<PAGE>
================================================================================
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2000
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 charters)
<TABLE>
<S> <C>
Delaware 13-4080422
Delaware 13-4061992
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
</TABLE>
c/o Insight Communications Company, Inc.
810 7th Avenue
New York, New York 10019
(Address of principal executive offices, including zip code)
(917) 286-2300
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [X ] Yes [ ] No
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Coaxial LLC Not Applicable
Coaxial Financing Corp. Not Applicable
Insight Communications of Central Ohio, LLC Not Applicable
================================================================================
<PAGE>
INDEX
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Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Coaxial LLC
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 1
Consolidated Statements of Operations and Changes in Member's Deficit
for the three months and six months ended June 30, 2000 and 1999
(unaudited) 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Coaxial Financing Corp.
Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 9
Notes to Balance Sheets (unaudited) 10
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 12
Consolidated Statements of Operations and Changes in Shareholders' Deficit
for the three months and six months ended June 30, 2000 and 1999
(unaudited) 13
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited) 14
Notes to Consolidated Financial Statements (unaudited) 15
Phoenix Associates
Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 18
Statements of Operations and Changes in Partners' Deficit for the three months
and six months ended June 30, 2000 and 1999 (unaudited) 19
Statements of Cash Flows for the six months ended June 30, 2000
and 1999 (unaudited) 20
Notes to Financial Statements (unaudited) 21
</TABLE>
<PAGE>
<TABLE>
Insight Communications of Central Ohio, LLC
<CAPTION>
<S> <C>
Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 24
Statements of Operations and Changes in Members' Deficit
for the three months and six months ended June 30, 2000 and 1999 (unaudited) 25
Statements of Cash Flows for the six months ended June 30,
2000 and 1999 (unaudited) 26
Notes to Financial Statements (unaudited) 27
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
<CAPTION>
PART II OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K 37
</TABLE>
<PAGE>
COAXIAL LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,770 $ 882
Subscriber receivables, less allowance for doubtful accounts
of $186 and $383 in 2000 and 1999, respectively 879 790
Other accounts receivable, less allowance for doubtful accounts
of $80 and $175 in 2000 and 1999, respectively 3,072 3,136
Prepaid expenses and other current assets 256 155
----------------- -----------------
Total current assets 9,977 4,963
Property and equipment, net of accumulated depreciation of
$58,803 and $53,999 in 2000 and 1999, respectively 62,379 51,455
Intangible assets, net of accumulated amortization of
$7,957 and $7,738 in 2000 and 1999, respectively 2,454 2,670
Note receivable Coaxial DJM LLC 6,750 6,750
Note receivable Coaxial DSM LLC 3,000 3,000
Due from related parties 2,717 2,023
----------------- -----------------
Total other assets 14,921 14,443
----------------- -----------------
Total assets $ 87,277 $ 70,861
================= =================
LIABILITIES AND MEMBER'S DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 33 $ 74
Accounts payable 5,246 4,963
Accrued interest 1,651 1,519
Accrued liabilities 2,970 5,061
Accrued programming 3,479 1,890
----------------- -----------------
Total current liabilities 13,379 13,507
NOTES PAYABLE
Senior discount notes 37,845 35,556
Senior notes 34,435 34,435
Senior credit facility 25,000 11,000
----------------- -----------------
Total notes payable 97,280 80,991
Capital lease obligations 43 43
Other deferred credits 2,345 2,408
Due to related parties 422 -
----------------- -----------------
Total liabilities 113,469 96,949
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT (26,192) (26,088)
----------------- -----------------
Total liabilities and member's deficit $ 87,277 $ 70,861
================= =================
</TABLE>
See accompanying notes
1
<PAGE>
<TABLE>
<CAPTION>
COAXIAL LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S DEFICIT
(Unaudited)
(in thousands)
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 12,411 $ 11,697 $ 23,946 $ 23,393
OPERATING EXPENSES:
Service and administrative 7,375 6,560 14,818 13,241
Depreciation and amortization 2,724 1,647 5,023 3,247
-------------- ------------- ----------- ------------
Total operating expenses 10,099 8,207 19,841 16,488
-------------- ------------- ----------- ------------
OPERATING INCOME 2,312 3,490 4,105 6,905
OTHER INCOME 11 79 40 79
INTEREST INCOME (EXPENSE):
Interest income--related parties 378 - 744 -
Interest income 26 342 44 757
Interest expense (2,450) (1,959) (4,759) (3,926)
-------------- ------------- ----------- ------------
Total interest expense, net (2,046) (1,617) (3,971) (3,169)
-------------- ------------ ----------- ------------
NET INCOME 277 1,952 174 3,815
Member's deficit, beginning of period (31,469) (23,944) (26,088) (20,701)
Member contributions 5,000 - 5,000 -
Member distributions - (241) (5,278) (5,347)
-------------- ------------- ----------- ------------
Member's deficit, end of period $(26,192) $(22,233) $(26,192) $(22,233)
============== ============ =========== ============
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
<CAPTION>
COAXIAL LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months ended June 30,
2000 1999
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 174 $ 3,815
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,023 3,373
Accretion of original issue discount on senior discount notes 2,289 2,065
Provision for losses on trade accounts receivable 255 338
Changes in certain assets and liabilities:
Subscriber receivables (344) (121)
Other accounts receivable, prepaid expenses and other
current assets (37) (180)
Accounts payable and accrued liabilities (282) 1,279
Accrued interest 132 57
Due to related parties (272) (953)
------------- ----------
Net cash provided by operating activities $ 6,938 $ 9,673
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (15,728) (10,324)
Increase in other intangible assets (3) (396)
------------- ----------
Net cash used in investing activities $(15,731) $(10,720)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (41) (50)
Capital distributions (5,278) (5,347)
Capital contributions 5,000 -
Borrowings under senior credit facility 14,000 -
------------- ----------
Net cash provided by (used in) financing activities $ 13,681 $ (5,397)
------------- ----------
NET INCREASE (DECREASE) IN CASH 4,888 (6,444)
CASH AND CASH EQUIVALENTS, beginning of period 882 8,709
------------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 5,770 $ 2,265
============= ==========
</TABLE>
See accompanying notes
3
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Business Organization And Purpose
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67 1/2% 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, LLC ("Insight Ohio"), operates a cable
television system in the eastern parts of Columbus, Ohio and surrounding areas.
Insight Ohio operates in one business segment. In connection with the
contribution of Coaxial's cable system ("the System") to Insight Ohio described
below, the issuance of the senior notes and the senior discount notes described
in Note 4, 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.
Other related entities owned or controlled by the majority shareholder of the
Company include Coaxial Financing Corp, Coaxial DJM LLC, Coaxial DSM LLC
(collectively with the Company, the "Coaxial Entities"), Phoenix Associates
("Phoenix"), Coaxial Communications of Southern Ohio, Inc., Coaxial Associates
of Columbus I, Coaxial Associates of Columbus II, Paxton Cable Television, Inc.
and Paxton Communications, Inc.
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns a
$140 million Series A preferred equity interest and a $30 million Series B
preferred equity interest of Insight Ohio (the "Series A Preferred Interest" and
"Series B Preferred Interest", respectively). The voting preferred equity
interests provide for distributions to Coaxial and indirectly to Phoenix and the
Company in amounts equal to the payments required on the senior notes and senior
discount notes described in Note 4. IHO serves as the manager of Insight Ohio.
