<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1998
Commission file numbers: 333-63677
333-63677-01
333-63677-02
Coaxial Communications of Central Ohio, Inc.
Phoenix Associates
Insight Communications of Central Ohio, LLC
(Exact name of registrants as specified in their respective charters)
Ohio 31-0975825
Florida 59-1798351
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
c/o Insight Communications Company, L.P.
126 East 56th Street
New York, NY 10022
(212) 371-2266
(Address and telephone number of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes....... No....X....
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] Not Applicable
State the aggregate market value of the common equity held by non-
affiliates of the registrants: Not Applicable
Indicate the number of shares outstanding of the registrants' common stock:
Not Applicable
<PAGE>
Forward-Looking Statements
This annual report contains "forward-looking statements," including
statements containing the words "believes," "anticipates," "expects" and words
of similar import, which concern, among other things, the operations, economic
performance and financial condition of the System (as defined below), including,
in particular, the likelihood of the System's success given its new management
by Insight Holdings of Ohio, LLC ("IHO"). All statements other than statements
of historical fact included in this annual report regarding Coaxial
Communications of Central Ohio, Inc. ("Coaxial"), Phoenix Associates ("Phoenix")
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, Phoenix and
Insight Ohio, and reflect future business decisions which are subject to change.
Although Coaxial, Phoenix 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 and Phoenix to make scheduled payments with respect
to the Senior Notes (as defined below) will depend on the financial and
operating performance of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is
required to be dedicated to the payment of principal and interest on its
indebtedness and the required distributions with respect to its Series A
Preferred Interests and its Series B Preferred Interests, thereby reducing
the funds available to Insight Ohio for its operations and future business
opportunities;
. Coaxial and Phoenix have no significant assets other than Coaxial's
ownership of common membership interests, Series A Preferred Interests and
Series B Preferred Interests in Insight Ohio; and
. the indenture governing the terms of the Senior Notes imposes restrictions
on Coaxial, Phoenix and Insight Ohio and the Senior Credit Facility of
Insight Ohio imposes restrictions on Insight Ohio.
Coaxial, Phoenix and Insight Ohio do not intend to update these forward-looking
statements.
2
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PART II
Item 6. Selected Financial Data
The following tables present selected historical financial data for Coaxial
and Phoenix as of and for the five years ended December 31, 1998 and selected
historical financial data for Insight Ohio as of and for the year ended December
31, 1998. The financial information of Central Ohio Cable System Operating Unit
is presented as it represents the predecessor to Insight Ohio. These tables
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
Coaxial Communications of Central Ohio, Inc.
(dollars in thousands, except subscriber data)
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................................... $ 47,956 $ 48,229 $ 50,418 $ 46,831 $ 43,546
Operating expenses:
Service and administrative............ 27,832 27,391 25,236 21,920 20,830
Severance and transaction
structure costs.................... 4,822 - - - -
Management fee........................ 493 - - - -
Home office........................... 1,370 1,498 1,697 1,695 1,316
Depreciation and amortization......... 5,311 5,256 5,350 4,837 4,010
------- -------- -------- -------- --------
Total operating expenses..... 39,828 34,145 32,283 28,452 26,156
Operating income............................... $ 8,128 $ 14,084 $ 18,135 $ 18,379 $ 17,390
Interest expense, net................. 1,622 1,230 426 1,033 864
Other expense......................... 421 271 248 251 261
------- -------- -------- -------- --------
Net income before
extraordinary item.................... $ 6,085 $ 12,583 $ 17,461 $ 17,095 $ 16,265
Extraordinary item - loss on debt
retirement......................... (847) - - - (130)
------- -------- -------- -------- --------
Net income..................................... $ 5,238 $ 12,583 $ 17,461 $ 17,095 $ 16,135
======= ======== ======== ======== ========
Financial Ratios and Other Data:
System Cash Flow (1)........................... $ 20,124 $ 20,838 $ 25,182 $ 24,911 $ 22,716
