employees who have completed six months of
employment and have attained the age of 21 are eligible to participate in the
Plans. The Company makes matching contributions equal to a portion of the
employee's wages. Company contributions to the Plans approximated $145,000 in
1998.
5. CREDIT FACILITY
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
group of banks and other financial institutions. The Senior Credit Facility
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity, with reductions to the amount of
the commitment commencing after three years. The amount available for borrowing
is reduced by any outstanding letter of credit obligations. Insight Ohio's
obligations under the Senior Credit Facility are secured by substantially all
the tangible and intangible assets of Insight Ohio. Loans under the Senior
Credit Facility bear interest, at Insight Ohio's option, at the prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the Senior
Credit Facility, create liens on assets, make investments, make acquisitions,
engage in mergers or consolidations, engage in certain transactions with
subsidiaries and affiliates and otherwise restrict certain activities.
6. RELATED PARTY TRANSACTIONS
Effective August 21, 1998, the Company entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee of equivalent to 3% of Insight Ohio's gross operating revenues.
Fees under this management agreement aggregated $492,713 for the period from
August 21 through December 31, 1998.
Insight Ohio has receivables from related parties as of December 31, 1998 of
$149,321 relating to working capital requirements.
F-45
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OPERATING LEASE AGREEMENTS
Insight Ohio leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $42,700 for the period
from August 21, 1998 to December 31, 1998. These amounts exclude utility pole
leases of $67,300, which provide for payments based on the number of poles used.
Minimum rental commitments required under non-cancelable operating leases are as
follows:
1999 $ 38,400
2000 26,400
2001 and thereafter 200
-------------
$ 65,000
=============
8. CAPITAL LEASE AGREEMENTS
Insight Ohio leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under these leases are as follows:
For the Years Ending December 31,
1999 $ 138,909
2000 81,174
2001 30,225
2002 3,003
--------------
253,311
Less: Amount representing interest (24,853)
Less: Current portion of capital lease obligations (123,187)
--------------
Long-term capital lease obligations $ 105,271
==============
9. COMMITMENTS AND CONTINGENCIES
Insight Ohio is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either Insight Ohio's future results of operations
or financial position.
F-46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Member
Coaxial LLC
We have audited the consolidated financial statements of Coaxial LLC as of
December 31, 1998 and for the year then ended, and have issued our report
thereon dated April 5, 1999 (included elsewhere in this Form 10-K). Our audit
also included the financial statement schedule listed in Item 14(a) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
April 5, 1999
<PAGE>
COAXIAL LLC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to Charged to
Beginning Costs & Other Ending
Description Balance Expenses Accounts Deductions (1) Balance
----------- --------- ---------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts
Allowance for doubtful accounts 374,000 833,000 - (756,000) 451,000
</TABLE>
_________
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
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: April 13, 1999 By: /s/ Michael S. Willner
------------------------------------
Michael S. Willner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Sidney R. Knafel Chairman April 13,1999
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President and Chief Executive Officer April 13,1999
- --------------------- (Principal Executive Officer)
Michael S. Willner
Kim D. Kelly Executive Vice President, Chief Financial April 13,1999
- ------------ and Operating Officer and Treasurer
Kim D. Kelly (Principal Financial and Accounting Officer)
</TABLE>
<PAGE>
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: April 13, 1999 By: /s/ Michael S. Willner
----------------------------------
Michael S. Willner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Sidney R. Knafel Director and Chairman April 13,1999
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner Director, President and Chief Executive April 13,1999
- --------------------- Officer (Principal Executive Office)
Michael S. Willner
Kim D. Kelly Director, Executive Vice President, Chief April 13,1999
- ------------ Financial and Operating Officer and Treasurer
Kim D. Kelly (Principal Financial and Accounting Officer)
</TABLE>
<PAGE>
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: April 13, 1999 By: /s/ Michael S. Willner
---------------------------------
Michael S. Willner, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Sidney R. Knafel Chairman April 13,1999
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President and Chief Executive Officer April 13,1999
- --------------------- (Principal Executive Officer)
Michael S. Willner
Kim D. Kelly Executive Vice President, Chief Financial April 13,1999
- ------------ and Operating Officer and Treasurer
Kim D. Kelly (Principal Financial and Accounting Officer)
</TABLE>
<PAGE>
EXHIBIT 16.1
April 15, 1999
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir/Madam:
We have read Item 9 included in the Form 10-K dated April 15, 1999 of Coaxial
LLC, Coaxial Financing Corp. and Insight Communications of Central Ohio, Inc.
filed with the Securities and Exchange Commission and are in agreement with the
statements contained therein.
Very truly yours,
ARTHUR ANDERSEN LLP
cc: Mr Daniel Mannino, Vice President and Controller
Coaxial Communications of Central Ohio, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001071003
<NAME> Coaxial LLC
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,708,553
<SECURITIES> 0
<RECEIVABLES> 3,156,947
<ALLOWANCES> 451,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,580,847
<PP&E> 78,798,344
<DEPRECIATION> 46,898,251
<TOTAL-ASSETS> 56,532,042
<CURRENT-LIABILITIES> 9,007,112
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (20,701,334)
<TOTAL-LIABILITY-AND-EQUITY> 56,532,043
<SALES> 47,955,737
<TOTAL-REVENUES> 47,955,737
<CGS> 39,827,898
<TOTAL-COSTS> 39,827,898
<OTHER-EXPENSES> 421,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,677,916
<INCOME-PRETAX> 5,028,503
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,028,503
<DISCONTINUED> 0
<EXTRAORDINARY> 846,641
<CHANGES> 0
<NET-INCOME> 4,181,862
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001071001
<NAME> Coaxial Financing Corp.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 990
<TOTAL-LIABILITY-AND-EQUITY> 1,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001070242
<NAME> Insight Communications of Central Ohio, LLC
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,708,553
<SECURITIES> 0
<RECEIVABLES> 3,156,947
<ALLOWANCES> 451,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,580,847
<PP&E> 78,798,344
<DEPRECIATION> 46,898,251
<TOTAL-ASSETS> 41,967,614
<CURRENT-LIABILITIES> 14,405,659
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (144,718,552)
<TOTAL-LIABILITY-AND-EQUITY> 41,967,614
<SALES> 17,275,582
<TOTAL-REVENUES> 17,275,582
<CGS> 11,304,043
<TOTAL-COSTS> 11,304,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (24,768)
<INCOME-PRETAX> 6,007,622
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,007,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,007,622
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