The Company and Coaxial Financing Corp. are co-issuers of the senior discount
notes described in Note 4(b). Coaxial and Phoenix are co-issuers of the senior
notes described in Note 4(a). The ability of Coaxial Financing Corp., the
Company, Coaxial, and Phoenix to make scheduled payments with respect to the
senior discount notes and senior notes is dependent on the financial and
operating performance of Insight Ohio. The required distributions on the Series
A Preferred Interest and Series B Preferred Interest to Coaxial are designed to
provide the cash flow necessary to service the debt service requirements on the
senior discount notes and senior notes.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
4
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Basis of Presentation (continued)
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
3. 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 June 30, 2000 and December 31, 1999, Coaxial had a
shareholders' deficiency and Insight Ohio had a members' deficiency.
Accordingly, the accompanying financial statements do not include any minority
interest liabilities.
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, which was amended by SFAS No. 137, 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. 137 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company does not anticipate the adoption of SFAS No. 137 to have a material
impact on its financial statements.
4. Notes Payable
Notes payable at June 30, 2000 and December 31, 1999 consisted of:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------- ------------------------
<S> <C> <C>
Senior Notes(a) $34,435,000 $34,435,000
Senior Discount Notes(b) 37,845,000 35,556,000
Senior Credit Facility(c) 25,000,000 11,000,000
------------------------- ------------------------
Total notes payable $97,280,000 $80,991,000
========================= ========================
</TABLE>
5
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(a) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest is payable in cash semi-annually on each February 15 and
August 15. Interest payments commenced on February 15, 1999. The Senior
Notes are secured by the outstanding Series A Preferred Interest in Insight
Ohio and conditionally guaranteed by Insight Ohio. The Series A Preferred
Interest has a liquidation preference of $140 million and pays
distributions in an amount equal to the payments on the Senior Notes. The
Series A Preferred Interest is owned by Coaxial and is pledged to Harris
Trust Company, as trustee, for the benefit of the holders of the Senior
Notes. Coaxial will utilize cash distributions made by Insight Ohio on the
Series A Preferred Interest to make payments on the Senior Notes. The
Senior Notes contain covenants that, among other things, restrict the
ability of Coaxial, Phoenix, Insight Ohio and any of their Restricted
Subsidiaries to: incur additional indebtedness; pay dividends and make
distributions; issue stock of subsidiaries to third parties; make certain
investments; repurchase stock; create liens; enter into transactions with
affiliates; enter into sale and leaseback transactions; create dividend or
other payment restrictions affecting Restricted Subsidiaries; merge or
consolidate in a transaction involving all or substantially all of the
assets of Coaxial, Phoenix and their Restricted Subsidiaries, taken as a
whole; transfer or sell assets; use distributions on the Series A Preferred
Interest or Series B Preferred Interest for any purpose other than required
payments of interest and principal on the Senior Notes or Senior Discount
Notes, respectively; and swap assets. Coaxial, as joint and several
issuer, with Phoenix, of the Senior Notes, provides the funding that will
allow Phoenix to repay its share of the notes payable, as Phoenix has no
operations.
(b) On August 21, 1998, the Company and Coaxial Financing Corp. issued senior
discount notes ("Senior Discount Notes") due 2008. The Senior Discount
Notes have a face amount of $55,869,000 and approximately $30,000,000 of
gross proceeds was received upon issuance. Approximately $19,500,000 of the
gross proceeds was contributed by the sole member of the Company to certain
related entities to repay indebtedness. Approximately $9,750,000 was loaned
to two related entities (Coaxial DJM LLC and Coaxial DSM LLC) by the
Company, which then contributed that amount to certain other related
entities to repay indebtedness. The debt discount of $25,869,000 is being
amortized over five years through August 15, 2003. Thereafter, interest on
the Senior Discount Notes accrues at 12 7/8% and is payable semi-annually.
All of the Senior Discount Notes were allocated to 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.
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 June 30,
2000.
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 Interest equal the distributions to be made by
Coaxial to the Company to service the Senior Discount Notes.
(c) Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of up to $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 of 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.
6
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including, in the event of a payment default under the Senior Credit
Facility, distributions on the Series A Preferred Interest and Series B
Preferred Interest that are required to pay the Senior Notes and the Senior
Discount Notes, create liens on assets, make investments, make acquisitions,
engage in mergers or consolidations, engage in certain transactions with
subsidiaries and affiliates and otherwise restrict certain activities. In
addition, the Senior Credit Facility requires compliance with certain
financial ratios, including total leverage, interest coverage and pro forma
debt service coverage ratios. Management does not expect that such covenants
will materially impact the ability of Insight Ohio to operate its business.
As of June 30, 2000, $25,000,000 was drawn on the Senior Credit Facility.
5. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations or financial position.
6. Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity
interest. The purchase price was 1,000,000 shares of common stock of Insight's
general partner, Insight Communications Company, Inc. ("ICCI"), 20% of which is
payable by September 1, 2000 in cash or shares of common stock, at ICCI's
option. In connection with the purchase, Insight Ohio's operating agreement was
amended to, among other things, remove certain participating rights of the
principals of the Coaxial Entities, and vest the common equity interests of
Insight Ohio with 70% of its total voting power and the preferred equity
interests with 30% of its total voting power. As a result of this transaction,
the financial results of Insight Ohio will be consolidated with the financial
results of ICCI. As such, the consolidated financial statements of the Company
for periods subsequent to the purchase will not include the consolidated results
of Insight Ohio. In addition, as a result of the amended operating agreement,
Insight Ohio will be managed by Insight and not by IHO.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC ("AT&T Broadband") for the
provision by AT&T Broadband of all-distance telephone service utilizing Insight
Ohio's cable infrastructure under the AT&T brand name. Telephony revenues are to
be attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly
per line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. Insight Ohio intends to market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband
for the contribution to Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T, of additional cable television systems,
including Insight Ohio. Through a series of transactions, Insight will
contribute to Insight Midwest its interests in systems serving approximately
187,000 customers, including the approximately 84,000 customers served by
Insight Ohio. In addition, Insight will purchase from AT&T and immediately
contribute to Insight Midwest, systems serving approximately 100,000 customers
and AT&T will contribute systems serving approximately 250,000 customers. Upon
completion of the transactions, Insight Midwest will remain equally owned by
Insight and AT&T Broadband, and Insight will continue to serve as the general
partner and manage and operate the Insight Midwest systems. The transactions are
subject to the negotiation and execution of definitive agreements.
7
<PAGE>
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Recent Developments (continued)
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of Insight Midwest. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
8
<PAGE>
<TABLE>
<CAPTION>
COAXIAL FINANCING CORP.
BALANCE SHEETS
June 30, 2000 December 31, 1999
------------------------ ------------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS:
Cash $1,000 $1,000
------------------------ ------------------------
Total assets $1,000 $1,000
======================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior Discount Notes (to be paid by Coaxial LLC -
See Note 3) $ - $ -
------------------------- -------------------------
- -
Common stock, $.01 par value; 1,000 shares authorized, 1,000
shares issued and outstanding 10 10
Additional paid-in capital 990 990
------------------------- -------------------------
Total liabilities and shareholders' equity $1,000 $1,000
========================= =========================
</TABLE>
See accompanying notes
9
<PAGE>
COAXIAL FINANCING CORP.
NOTES TO BALANCE SHEETS
(UNAUDITED)
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 3, which allows certain investors the ability to be holders of
the debt. The Company has no operations. Three individuals own the outstanding
shares of the Company.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1999.
3. 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). Thereafter, 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 June 30, 2000.
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.
4. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations or financial position.