System Cash Flow margin........................ 42.0% 43.2% 49.9% 53.2% 52.2%
Operating Cash Flow(2)......................... 18,261 19,340 23,485 23,216 21,400
Capital expenditures........................... 7,369 5,570 5,998 5,724 5,486
Net cash provided by operating activities...... 12,596 18,622 24,369 21,895 5,266
Net cash used in investing activities.......... 3,470 15,242 19,551 19,914 5,441
Net cash used in financing activities.......... 991 3,712 4,582 1,623 525
Operating Data: (at end of period, except
average and annualized data)
Homes passed (3)............................... 171,753 166,306 161,018 156,613 152,562
Basic subscribers (4).......................... 87,637 91,873 88,056 86,041 82,166
Basic penetration (5).......................... 51.0% 55.2% 54.7% 54.9% 53.9%
Premium service units (6)...................... 90,032 80,013 68,720 74,087 74,529
Premium penetration (7)........................ 102.7% 87.1% 78.0% 86.1% 90.7%
Average monthly revenue per basic
subscriber (8)............................... $ 44.52 $ 44.67 $ 48.27 $ 46.40 $ 44.70
System Cash Flow per basic subscriber.......... $ 224.21 $ 231.62 $ 289.28 $ 296.20 $ 279.78
Balance Sheet Data: (at the end of the period)
Total assets................................... $ 45,063 $ 109,655 $ 102,099 $ 87,946 $71,677
Total debt..................................... 35,692 47,236 50,442 40,375 34,123
Total liabilities.............................. 45,723 55,328 59,767 50,927 44,062
Total shareholders' equity (deficit)........... (660) 54,327 42,332 37,019 27,615
</TABLE>
3
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Phoenix Associates
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Home office........................... $ - $ - $ - $ - $ 4
--------- --------- --------- --------- ---------
Total operating expenses............ - - - - 4
Operating loss......................... - - - - (4)
Interest expense, net............... $ 12,350 $ 12,094 $ 12,490 $ 12,362 $ 7,265
Other expense....................... 61 89 106 120 167
--------- --------- --------- --------- ---------
Net loss before extraordinary item..... (12,411) (12,183) (12,596) (12,482) (7,436)
Extraordinary item-(loss) gain......... 100 3,315 - - (755)
--------- --------- --------- --------- ---------
Net loss............................... $ (12,311) $ (8,868) $ (12,596) $ (12,482) $ (8,191)
========= ========= ========= ========= =========
Balance Sheet Data: (at end of period)
Total assets........................... $ 4,413 $ 7,954 $ 9,218 $ 8,592 $ 8,105
Total debt............................. 105,565 178,365 170,762 157,448 144,514
Total liabilities...................... 109,346 178,366 170,762 157,540 144,572
Total partners' deficit................ (104,993) (170,412) (161,544) (148,948) (136,466)
</TABLE>
4
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Insight Communications of Central Ohio, LLC
(dollars in thousands, except subscriber data)
<TABLE>
<CAPTION>
Insight
Communications
of
Central Ohio, LLC Central Ohio Cable System Operating Unit
------------------- -------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 47,956 $ 48,229 $ 50,418 $ 46,831 $ 43,546
Operating expenses:
Service and administrative 27,831 27,391 25,236 21,920 20,830
Severance and transaction structure costs 4,822 - - - -
Management fee 493 - - - -
Home office 1,371 1,498 1,697 1,695 1,316
Depreciation and amortization 5,311 5,238 5,334 4,823 3,978
---------------- ------------- ------------- ------------- -------------
Total operating expenses 39,828 34,127 32,267 28,438 26,124
---------------- ------------- ------------- ------------- -------------
Operating income 8,128 14,102 18,151 18,393 17,422
Interest expense (income), net (59) (70) (29) (38) (22)
Other expense 422 271 248 251 239
---------------- ------------- ------------- ------------- -------------
Net income $ 7,765 $ 13,901 $ 17,932 $ 18,180 $ 17,205
================ ============= ============= ============= =============
Financial Ratios and Other Data:
System Cash Flow (1) $ 20,125 $ 20,838 $ 25,182 $ 24,911 $ 22,716
System Cash Flow margin 42.0% 43.2% 49.9% 53.2% 52.2%
Operating Cash Flow (2) 18,261 19,340 23,485 23,216 21,400
Capital Expenditures 7,369 5,529 5,992 5,702 5,479
Net cash provided by operating activities 14,399 19,454 21,975 22,192 21,208
Net cash used in investing activities (6,679) (5,554) (5,711) (5,955) (5,435)
Net cash used in financing activities (1,585) (14,232) (16,028) (15,879) (16,473)
Operating Data: (at end of period, except average
and annualized data)
Homes passed (3) 171,753 166,306 161,018 156,613 152,562
Basic subscribers (4) 87,637 91,873 88,056 86,041 82,166
Basic penetration (5) 51.0% 55.2% 54.7% 54.9% 53.9%