10
<PAGE>
COAXIAL FINANCING CORP.
NOTES TO BALANCE SHEETS
(UNAUDITED)
5. Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial LLC's 25% non-voting common
equity interest in Insight Ohio. The purchase price was 1,000,000 shares of
common stock of Insight's general partner, Insight Communications Company, Inc.
("ICCI"), 20% of which is payable by September 1, 2000 in cash or shares of
common stock, at ICCI's option. In connection with the purchase, Insight Ohio's
operating agreement was amended to, among other things, remove certain
participating rights of the principals of the Company, Coaxial LLC, Coaxial DJM
LLC and Coaxial DSM, LLC and vest the common equity interests of Insight Ohio
with 70% of its total voting power and the preferred equity interests with 30%
of its total voting power. As a result of this transaction, the financial
results of Insight Ohio will be consolidated with the financial results of ICCI.
As such, the consolidated financial statements of the Company for periods
subsequent to the purchase will not include the consolidated results of Insight
Ohio. In addition, as a result of the amended operating agreement, Insight Ohio
will be managed by Insight and not by IHO.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. Insight Ohio intends to market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband
for the contribution to Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T, of additional cable television systems,
including Insight Ohio. Through a series of transactions, Insight will
contribute to Insight Midwest its interests in systems serving approximately
187,000 customers, including the approximately 84,000 customers served by
Insight Ohio. In addition, Insight will purchase from AT&T and immediately
contribute to Insight Midwest, systems serving approximately 100,000 customers
and AT&T will contribute systems serving approximately 250,000 customers. Upon
completion of the transactions, Insight Midwest will remain equally owned by
Insight and AT&T Broadband, and Insight will continue to serve as the general
partner and manage and operate the Insight Midwest systems. The transactions are
subject to the negotiation and execution of definitive agreements.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of Insight Midwest. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
11
<PAGE>
<TABLE>
<CAPTION>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, 2000 December 31, 1999
----------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,770 $ 882
Subscriber receivables, less allowance for doubtful accounts
of $186 and $383 in 2000 and 1999, respectively 879 790
Other accounts receivable, less allowance for doubtful accounts
of $80 and $175 in 2000 and 1999, respectively 3,072 3,136
Prepaid expenses and other current assets 256 155
----------------- -----------------
Total current assets 9,977 4,963
Property and equipment, net of accumulated depreciation of
$58,803 and $53,999 in 2000 and 1999, respectively 62,379 51,455
Intangible assets, net of accumulated amortization of
$7,767 and $7,600 in 2000 and 1999, respectively 1,244 1,408
Due from related parties 108 158
----------------- -----------------
Total assets $ 73,708 $ 57,984
================= =================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 32 $ 73
Accounts payable 5,246 4,963
Accrued interest 1,651 1,519
Accrued liabilities 2,970 5,061
Accrued programming 3,479 1,890
----------------- -----------------
Total current liabilities 13,378 13,506
NOTES PAYABLE:
Senior notes 34,435 34,435
Senior credit facility 25,000 11,000
----------------- -----------------
Total notes payable 59,435 45,435
Capital lease obligations 43 43
Other deferred credits 2,345 2,408
Due to related parties 422 -
----------------- -----------------
Total liabilities 75,623 61,392
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 2000 and 1999 1 1
Paid-in capital 11,501 11,501
Accumulated deficit (13,417) (14,910)
----------------- -----------------
Total shareholders' deficit (1,915) (3,408)
----------------- -----------------
Total liabilities and shareholders' deficit $ 73,708 $ 57,984
================= =================
</TABLE>
See accompanying notes
12
<PAGE>
<TABLE>
<CAPTION>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN SHAREHOLDERS' DEFICIT
(Unaudited)
(in thousands)
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES $12,411 $11,697 $ 23,946 $23,393
OPERATING EXPENSES:
Service and administrative 7,375 6,560 14,818 13,241
Depreciation and amortization 2,698 1,647 4,971 3,247
---------- ---------- ---------- ----------
Total operating expenses 10,073 8,207 19,789 16,488
---------- ---------- ---------- ----------
OPERATING INCOME 2,338 3,490 4,157 6,905
OTHER INCOME 11 79 40 79
INTEREST INCOME (EXPENSE):
Interest income 26 9 44 86
Interest expense (1,288) (905) (2,470) (1,809)
---------- ---------- ---------- ---------
Total interest expense, net (1,262) (896) (2,426) (1,723)
---------- ---------- ---------- ---------
NET INCOME 1,087 2,673 1,771 5,261
Shareholders' deficit, beginning of period (8,002) (3,178) (3,408) (660)
Capital contributions 5,000 - 5,000 -
Capital distributions - (441) (5,278) (5,547)
---------- ---------- ---------- ---------
Shareholders' deficit, end of period $(1,915) $ (946) $(1,915) $ (946)
========== ========== ========== =========
</TABLE>
See accompanying notes
13
<PAGE>
<TABLE>
<CAPTION>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months ended June 30,
2000 1999
---------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,771 $ 5,261
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,971 3,322
Provision for losses on trade accounts receivable 255 338
Changes in operating assets and liabilities:
Subscriber receivables (344) (121)
Other accounts receivable, prepaid expenses and other
current assets (37) (180)
Accounts payable and accrued liabilities (282) 1,279
Accrued interest 132 57
Due to related parties 472 (283)
--------- ---------
Net cash provided by operating activities $ 6,938 $ 9,673
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (15,728) (10,324)
Increase in other intangible assets (3) (196)
--------- ---------
Net cash used in investing activities $(15,731) $(10,250)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (41) (50)
Capital distributions (5,278) (5,547)
Capital contributions 5,000 -
Borrowings under senior credit facility 14,000 -
--------- ---------
Net cash provided by (used in) financing activities $ 13,681 $ (5,597)
--------- ---------
NET INCREASE (DECREASE) IN CASH 4,888 (6,444)
CASH AND CASH EQUIVALENTS, beginning of period 882 8,709
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 5,770 $ 2,265
========= =========
</TABLE>
See accompanying notes
14
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Business Organization And Purpose
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio, LLC ("Insight Ohio"), operates a cable
television system which provides basic and expanded cable television services to
homes in the eastern parts of Columbus, Ohio and surrounding areas. Insight
Ohio operates in one business segment. In connection with the contribution of
the Company's cable system ("the System") described below, the issuance of the
senior notes described in Note 4, and the issuance of the senior discount notes
by the Company's majority shareholder, during 1998 the three individuals who
previously owned the outstanding stock of the Company contributed their stock to
three separate limited liability companies. Accordingly, the Company is a
subsidiary of Coaxial LLC, which owns 67 1/2% of its outstanding stock.
Other related entities affiliated with Coaxial include Coaxial Financing Corp.,
Coaxial LLC, Coaxial DJM LLC, Coaxial DSM LLC, (collectively, the "Coaxial
Entities"), Phoenix Associates ("Phoenix"), Coaxial Communications of Southern
Ohio, Inc., Coaxial Associates of Columbus I, Coaxial Associates of Columbus II,
Paxton Cable Television, Inc. and Paxton Communications, Inc.
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns a
$140 million Series A preferred equity interest and a $30 million Series B
preferred equity interest of Insight Ohio (the "Series A Preferred Interest" and
"Series B Preferred Interest", respectively). The voting preferred equity
interests provide for distributions to Coaxial and indirectly to Phoenix and
Coaxial LLC in amounts equal to the payments required on the senior and senior
discount notes described in Note 4. IHO serves as the manager of Insight Ohio.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
3. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at June 30, 2000, the accompanying financial statements include the accounts of
Insight Ohio. All intercompany balances have been eliminated in consolidation.