Premium service units (6) 90,032 80,013 68,720 74,087 74,529
Premium penetration (7) 102.7% 87.1% 78.0% 86.1% 90.7%
Average monthly revenue per basic subscriber (8) $ 44.52 $ 44.67 $ 48.27 $ 46.40 $ 44.70
System Cash Flow per basic subscriber(9) $ 224.22 $ 231.62 $ 289.28 $ 296.18 $ 279.78
Balance Sheet Data: (at end of the period)
Total assets $ 41,967 $ 33,553 $ 34,062 $ 33,226 $ 30,398
Total debt 228 407 615 651 654
Total liabilities 16,686 7,982 8,425 9,728 9,384
Total preferred interests 170,000 N/A N/A N/A N/A
Total liabilities and preferred interests 186,686 N/A N/A N/A N/A
Total member's deficit (144,719) N/A N/A N/A N/A
Net assets to be contributed N/A 25,571 25,637 23,499 21,014
</TABLE>
5
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Notes To Selected Financial and Operating Data
(1) Represents Operating Cash Flow (as defined below in Note 2) plus home office
expense for periods prior to the acquisition of the System, and Operating Cash
Flow plus management fees for periods after or which give effect to the
acquisition of the System. Management believes that System Cash Flow is a
meaningful measure of performance because it is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, System Cash
Flow is not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net income
as an indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted accounting
principles. System Cash Flow, as computed by management, is not necessarily
comparable to similarly titled amounts of other companies. See the financial
statements, including the Statements of Cash Flows, included elsewhere in this
Report.
(2) Represents earnings before depreciation, amortization, severance and
transaction structure costs, interest expense, other expenses, and extraordinary
item. Management believes that Operating Cash Flow is a meaningful measure of
performance because it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, Operating Cash Flow is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
Operating Cash Flow, as computed by management, is not necessarily comparable to
similarly titled amounts of other companies. See the financial statements,
including the Statements of Cash Flows included elsewhere in this Report.
(3) Refers to estimates by management of the approximate number of dwelling
units in a particular community that can be connected to the System.
(4) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts are included on an equivalent
basic unit basis in which the total monthly bill for the account is divided by
the basic monthly charge for a single outlet in the area.
(5) Calculated as basic subscribers as a percentage of homes passed.
(6) Includes only single channel services offered for a monthly fee per channel
and does not include tiers of channels offered as a package for a single monthly
fee. A subscriber may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(7) Calculated as premium service units as a percentage of basic subscribers.
(8) Represents revenues of the System during the respective period divided by
the months in the period divided by the average number of basic subscribers
(beginning of period plus end of
6
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period divided by two) for such respective period.
(9) Represents Annualized System Cash Flow during the respective period divided
by the average number of basic subscribers (beginning of period plus end of
period divided by two) for such respective period.
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Private Offering of Senior Notes and Acquisition of System by Insight Ohio
Coaxial and Phoenix completed on August 21, 1998 a private offering (the
"Senior Notes Offering") of $140,000,000 aggregate principal amount of their
Senior Notes in connection with the Financing Plan discussed under "Liquidity
and Capital Resources," which included the contribution of the System to Insight
Ohio. As a result of this transaction, Coaxial and Phoenix have only nominal
assets except for Coaxial's ownership of 25% of the non-voting common membership
interests in Insight Ohio and 100% of the voting Preferred Interests. The Senior
Notes are guaranteed on a conditional basis by Insight Ohio.
As part of the Financing Plan, one of the owners of Coaxial ("Coaxial LLC")
and an affiliated corporation ("Coaxial Financing Corp.") completed a private
offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their Senior Discount Notes. The Senior Discount
Notes are also guaranteed on a conditional basis by Insight Ohio, subordinated
to the conditional guarantee of the Senior Notes. The three limited liability
companies that own Coaxial, which includes Coaxial LLC, are referred to herein
as the "Individual LLCs."