At June 30, 2000, 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.
15
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
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, which was amended by SFAS No. 137, 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. 137 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company does not anticipate the adoption of SFAS No. 137 to have a material
impact on its financial statements.
4. Notes Payable
Notes payable at June 30, 2000 and December 31, 1999 consisted of senior notes
with an outstanding principal balance of $34,435,000 and borrowings under a
senior credit facility of $25,000,000 at June 30, 2000 and $11,000,000 at
December 31, 1999.
On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million
was allocated to Phoenix and $34.4 million was allocated to Coaxial. Interest
is payable in cash semi-annually on each February 15 and August 15. Interest
payments commenced on February 15, 1999. The Senior Notes are secured by the
outstanding Series A Preferred Interest in Insight Ohio and conditionally
guaranteed by Insight Ohio. The Series A Preferred Interest has a liquidation
preference of $140 million and pays distributions in an amount equal to the
payments on the Senior Notes. The Series A Preferred Interest is owned by
Coaxial and is pledged to Harris Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions made by
Insight Ohio on the Series A Preferred Interest to make payments on the Senior
Notes. The Senior Notes contain covenants that, among other things, restrict the
ability of Coaxial, Phoenix, Insight Ohio and any of their Restricted
Subsidiaries to incur additional indebtedness; pay dividends and make
distributions; issue stock of subsidiaries to third parties; make certain
investments; repurchase stock; create liens; enter into transactions with
affiliates; enter into sale and leaseback transactions; create dividend or other
payment restrictions affecting Restricted Subsidiaries; merge or consolidate in
a transaction involving all or substantially all of the assets of Coaxial,
Phoenix and their Restricted Subsidiaries, taken as a whole; transfer or sell
assets; use distributions on the Series A Preferred Interest or Series B
Preferred Interest for any purpose other than required payments of interest and
principal on the Senior Notes or Senior Discount Notes, respectively; and swap
assets. Coaxial, as joint and several issuer, with Phoenix, of the Senior
Notes, provides the funding that will allow Phoenix to repay its share of the
notes payable, as Phoenix has no operations.
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of up to $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
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, in
the event of a payment default under the Senior Credit Facility, distributions
on the Series A Preferred Interest and Series B Preferred Interest that are
required to pay the Senior Notes and the Senior Discount Notes, create liens on
assets, make investments, make acquisitions, engage in mergers or
consolidations, engage in certain transactions with subsidiaries and affiliates
and otherwise restrict certain activities. In addition, the Senior Credit
Facility requires compliance with certain financial
16
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
ratios, including total leverage, interest coverage and pro forma debt service
coverage ratios. As of June 30, 2000, $25,000,000 was drawn on the Senior
Credit Facility.
5. Commitments and Contingencies
The Company is a party to 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.
6. Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial LLC's 25% non-voting common
equity interest in Insight Ohio. The purchase price was 1,000,000 shares of
common stock of Insight's general partner, Insight Communications Company, Inc.
("ICCI"), 20% of which is payable by September 1, 2000 in cash or shares of
common stock, at ICCI's option. In connection with the purchase, Insight Ohio's
operating agreement was amended to, among other things, remove certain
participating rights of the principals of the Coaxial Entities, and vest the
common equity interests of Insight Ohio with 70% of its total voting power and
the preferred equity interests with 30% of its total voting power. As a result
of this transaction, the financial results of Insight Ohio will be consolidated
with the financial results of ICCI. As such, the consolidated financial
statements of the Company for periods subsequent to the purchase will not
include the consolidated results of Insight Ohio. In addition, as a result of
the amended operating agreement, Insight Ohio will be managed by Insight and not
by IHO.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. Insight Ohio intends to market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband
for the contribution to Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T, of additional cable television systems,
including Insight Ohio. Through a series of transactions, Insight will
contribute to Insight Midwest its interests in systems serving approximately
187,000 customers, including the approximately 84,000 customers served by
Insight Ohio. In addition, Insight will purchase from AT&T and immediately
contribute to Insight Midwest, systems serving approximately 100,000 customers
and AT&T will contribute systems serving approximately 250,000 customers. Upon
completion of the transactions, Insight Midwest will remain equally owned by
Insight and AT&T Broadband, and Insight will continue to serve as the general
partner and manage and operate the Insight Midwest systems. The transactions are
subject to the negotiation and execution of definitive agreements.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of Insight Midwest. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
17
<PAGE>
PHOENIX ASSOCIATES
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------- --------------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Interest receivable 293 215
--------- ---------
Total current assets 293 215
OTHER ASSETS:
Due from related parties 406 406
Notes receivable--related parties 550 550
Deferred financing fees, net of accumulated
amortization
of $865 and $627 in 2000 and 1999, respectively 2,935 3,173
--------- ---------
Total other assets 3,891 4,129
--------- ---------
Total assets $ 4,184 $ 4,344
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Interest payable $ 4,017 $ 4,017
--------- ---------
Total current liabilities 4,017 4,017
NOTES PAYABLE 105,565 105,565
--------- ---------
Total liabilities 109,582 109,582
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT (105,398) (105,238)
--------- ---------
Total liabilities and partners' deficit $ 4,184 $ 4,344
========= =========
</TABLE>
See accompanying notes
18
<PAGE>
PHOENIX ASSOCIATES
STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
EXPENSES $ - $ - $ - $ -
INTEREST EXPENSE (INCOME)
Interest income--related parties 39 - 78 -
Interest expense (2,758) (2,759) (5,516) (5,509)
------------ ------------ ----------- ------------
Total interest expense, net (2,719) (2,759) (5,438) (5,509)
------------ ------------ ----------- ------------
NET LOSS (2,719) (2,759) (5,438) (5,509)
PARTNERS' DEFICIT, beginning of period (102,679) (102,641) (105,238) (104,993)
CAPITAL CONTRIBUTIONS - 241 5,278 5,343
------------ ------------ ----------- ------------
PARTNERS' DEFICIT, end of period $(105,398) $(105,159) $(105,398) $(105,159)
============ ============ =========== ============
</TABLE>
See accompanying notes
19
<PAGE>
PHOENIX ASSOCIATES
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,438) $(5,509)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of deferred financing fees 238 231
Changes in operating assets and liabilities:
Interest receivable (78) -
Accrued interest - 176
--------------------- ---------------------
Net cash used in operating activities $(5,278) $(5,102)
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 5,278 5,343
Change in other intangibles - (241)
--------------------- ---------------------
Net cash provided by financing activities $ 5,278 $ 5,102
--------------------- ---------------------
NET INCREASE (DECREASE) IN CASH - -
CASH, beginning of period - -
--------------------- ---------------------
CASH, end of period $ - $ -
===================== =====================
</TABLE>
See accompanying notes
20
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 4, along with an affiliate, Coaxial Communications
of Central Ohio, Inc. ("Coaxial").
Phoenix is owned by 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 DJM LLC, Coaxial DSM LLC (the "Coaxial Entities")
Insight Communications of Central Ohio, LLC ("Insight Ohio"), Coaxial
Communications of Southern Ohio, Inc., Coaxial Associates of Columbus I, Coaxial
Associates of Columbus II, Paxton Cable Television, Inc. and Paxton
Communications, Inc.
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns a
$140 million Series A preferred equity interest and a $30 million Series B
preferred equity interest of Insight Ohio (the "Series A Preferred Interest" and
"Series B Preferred Interest", respectively). The voting preferred equity
interests provide for distributions to Coaxial and indirectly to Phoenix and
Coaxial LLC in amounts equal to the payments required on the senior notes and
senior discount notes described in Note 4. Coaxial will make distributions
that will enable Phoenix to fund the required payments on the senior notes.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
21
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133, which was amended by SFAS No. 137, 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. 137 is
effective for all quarters of fiscal years beginning after June 15, 2000.
Phoenix does not anticipate that the adoption of SFAS No. 137 will have a
material impact on its financial statements.
4. Notes Payable
Notes payable at June 30, 2000 and December 31, 1999 consisted of Senior Notes
with an outstanding principal balance of $105,565,000.
On August 21, 1998, Coaxial and Phoenix completed an offering of $140 million
10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million was allocated
to Phoenix and $34.4 million was allocated to Coaxial. Interest is payable in
cash semi-annually on each February 15 and August 15. Interest payments
commenced on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interest in Insight Ohio and conditionally guaranteed by
Insight Ohio. The Series A Preferred Interest has a liquidation preference of
$140 million and pays distributions in an amount equal to the payments on the
Senior Notes. The Series A Preferred Interest is owned by Coaxial and is pledged
to Harris Trust Company, as trustee, for the benefit of the holders of the
Senior Notes. Coaxial will utilize cash distributions made by Insight Ohio on
the Series A Preferred Interest to make payments on the Senior Notes. The Senior
Notes contain covenants that, among other things, restrict the ability of
Coaxial, Phoenix, Insight Ohio and any of their Restricted Subsidiaries to:
incur additional indebtedness; pay dividends and make distributions; issue
stock of subsidiaries to third parties; make certain investments; repurchase
stock; create liens; enter into transactions with affiliates; enter into sale
and leaseback transactions; create dividend or other payment restrictions
affecting Restricted Subsidiaries; merge or consolidate in a transaction
involving all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interest or Series B Preferred Interest
for any purpose other than required payments of interest and principal on the
Senior Notes or Senior Discount Notes, respectively; and swap assets. Phoenix is
a co-issuer and joint and several obligor of the debt, along with an affiliate,
Coaxial.
5. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations or financial position.
6. Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity
interest. The purchase price was 1,000,000 shares of common stock of Insight's
general partner, Insight Communications Company, Inc. ("ICCI"), 20% of which is
payable by September 1, 2000 in cash or shares of common stock, at ICCI's
option. In connection with the purchase, Insight Ohio's operating agreement was
amended to, among other things, remove certain participating rights of the
principals of the Coaxial Entities, and vest the common equity interests of
Insight Ohio with 70% of its total voting power and the preferred equity
interests with 30% of its total voting power. As a result of this transaction,
the financial results of Insight Ohio will be consolidated with the financial
results of ICCI. As such, the consolidated financial statements of the Company
for periods subsequent to
22
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
6. Recent Developments (continued)
the purchase will not include the consolidated results of Insight Ohio. In
addition, as a result of the amended operating agreement, Insight Ohio will be
managed by Insight and not by IHO.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. Insight Ohio intends to market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband
for the contribution to Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T, of additional cable television systems,
including Insight Ohio. Through a series of transactions, Insight will
contribute to Insight Midwest its interests in systems serving approximately
187,000 customers, including the approximately 84,000 customers served by
Insight Ohio. In addition, Insight will purchase from AT&T and immediately
contribute to Insight Midwest, systems serving approximately 100,000 customers
and AT&T will contribute systems serving approximately 250,000 customers. Upon
completion of the transactions, Insight Midwest will remain equally owned by
Insight and AT&T Broadband, and Insight will continue to serve as the general
partner and manage and operate the Insight Midwest systems. The transactions are
subject to the negotiation and execution of definitive agreements.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of Insight Midwest. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
23
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------ -------------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,770 $ 882
Subscriber receivables, less allowance for doubtful accounts
of $186 and $383 in 2000 and 1999, respectively 879 790
Other accounts receivable, less allowance for doubtful accounts
of $80 and $175 in 2000 and 1999, respectively 3,072 3,136
Prepaid expenses and other current assets 256 155
------------------------ ---------------------
Total current assets 9,977 4,963
Property and equipment, net of accumulated depreciation of
$58,803 and $53,999 in 2000 and 1999, respectively 62,379 51,455
Intangible assets, net of accumulated amortization of
$7,484 and $7,395 in 2000 and 1999, respectively 302 388
Due from related parties 108 158
------------------------ ---------------------
Total assets $ 72,766 $ 56,964
======================== =====================
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 32 $ 73
Accounts payable 5,246 4,963
Accrued interest 343 212
Accrued liabilities 2,970 5,060
Series A Preferred Dividend Payable 5,250 5,250
Accrued programming 3,479 1,890
------------------------ ---------------------
Total current liabilities 17,320 17,448
Capital lease obligations 43 43
Other deferred credits 2,345 2,408
Due to related parties 422 -
Series A Preferred Interest 140,000 140,000
Series B Preferred Interest 37,845 35,556
Senior credit facility 25,000 11,000
------------------------ --------------------
Total liabilities and preferred interests 222,975 206,455
Members' deficit (150,209) (149,491)
------------------------ --------------------
Total liabilities and members' deficit $ 72,766 $ 56,964
======================== ====================
</TABLE>
see accompanying notes
24
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 12,411 $ 11,697 $ 23,946 $ 23,393
OPERATING EXPENSES:
Service and administrative 7,375 6,560 14,818 13,241
Depreciation and amortization 2,659 1,647 4,893 3,247
------------ ------------ ----------- -----------
Total operating expenses 10,034 8,207 19,711 16,488
------------ ------------ ----------- -----------
OPERATING INCOME 2,377 3,490 4,235 6,905
OTHER INCOME 11 79 40 79
INTEREST INCOME (EXPENSE):
Interest expense (427) (6) (748) (12)
Interest income 26 9 44 86
------------ ------------ ----------- -----------
Total interest expense (income), net (401) 3 (704) 74
------------ ------------ ----------- -----------
NET INCOME 1,987 3,572 3,571 7,058
Accrual of preferred interests (4,662) (4,499) (9,289) (8,721)
------------ ------------ ----------- -----------
Loss attributable to common interests (2,675) (927) (5,718) (1,663)
Members' deficit, beginning of period (152,534) (145,454) (149,491) (144,718)
Capital contributions 5,000 - 5,000 -
Capital distributions - (520) - (520)
------------ ------------ ----------- -----------
Members' deficit, end of period $(150,209) $(146,901) $(150,209) $(146,901)
============ ============ =========== ===========
</TABLE>
See accompanying notes
25
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Net income $ 3,571 $ 7,058
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,893 3,247
Provision for losses on trade accounts receivable 255 338
Changes in certain assets and liabilities:
Subscriber receivables (344) (121)
Other accounts receivable, prepaid expenses and other current assets (37) (180)
Accounts payable and accrued liabilities (281) 1,274
Accrued interest 131 -
Due to related parties 472 (282)
----------- ----------
Net cash provided by operating activities $ 8,660 $ 11,334
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (15,728) (10,324)
Increase in other intangible assets (3) (117)
----------- ----------
Net cash used in investing activities $(15,731) $(10,441)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital distributions - (520)
Capital contributions 5,000 -
Principal payments on capital lease obligations (41) (50)
Preferred interest distributions (7,000) (6,767)
Borrowings under senior credit facility 14,000 -
----------- ----------
Net cash provided by (used in) financing activities $ 11,959 $ (7,337)
----------- ----------
NET INCREASE (DECREASE) IN CASH 4,888 (6,444)
CASH AND CASH EQUIVALENTS, beginning of period 882 6,709
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 5,770 $ 265
=========== ==========
</TABLE>
see accompanying notes
26
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 substantially all of the assets
and liabilities comprising the cable television system of Coaxial Communications
of Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television system (the "System") for which Coaxial received a 25% non-voting
common membership interest in Insight Ohio as well as 100% of the voting
preferred membership interests of Insight Ohio ("Series A Preferred Interest"
and "Series B Preferred Interest"). In conjunction therewith, Insight Holdings
of Ohio, LLC ("IHO") contributed $10 million in cash to Insight Ohio for which
it received a 75% non-voting common membership interest in Insight Ohio. Insight
Ohio provides basic and expanded cable services to homes in the eastern parts of
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 ("Senior Discount
Notes"). The Senior Discount Notes have a face amount of $55,869,000 and
approximately $30,000,000 of gross proceeds was received upon issuance. The
Senior Discount Notes are non-recourse, secured by the issued and outstanding
Series B Preferred Interest in Insight Ohio and 100% of the common stock of
Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial
LLC, and conditionally guaranteed by Insight Ohio.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
3. Summary of Significant Accounting Policies
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, which was amended by SFAS No. 137, 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. 137 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company does not anticipate the adoption of SFAS No. 137 to have a material
impact on its financial statements.
4. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a bank
which provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the Company's cable plant and for the introduction of new video services. The
Senior Credit Facility has
27
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. Credit Facility (continued)
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, in
the event of a payment default under the Senior Credit Facility, distributions
on the Preferred Interests that are required to pay the Senior Notes and the
Senior Discount Notes, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including total leverage, interest coverage and
proforma debt service coverage ratios. As of June 30, 2000, $25,000,000 was
drawn on the Senior Credit Facility.
5. 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.
6. Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial LLC's 25% non-voting common
equity interest. The purchase price was 1,000,000 shares of common stock of
Insight's general partner, Insight Communications Company, Inc. ("ICCI"), 20% of
which is payable by September 1, 2000 in cash or shares of common stock, at
ICCI's option. In connection with the purchase, Insight Ohio's operating
agreement was amended to, among other things, remove certain participating
rights of the principals of Coaxial LLC, Coaxial Financing Corp., Coaxial DJM
LLC and Coaxial DSM LLC, and vest the common equity interests of Insight Ohio
with 70% of its total voting power and the preferred equity interests with 30%
of its total voting power. As a result of this transaction, the financial
results of Insight Ohio will be consolidated with the financial results of ICCI.
As such, the consolidated financial statements of the Company for periods
subsequent to the purchase will not include the consolidated results of Insight
Ohio. In addition, as a result of the amended operating agreement, Insight Ohio
will be managed by Insight and not by IHO.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. Insight Ohio intends to market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband
for the contribution to Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T, of additional cable
28
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
6. Recent Developments (continued)
television systems, including Insight Ohio. Through a series of transactions,
Insight will contribute to Insight Midwest its interests in systems serving
approximately 187,000 customers, including the approximately 84,000 customers
served by Insight Ohio. In addition, Insight will purchase from AT&T and
immediately contribute to Insight Midwest, systems serving approximately 100,000
customers and AT&T will contribute systems serving approximately 250,000
customers. Upon completion of the transactions, Insight Midwest will remain
equally owned by Insight and AT&T Broadband, and Insight will continue to serve
as the general partner and manage and operate the Insight Midwest systems. The
transactions are subject to the negotiation and execution of definitive
agreements.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of Insight Midwest. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
29
<PAGE>
Item 2. 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.
Forward-Looking Statements
This report contains "forward-looking statements," including statements
containing the words "believes," "anticipates," "expects" and words of similar
import, which concern, among other things, the operations, economic performance
and financial condition of the System (as defined below). All statements other
than statements of historical fact included in this report regarding Coaxial
LLC, Coaxial Financing Corp. and Insight Communications of Central Ohio, LLC
("Insight Ohio") or any of the transactions described in this report, including
the timing, financing, strategies and effects of such transactions, are forward-
looking statements. Such forward-looking statements are based upon a number of
assumptions and estimates, which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of Coaxial
LLC, Coaxial Financing Corp. and Insight Ohio, and reflect future business
decisions which are subject to change. Although Coaxial LLC, Coaxial Financing
Corp. and Insight Ohio believe that the expectations reflected in such forward-
looking statements are reasonable, they can give no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from expectations include, without limitation:
. the ability of Coaxial LLC and Coaxial Financing Corp. to make scheduled
payments with respect to the Senior Discount Notes (as defined below) will
depend on the financial and operating performance of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is required
to be dedicated to the payment of principal and interest on its indebtedness
and the required distributions with respect to its Series A Preferred
Interest and its Series B Preferred Interest, thereby reducing the funds
available to Insight Ohio for its operations and future business
opportunities;
. Coaxial LLC and Coaxial Financing Corp. have no significant assets other than
the common equity of Coaxial Communications of Central Ohio, Inc. ("Coaxial")
owned by Coaxial LLC and notes issued by Coaxial DJM LLC (an owner of 22.5%
of the common equity of Coaxial) and Coaxial DSM LLC (an owner of 10% 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.
Offering of Senior Discount Notes and Senior Notes and Acquisition of System by
Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a private
offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their 12 7/8% Senior Discount Notes due in 2008
(the "Senior Discount Notes") in connection with a Financing Plan (the
"Financing Plan") which included the contribution of Coaxial's cable television
system (the "System") to Insight Ohio. On February 16, 1999, Coaxial LLC and
Coaxial Financing Corp. consummated an exchange of registered Senior Discount
Notes for their privately issued Senior Discount Notes. Coaxial LLC and Coaxial
Financing Corp. have only nominal assets except for Coaxial LLC's ownership of
67.5% of the common stock of Coaxial and notes of Coaxial DJM LLC and Coaxial
DSM LLC (the other two owners of Coaxial), which notes are secured by the
remaining 32.5% of the common stock of Coaxial. The Senior Discount Notes are
guaranteed on a conditional basis by Insight Ohio. The limited liability
companies that own Coaxial are referred to herein as the "Individual LLCs".
30
<PAGE>
As part of the Financing Plan, Coaxial and Phoenix Associates, an affiliated
general partnership, completed a private offering (the "Senior Notes Offering")
of $140,000,000 aggregate principal amount of their 10% Senior Notes due in 2006
(the "Senior Notes"). On February 16, 1999, Coaxial and Phoenix consummated an
exchange of registered Senior Notes for their privately issued Senior Notes. The
Senior Notes are also guaranteed on a conditional basis by Insight Ohio. The
conditional guarantee of the Senior Discount Notes is subordinated to the
conditional guarantee of the Senior Notes. Coaxial has only nominal assets
except for the Series A Preferred Interest and the Series B Preferred Interest
of Insight Ohio (together the "Preferred Interests").
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series B Preferred Interest
will be used to pay dividends to the Individual LLCs, which dividends will be
used to pay interest and principal on the Senior Discount Notes and the
distributions from the Series A Preferred Interest 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. Insight serves as the manager of the System.
The following discussion relates to the operations of Coaxial LLC for the
three months and six months ended June 30, 2000 compared to the three months and
six months ended June 30, 1999. The financial statements of Insight Ohio are
included in the consolidated financial statements of Coaxial and Coaxial was
deemed to be a subsidiary of Coaxial LLC and, as such, the financial statements
of Coaxial are included in the consolidated financial statements of Coaxial LLC.