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series A Preferred
Interests will be used to pay interest and principal on the Senior Notes and the
distributions from the Series B Preferred Interests will be used to pay
dividends to the Individual LLCs, which dividends will be used to pay interest
and principal on the Senior Discount Notes. Distributions by Insight Ohio will
be subject to certain financial covenants and other conditions set forth in its
Senior Credit Facility.
Coaxial and Phoenix do not conduct any business and are dependent upon the
cash flow of Insight Ohio to meet their obligations under the Senior Notes. IHO,
a wholly-owned subsidiary of Insight, serves as the manager of the System.
The following discussion relates to the historical operations of Coaxial
for the periods presented. On August 21, 1998, all of the assets and
liabilities comprising the System (predecessor company to Insight Ohio) were
contributed to Insight Ohio. Subsequent to the consummation of the Financing
Plan, Insight Ohio was deemed to be a subsidiary of Coaxial and, as such, the
financial statements of Insight Ohio are consolidated into the financial
statements of Coaxial. Financial results related to historical information
reflect the operation and management of the System by Coaxial through August 21,
1998 and by IHO from August 21, 1998 to December 31, 1998. The historical
operating results of Coaxial presented below reflect the actual results of the
System in addition
8
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to certain financing activities unrelated to the operation of the System. These
financing activities relate primarily to the offering of the 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 presented below appear
elsewhere in this report under the heading "Coaxial Communications of Central
Ohio, Inc."
Overview
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, other revenues are derived from installation and reconnection fees
charged to basic customers to commence or discontinue service, pay-per-view
charges, late payment fees, franchise fees, advertising revenues and commissions
related to the sale of goods by home shopping services.
System operating expenses consist of service and administrative expenses,
home office expenses and depreciation and amortization. Service and
administrative expenses include direct costs, such as fees paid to programming
suppliers, expenses related to copyright fees, bad debt expense, and franchise
and use fees. Programming fees have historically increased at rates in excess of
inflation due to increases in the number of programming services offered by the
System and improvements in the quality of programming. Service and
administrative expenses also include costs attributable to the operation of the
System, including wages and salaries and other expenses related to plant
operating activities, customer service operations, marketing, billing,
advertising sales and video production. Prior to August 21, 1998, service and
administrative expenses also included costs attributable to finance and
accounting, human resources and other administrative functions. Upon
consummation of the Financing Plan, such expenses were replaced by the
management fee arrangement with IHO.
The System relies on IHO for all of its strategic, managerial, financial
and operational oversight and advice. IHO also centrally purchases programming
and equipment and provides the associated discount to the System. In exchange
for all such services provided to the System and subject to certain restrictions
contained in the covenants with respect to Insight Ohio's Senior Credit
Facility, the Senior Notes and the Senior Discount Notes, IHO is entitled to
receive management fees of 3.0% of gross operating revenues of the System. Such
management fee is payable only after distributions have been made in respect of
the Preferred Interests and only to the extent that such payment would be
permitted by an exception to the restricted payments covenants of the Senior
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.
9
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Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were $48.0 million, compared
to $48.2 million for the year ended December 31, 1997. For the year ended
December 31, 1998, subscribers served averaged 89,755, as compared with 89,965
in 1997. Effective January 1998, Coaxial no longer included franchise fees in
revenue due to a change in Coaxial's financial reporting which caused 1998
revenue to be lower by approximately $1.0 million. On a pro forma basis,
including franchise fees, revenue for the year ended December 31, 1998 was 7.7%
higher than the previous year, primarily reflecting a 22.9% increase in
advertising revenue, which includes production revenue. In addition, revenues
were depressed by the former owner's program of deeply discounting its service
by more than 55% of the System's rate card. The program was initiated in late
July 1997 and continued through June 1998. Therefore, the full impact of the
approximately 16,000 subscribers billed at promotional rates will not be fully
evident until fiscal 1999.