The historical operating results of Coaxial LLC 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."
Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity
interest. The purchase price was 1,000,000 shares of common stock of Insight's
general partner, Insight Communications Company, Inc. ("ICCI"), 20% of which is
payable by September 1, 2000 in cash or shares of common stock, at ICCI's
option. In connection with the purchase, Insight Ohio's operating agreement was
amended to, among other things, remove certain participating rights of the
principals of the Coaxial Entities, and vest the common equity interests of
Insight Ohio with 70% of its total voting power and the preferred equity
interests with 30% of its total voting power. As a result of this transaction,
the financial results of Insight Ohio will be consolidated with the financial
results of ICCI. As such, the consolidated financial statements of the Company
for periods subsequent to the purchase will not include the consolidated results
of Insight Ohio. In addition, as a result of the amended operating agreement,
Insight Ohio will be managed by Insight and not by IHO.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. Insight Ohio intends to market the telephone
services both independently and as part of a bundle of services.
31
<PAGE>
Contribution of Insight Ohio
On March 23, 2000, Insight entered into a letter of intent with AT&T Broadband
for the contribution to Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T, of additional cable television systems,
including Insight Ohio. Through a series of transactions, Insight will
contribute to Insight Midwest its interests in systems serving approximately
187,000 customers, including the approximately 84,000 customers served by
Insight Ohio. In addition, Insight will purchase from AT&T and immediately
contribute to Insight Midwest, systems serving approximately 100,000 customers
and AT&T will contribute systems serving approximately 250,000 customers. Upon
completion of the transactions, Insight Midwest will remain equally owned by
Insight and AT&T Broadband, and Insight will continue to serve as the general
partner and manage and operate the Insight Midwest systems. The transactions are
subject to the negotiation and execution of definitive agreements.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of Insight Midwest. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
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, revenues are derived from installation and reconnection fees charged
to basic customers to commence or discontinue service, pay-per-view charges,
digital and high speed data services, late payment fees, advertising revenues
and commissions related to the sale of goods by home shopping services.
System operating expenses consist of service and administrative expenses, home
office expenses and depreciation and amortization. Service and administrative
expenses include direct costs, such as fees paid to programming suppliers,
expenses related to copyright fees, bad debt expense, and use fees. Programming
fees have historically increased at rates in excess of inflation due to
increases in the number of programming services offered by the System and
improvements in the quality of programming. Service and administrative expenses
also include costs attributable to the operation of the System, including wages
and salaries and other expenses related to plant operating activities, customer
service operations, marketing, billing, advertising sales and video production.
The System relies on Insight for all of its strategic, managerial, financial
and operational oversight and advice. Insight also centrally purchases
programming and equipment and provides the associated discount to the System. In
exchange for all such services provided to the System and subject to certain
restrictions contained in the covenants with respect to Insight Ohio's Senior
Credit Facility, the Senior Notes and the Senior Discount Notes, Insight 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 Notes and the Senior Discount Notes as well as Insight Ohio's Senior
Credit Facility. Such management fee is included in service and administrative
expenses.
Results of Operations
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues for the three months ended June 30, 2000 were $12.4 million compared
to $11.7 million for the three months ended June 30, 1999. For the three months
ended June 30, 2000, customers served averaged 84,242 compared with 85,995
during the same time period in 1999. Revenues for the three months ended June
30, 2000 were 6.1% higher than the same period for the prior year due primarily
to revenues generated from new product launches, increased advertising revenues
and increased pay revenue resulting from a decrease in discounting of pay units.
32
<PAGE>
Effective November 1, 1999, the System began activating nodes in rebuilt
areas, increasing the rate for classic service by $1.75 from $14.93 to $16.68.
As of June 30, 2000, there were approximately 28,500 customers receiving this
enhanced service which offers six more channels on the classic service tier. In
addition, customers in rebuilt areas have the opportunity to receive new
products including Insight's interactive digital service (which includes video
on demand) and high speed data access. As of June 30, 2000, there were
approximately 7,400 digital customers representing 26.0% penetration (digital
customers as a percentage of total customers with access to digital service).
Digital revenue for the quarter was approximately $334,000, including
approximately $131,000 for video on demand service. High speed data services
were launched during the second quarter of 2000. As of June 30, 2000, there
were approximately 1,900 cable modem customers, a penetration of 3.0% (modem
customers as a percentage of homes passed with access to high speed data
services). Revenues from high speed data services were approximately $96,000
for the quarter ended June 30, 2000. In addition to revenues from new product
launches, revenues for the second quarter increased as a result of higher
advertising revenues of approximately $223,000 and increased pay revenue of
approximately $143,000.
Average revenue per customer per month for the three months ended June 30,
2000 totaled $49.11 versus $45.34 for the three months ended June 30, 1999,
primarily as a result of the revenue increases noted above. Despite a 2.0%
decrease in average customers served, the average monthly revenue per basic
customer increased slightly primarily as a result of the increase in the rate
for classic service in connection with the System's rebuild.
Service and administrative expenses increased to $7.4 million for the three
months ended June 30, 2000 compared to $6.6 million for the three months ended
June 30, 1999, an increase of approximately $815,000 or 12.4%. An increase of
22.2% in basic programming expenses from $1.7 million for the three months ended
June 30, 1999 to $2.1 million for the same time period in 2000 reflects
increased programming rates as discounts previously realized through Insight
Ohio's affiliation with Media One expired in November 1999. Similarly, pay
programming expenses increased 19.1% during the three months ended June 30, 2000
versus the three months ended June 30, 1999, to $1.1 million. The increased
basic and pay programming expense accounted for approximately $562,000 or 69.0%
of the total increase in expenses. In addition, programming costs increased due
to additional channels added in rebuilt areas. Service and administrative
expenses also increased due to the launch of video on demand service, the launch
of high speed data services, as well as increased marketing costs and property
taxes.
Depreciation and amortization expense for the three months ended June 30, 2000
increased 65.4% over the three months ended June 30, 1999 to approximately $2.7
million reflecting additional capital expenditures resulting from upgrades to
the System's network.
Operating income for the three months ended June 30, 2000 totaled $2.3 million
versus $3.5 million for the three months ended June 30, 1999 reflecting
increased expenses and depreciation, partially offset by increased revenues.
Net interest expense for the three months ended June 30, 2000 totaled
approximately $2.0 million versus approximately $1.6 million for the three
months ended June 30, 1999, primarily resulting from interest on the Senior
Discount Notes issued and from increased borrowings under the Senior Credit
Facility.
Net income of $277,000 was realized for the three months ended June 30, 2000
compared to net income of $2.0 million for the three months ended June 30, 1999
for the reasons set forth above.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues for the six months ended June 30, 2000 were $23.9 million compared to
$23.4 million for the six months ended June 30, 1999. For the six months ended
June 30, 2000, customers served averaged 84,225 compared with 86,503 during the
same time period in 1999. Revenues for the six months ended June 30, 2000 were
2.4% higher than the same period for the prior year where revenue from new
product launches, increased advertising and pay revenues more than offset
decreases in basic, pay per view and revenues from late charges. Digital
revenue for the six months ended June 30, 2000 was approximately $450,000,
including approximately $181,000 for video on demand service. High speed data
revenue was approximately $96,000 for the six months ended June 30, 2000 and
advertising and pay revenue increased by approximately $477,000 and $187,000,
respectively, as compared to the six months ended June 30, 1999. Pay per view
and late charge revenues decreased approximately $201,000 and $137,000,
respectively during the six months ended June 30, 2000 as compared to the same
period in the prior year.