Service and administrative expenses increased to $29.7 million for the year
ended December 31, 1998, compared to $28.9 million in 1997, an increase of
$800,000, or 2.8%. Programming expenses increased by 15.4%, from $10.4 million
in 1997 to $12.0 million in 1998, reflecting additional channels provided in the
competitive areas, an increase in customers and annual increases in programming
rates offset by savings realized through Insight's purchasing discounts. The
System was charged home office expenses that include costs incurred by the
owners of Coaxial and their direct employees relating to the System including
salaries, benefits, legal fees, travel and entertainment, accounting fees and
other office expenses. For the year ended December 31, 1998, such expenses
totaled $1.4 million, an increase of $100,000, or 7.7%, from 1997. Upon
consummation of the Financing Plan, IHO commenced management services to the
System for which it receives a management fee. Service and administrative
expenses, which accounted for 66.1% of total revenue for the period ended August
21, accounted for only 54.5% of total revenue from August 21 through the end of
year reflecting Coaxial's new cost structure. In particular, programming fees
were approximately 6.0% less on a per customer basis due to discounts available
to Coaxial. In addition, on an annualized basis, personnel expenses were less by
approximately 16.7% due to the elimination of duplicative administrative
personnel.
Severance and transaction structure costs of $4.8 million were incurred for
the year ended December 31, 1998 as a result of the Financing Plan and the
related contribution of the System to Insight Ohio. These costs consisted of
severance costs of $960,000 and professional fees of $3.8 million.
Depreciation and amortization remained flat at $5.3 million for the years
1998 and 1997.
Net interest expense increased approximately $400,000 to $1.6 million for
the year ended
10
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December 31, 1998.
In 1998, an extraordinary loss of $847,000 was recognized due to the
refinancing of Coaxial's bank debt that existed prior to August 21, 1998.
Net income decreased to $5.2 million for the year ended December 31, 1998
from net income of $12.6 million for the year ended December 31, 1997 for the
reasons set forth above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 were $48.2 million, compared
to $50.4 million for the year ended December 31, 1996, a decrease of $2.2
million, or 4.4%. Basic, standard and premium revenues accounted for nearly all
of the decrease, declining from $41.3 million in the 1996 period to $39.2
million in the 1997 period, a decrease of $2.1 million, or 5.1%. This decline in
revenue reflects the full impact of the competitive environment for
approximately 23,000 customers who were overbuilt in the last half of 1996, the
addition of approximately 23,000 customers to the overbuilt areas during 1997
and the effect of a promotional campaign used to acquire customers in the last
half of 1997. The overall result of the rate reductions and promotional campaign
was alleviated by customer growth during 1997, from approximately 88,000 at the
end of 1996 to approximately 91,900 at year-end 1997, an increase of 4.4%. Other
revenue declined by $157,000, or 7.2%, to $2.0 million for 1997, from $2.2
million in 1996, primarily due to installation revenues which were lower due to
promotional offerings. Advertising revenues increased to $3.4 million for 1997,
from $3.1 million in 1996, an increase of 9.7%.
Service and administration expenses (including home office) rose to $28.9
million for the year ended December 31, 1997, compared to $26.9 million for the
same period in 1996, an increase of 7.4%. Fees for basic and standard
programming were $6.4 million in 1997, compared to $4.9 million in 1996, an
increase of 30.6%. The increase in programming costs reflected additional
services added in the competitive areas, customer growth and fee increases. Home
office expenses were $1.5 million in 1997, a decrease of $200,000, or 11.8%,
from $1.7 million in 1996. The reduction resulted primarily from the elimination
of salaries for shareholder officers. In addition to programming costs, other
expenses increased from $14.4 million in 1996 to $15.2 million in 1997, an
increase of $800,000, or 5.6%. Of this increase, $500,000 occurred in general
and administrative and personnel accounts due to increases in benefit costs,
legal fees and office rent.
Depreciation and amortization decreased by $100,000, or 1.8%, to a total of
$5.2 million in 1997.
Net interest expense increased approximately $800,000 to $1.2 million for
the year ended December 31, 1997.
11
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Net income decreased to $12.6 million for the year ended December 31, 1997
from $17.5 million for the year ended December 31, 1996 for the reasons set
forth above.
Liquidity and Capital Resources
The cable television business is a capital intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. The capital expenditures relating to Coaxial totaled
$5.6 million for the year ended December 31, 1997 and $6.3 million for the year
ended December 31, 1998. These expenditures were primarily for serving new
homes, the rebuild of cable plant, equipment purchases, the upgrade and
replacement of service vehicles and routine maintenance and replacement of cable
plant and related equipment. Prior to August 21, 1998, the capital expenditures
were financed through borrowings under a senior credit facility among Coaxial,
Phoenix, certain of their affiliates, The Chase Manhattan Bank, as agent, and
certain lenders (the "Chase Credit Facility") and cash flows from operations.
Subsequent to August 21, 1998, the capital expenditures were financed by cash
received from the Financing Plan and cash flows from operations.
IHO plans to further enhance the technical platform of the System by
upgrading the plant serving the majority of customers. The capability for high-
speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Capital expenditures are expected to approximate $35.0 million during 1999
to support not only ongoing plant extensions, new customer additions and
maintenance capital, but also to fund an upgrade of a significant portion of the
plant to 870 MHz and to activate plant for 2-way transmission, which is
necessary to facilitate the deployment of interactive services. It costs
approximately $1,500/mile to activate 2-way or reverse plant. IHO expects to
complete the upgrade of the plant with 2-way activation within 16 months. IHO
had originally planned to rebuild the plant to 750 MHz, but upon further review,
decided to expand the plant capacity to 870 MHz. In addition, IHO decided to
enlarge the upgrade by approximately 400 miles. The combination of these changes
will result in incremental capital costs of approximately $8.0 million. In
September 1998, IHO announced that it would fund the additional costs by an
additional infusion of $8.0 million of equity into Insight Ohio.
The Senior Notes Offering was part of the Financing Plan implemented to
facilitate the organization of Insight Ohio, the acquisition of the System by
Insight Ohio and to provide for the System's liquidity and operational and
financial flexibility. Pursuant to the Financing Plan:
. Coaxial contributed to Insight Ohio substantially all of the assets
comprising the System for which Coaxial received a 25% non-voting common
membership interest in Insight Ohio as well as the voting Preferred Interests
in Insight Ohio, which provide for distributions to Coaxial that will be used
to pay interest and principal on the Senior Notes and to pay
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dividends to the Individual LLCs that will be used to pay interest and
principal on the Senior Discount Notes;
. IHO contributed $10.0 million in cash to Insight Ohio for which it received a
75% non-voting common membership interest in Insight Ohio;
. Coaxial and Phoenix effected the Senior Notes Offering;
. Coaxial LLC and Coaxial Financing Corp. effected the Senior Discount Notes
Offering; and
. a portion of the existing bank indebtedness of Coaxial and Phoenix and
certain of their affiliates was repaid and the balance was purchased by CIBC
Oppenheimer Corp. ("CIBC") and restructured in accordance with an agreement
among the parties.
The gross proceeds received by Coaxial LLC and Coaxial Financing Corp. from
the Senior Discount Notes Offering were approximately $30.0 million. Proceeds
from such private offering were used for the repayment of outstanding
indebtedness (approximately $28.9 million). CIBC purchased certain outstanding
indebtedness (approximately $136.4 million) of Coaxial and Phoenix and
restructured that debt in accordance with the Financing Plan. CIBC funded such
purchase with proceeds from the Senior Notes Offering. The remaining proceeds
from the Senior Notes Offering and the Senior Discount Notes Offering and the
$10.0 million cash contribution from IHO were used for working capital
(approximately $2.9 million), deferred compensation and severance payments
(approximately $3.0 million) and fees and expenses (approximately $8.8 million).
Insight Ohio entered into the Senior Credit Facility on October 7, 1998
with Canadian Imperial Bank of Commerce (which is an affiliate of CIBC), as
agent ("Canadian Imperial Bank"), for the purpose of financing its future
capital expenditures and for working capital and general purposes, including the
planned upgrade of the System's technical capability, as discussed above. The
Senior Credit Facility is a six-year $25 million reducing revolving credit
facility. As of December 31, 1998, no borrowings had been made under the Senior
Credit Facility and $25 million remains available for borrowing.
Coaxial and Phoenix expect to make interest payments on the Senior Notes
from funds distributed to Coaxial in respect of the Series A Preferred Interests
in Insight Ohio to the extent permitted under the terms of its Senior Credit
Facility. Insight Ohio accrues preferred dividends in respect of the Series A
Preferred Interests. Coaxial expects to make dividend payments to its
shareholders from funds distributed to Coaxial in respect of the Series B
Preferred Interests in Insight Ohio to the extent permitted under the terms of
its Senior Credit Facility. Insight Ohio accrues preferred dividends in respect
of the Series B Preferred Interests.