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Average revenue per customer per month for the six months ended June 30, 2000
totaled $47.39 versus $45.07 for the six months ended June 30, 1999, primarily
as a result of the revenue increases noted above. Despite a 2.6% decrease in
average customers served, the average monthly revenue per basic customer
increased slightly primarily as a result of the increase in the rate for classic
service in connection with the System's rebuild. Basic revenue decreased
approximately 1.4% for the six months ended June 30, 2000 as compared to the
same period in the prior year.
Service and administrative expenses increased to $14.8 million for the six
months ended June 30, 2000 compared to $13.2 million for the six months ended
June 30, 1999, an increase of $1.6 million or 11.9%. An increase of 25.4% in
basic programming expenses from $3.5 million for the six months ended June 30,
1999 to $4.4 million for the same time period in 2000 reflects increased
programming rates as discounts previously realized through Insight Ohio's
affiliation with Media One expired in November 1999. Similarly, pay programming
expenses increased 16.1% during the six months ended June 30, 2000 versus the
six months ended June 30, 1999, to $2.2 million. The increased basic and pay
programming rates accounted for approximately $1.2 million or 75.0% of the total
increase in expenses. In addition, programming costs increased due to
additional channels added in rebuilt areas. Service and administrative expenses
also increased due to the launch of video on demand service, the launch of high
speed data services, as well as increased property tax expense.
Depreciation and amortization expense for the six months ended June 30, 2000
increased by 54.7% over the six months ended June 30, 1999 to approximately $5.0
million reflecting additional capital expenditures resulting from upgrades to
the System's network.
Operating income for the six months ended June 30, 2000 totaled $4.1 million
versus $6.9 million reflecting increased expenses and depreciation, partially
offset by increased revenues.
Net interest expense for the six months ended June 30, 2000 totaled
approximately $4.0 million versus approximately $3.2 million for the six months
ended June 30, 1999, primarily resulting from interest on the Senior Discount
Notes and from increased borrowings under the Senior Credit Facility.
Net income of $174,000 was realized for the six months ended June 30, 2000
compared to net income of $3.8 million for the six months ended June 30, 1999
for the reasons set forth above.
Liquidity and Capital Resources
The cable television business is a capital-intensive business that generally
requires financing for the upgrade, expansion and maintenance of the technical
infrastructure. Capital expenditures totaled $15.7 million for the six months
ended June 30, 2000. These expenditures were primarily for the rebuild of cable
plant and for serving new homes. Capital expenditures are financed by cash flows
from operations, borrowings under the Senior Credit Facility and capital
contributions.
Insight continues to further enhance the technical platform of the System by
upgrading the plant serving the majority of customers. The capability for high-
speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Capital expenditures are expected to approximate $34.6 million during the year
2000 to support not only ongoing plant extensions, new customer additions and
capital replacement, but also to fund the plant upgrade to 870 MHz and to
activate plant for 2-way transmission, which is necessary to facilitate the
deployment of interactive services.
Cash provided by operations for the six months ended June 30, 2000 was $6.9
million compared to $9.7 million for the same period in 1999. The decrease is
primarily attributable to a decrease in net income.
Cash used in investing activities for the six months ended June 30, 2000 and
1999 was $15.7 million and $10.7 million, respectively, reflecting capital
expenditures to upgrade the System and build plant expansions.
34
<PAGE>
Cash provided by financing activities for the six months ended June 30, 2000
was $13.7 million as capital distributions of $5.3 million were offset by
capital contributions of $5.0 million. In addition, $14.0 million in borrowings
under the Senior Credit Facility were made to support capital expenditures and
changes in working capital. Cash used in financing activities for the six
months ended June 30, 1999 was $5.4 million consisting primarily of capital
distributions. The capital distributions were made to Phoenix Associates
("Phoenix"), to be used to pay interest on Phoenix's portion of the Senior
Notes.
In addition to cash flow from operations, Insight Ohio has a $25 million
Senior Credit Facility which was fully borrowed at June 30, 2000.
Due to the increased rebuild costs, management had determined that amounts
available under the Senior Credit Facility and cash flows from operations may
not be sufficient to finance the operating and capital requirements of the
System, debt service requirements and distributions on the Preferred Interests
over the next year. As such, Insight has provided a commitment letter to
Insight Ohio to fund any operating shortfall through the year 2000. Insight
contributed $6.0 million to Insight Ohio through August 9, 2000.
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 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, which was amended by SFAS No.
137, is effective for all quarters of fiscal years beginning after June 15,
2000. Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not anticipate
the adoption of this statement to have a material impact on their respective
financial statements.
35
<PAGE>
Item 3. Quantitative and Qualitative Disclosures 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.
Insight Ohio's senior credit facility bears interest at floating rates.
Accordingly, Insight Ohio is exposed to potential losses related to changes in
interest rates. The Senior Discount Notes issued by Coaxial LLC and Coaxial
Financing Corp. and the Senior Notes issued by Coaxial and Phoenix Associates
("Phoenix") bears interest at fixed rates.
The fair value of borrowings under Insight Ohio's senior credit facility
approximates carrying value as it bears interest at floating rates. The fair
value and carrying value of the Senior Discount Notes as of June 30, 2000 was
$35.6 and $37.8 million, respectively. The fair value and carrying value of the
Senior Notes applicable to Coaxial as of June 30, 2000 was $32.9 and $34.4
million, respectively. The fair value and carrying value of the Senior Notes
applicable to Phoenix as of June 30, 2000 was $100.8 and $105.6 million,
respectively.
36
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 - Purchase and Option Agreement, dated as of August 8, 2000, among
Coaxial Communications of Central Ohio, Inc., Insight Communications of
Central Ohio, LLC, Insight Holdings of Ohio, LLC, Insight Communications
Company, L.P., Insight Communications Company, Inc., Coaxial LLC, Coaxial DJM
LLC, Coaxial DSM LLC, Barry Silverstein, Dennis J. McGillicuddy, and D.
Stevens McVoy (filed as Exhibit 2.1 to Insight Communications Company,
Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 (File No. 0-26677) and incorporated herein by reference)
3.1 - Amended and Restated Operating Agreement of Insight Ohio, dated as
of August 8, 2000 (filed as Exhibit 3.1 to Insight Communication Company,
Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 (File No. 0-26677) and incorporated herein by reference)
10.1 - Cable Facilities Lease Agreement, dated July 17, 2000, among AT&T
Broadband, LLC and Insight Communications Company, Inc. and certain of its
affiliates, including Insight Ohio (filed as Exhibit 10.1 to Insight
Communications Company, Inc's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 (File No. 0-26677) and incorporated herein by
reference)
27.1 - Financial Data Schedule of Coaxial LLC
27.2 - Financial Data Schedule of Coaxial Financing Corp.
27.3 - Financial Data Schedule of Insight Communications of Central Ohio,
LLC
(b) Reports on Form 8-K
None
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial LLC
(Registrant)
Dated: August 11, 2000
By: /s/ Michael S. Willner
_________________________
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
_________________________
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial Financing Corp.
(Registrant)
Dated: August 11, 2000
By: /s/ Michael S. Willner
_________________________
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
_________________________
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Insight Communications of Central Ohio, LLC
(Registrant)
Dated: August 11, 2000
By: /s/ Michael S. Willner
_________________________
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
_________________________
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