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
13
<PAGE>
interest, at Insight Ohio's option, at Canadian Imperial Bank's prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow, in the case of prime rate loans, 0.75% or, if
under a 5:1 ratio, 0.25%; and in the case of Eurodollar loans, 2.0% or, if under
a 5:1 ratio, 1.5%.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Senior Discount Notes in the event of a payment default under the
Senior Credit Facility, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including with respect to total leverage, interest
coverage and pro forma debt service coverage. Management does not expect that
such covenants will materially impact the ability of Insight Ohio to operate its
business.
The Indentures impose (i) restrictions, that, among other things, limit the
amount of additional indebtedness that may be incurred by Coaxial and Phoenix
and their subsidiaries (including Insight Ohio) and (ii) limitations on, among
other things, investments, loans and other payments, certain transactions with
affiliates and certain mergers and acquisitions.
The ability of Insight Ohio to comply with the covenants and restrictions
of the Indentures and the Senior Credit Facility can be affected by events
beyond its control, and there can be no assurance that Insight Ohio will achieve
operating results that would permit compliance with such provisions. The breach
of certain provisions of the Senior Credit Facility would, under certain
circumstances, result in defaults thereunder, permitting the lenders thereunder
to prevent distributions with respect to the Preferred Interests and to
accelerate the indebtedness thereunder. If Insight Ohio were unable to repay the
amounts due in respect of the Senior Credit Facility, the lenders thereunder
could foreclose upon the assets pledged to secure such repayment. Any of such
events would adversely affect the ability of Coaxial and Phoenix to service the
Senior Notes or the ability of Insight Ohio to comply with the redemption
provisions of the Series A Preferred Interests.
Cash provided by operations for the year ended December 31, 1998 was $12.6
million compared to $18.6 million for the same period in 1997. This decrease in
Coaxial's net cash flow from operations is the result of a decrease in net
income primarily due to the $4.8 million paid for severance and transaction
structure cost.
Coaxial used cash in investing activities for the years ended December 31,
1998 and 1997 of $3.5 million and $15.2 million, respectively. For the years
ended December 31, 1998 and 1997, Coaxial had capital expenditures of $7.4
million and $5.6 million, respectively, to
14
<PAGE>
build plant and purchase equipment needed to service customers.
Cash provided by financing activities for the year ended December 31, 1998
was $1.0 million. Cash provided by financing activities was primarily generated
from the issuance of the Senior Notes and the $10 million contribution by IHO
which was subsequently offset by approximately $7.6 million of capital
distributions. For the year ended December 31, 1997, cash used in financing
activities was $3.7 million. This cash was used primarily for notes payable
payments.
Management anticipates that cash flows from operations, together with the
announced $8.0 million infusion by IHO and amounts available under Insight
Ohio's Senior Credit Facility, will be sufficient to finance the operating
requirements of the System, debt service requirements, distributions on the
Preferred Interests and anticipated capital expenditures for the next year.
Inflation and Changing Prices
Coaxial's costs and expenses are subject to inflation and price
fluctuations. Although changes in costs can be passed through to customers, such
changes may be constrained by competition. Management does not expect inflation
to have a material effect on Coaxial's results of operations.
Year 2000
The Year 2000 will pose a unique set of challenges to those industries
reliant on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. Insight
Ohio and other companies in the same business are vulnerable to their dependence
on distribution and communications systems.
Insight Ohio's greatest Year 2000 exposure is presented by its third party
billing system which is responsible for mailing monthly bills to customers and
maintaining customer data. Insight Ohio has recently implemented the Convergys
billing system. Convergys has informed Insight Ohio that testing of the billing
system was completed by the first quarter of 1999.
Management believes that the remaining systems of Insight Ohio will be
fully Y2K compliant by the end of the third quarter of 1999. Insight Ohio has
completed an inventory of all areas which are at risk and is in the process of
replacing and upgrading all equipment and software as needed. Due to Insight's
affiliation with TCI, Insight Ohio is a member of TCI's Year 2000 task force.
This allows Insight Ohio access to TCI's extensive database which details
various vendors', suppliers' and programmers' Year 2000 compliance. Management
estimates that the total cumulative costs relating to its efforts to make its
systems Y2K compliant will be
15
<PAGE>
approximately $120,000, of which $20,000 has been incurred as of December 31,
1998.
Management believes that the expenditures required to bring Insight Ohio's
systems into compliance will not have a materially adverse effect on Insight
Ohio's performance. However, the Year 2000 problem is pervasive and complex and
can potentially affect any computer process. Accordingly, no assurance can be
given that Year 2000 compliance can be achieved without additional unanticipated
expenditures and uncertainties that might affect future financial results.
Moreover, to operate its business, Insight Ohio relies on governmental
agencies, utility companies, telecommunications companies, shipping companies,
suppliers and other third party service providers over which it can assert
little control. Insight Ohio's ability to conduct its business is dependent upon
the ability of these third parties to avoid Year 2000 related disruptions.
Insight Ohio is in the process of contacting its third party service providers
about their Year 2000 readiness, but Insight Ohio has not yet received any
assurances from any such third parties about their Year 2000 compliance. If
Insight Ohio's key third party service providers do not adequately address their
Year 2000 issues, Insight Ohio's business may be materially affected, which
could result in a materially adverse effect on Insight Ohio's results of
operations and financial condition.
Insight Ohio has not, as of yet, developed any contingency plans, as such
plans will depend on the responses from its third party service providers, in
the event Insight Ohio or any key third party providers should fail to become
Year 2000 compliant.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This pronouncement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. The Company believes this statement does not
have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). This
pronouncement establishes standards for reporting information about operating
segments in annual and interim financial statements. The Company believes this
statement does not have a material effect on the financial statements as the
Company operates in one business segment.
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Coaxial, Phoenix and Insight Ohio do not
anticipate the adoption of this statement to have a material impact on their
respective financial statements.
16
<PAGE>
Item 8. Financial Statements and Supplementary Data
Reference is made to pps. F-1 through F-39 comprising a portion of this
Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Subsequent to the Financing Plan, Arthur Andersen LLP resigned as
independent auditor for Coaxial, Phoenix and Insight Ohio.
Arthur Andersen LLP's reports on each of Coaxial's and Phoenix's
financial statements for each of the two fiscal years ended December 31,
1997 and 1996, and Insight Ohio's balance sheet as of July 31, 1998
(collectively, the "Prior Fiscal Years"), did not contain an adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report on
Phoenix included an explanatory paragraph in reference to Phoenix's ability to
satisfy debt and other obligations being dependent upon funding from related
parties.
There were no disagreements ("Disagreements") between Coaxial, Phoenix or
Insight Ohio and Arthur Andersen during either (a) the Prior Fiscal Years, or
(ii) the period from January 1, 1998 until the resignation of Arthur Andersen
(the "Interim Period") on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
Disagreement, if not resolved to the satisfaction of Arthur Andersen, would have
caused Arthur Andersen to make reference to the subject matter of the
Disagreement in connection with its reports for the Prior Fiscal Years.
There were no "Reportable Events," as such term is defined in Item
304(a)(1)(v) of Regulation S-K, during either (a) the Prior Fiscal Years or (b)
the Interim Period.
Arthur Andersen's resignation was unanimously approved by the Board of
Directors or its equivalent of Coaxial, Phoenix and Insight Ohio.
Coaxial, Phoenix and Insight Ohio each engaged Ernst & Young LLP as its
independent auditor for its fiscal year ended December 31, 1998. Coaxial,
Phoenix and Insight Ohio did not consult Ernst & Young with respect to either
(a) the Prior Fiscal Years, (b) the Interim Period with respect to either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Coaxial's, Phoenix's and Insight Ohio's financial statements, or (c) any matter
that was either the subject of a Disagreement or a Reportable Event.
17
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Coaxial Communications of Central Ohio Report of Independent Auditors -Arthur Andersen LLP F-1
Coaxial Communications of Central Ohio, Inc. Report of Independent Auditors - Ernst & Young LLP F-2
Financial Statements:
Coaxial Communications of Central Ohio, Inc. Consolidated Balance Sheets at December 31, 1998 and
December 31, 1997 F-3
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Operations and Changes in
Stockholder's Equity (Deficit) for the years ended December 31, 1998, 1997, and 1996 F-4
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 F-5
Coaxial Communications of Central Ohio, Inc. Notes to Consolidated Financial Statements F-6
Phoenix Associates Report of Independent Auditors -Arthur Andersen LLP F-14
Phoenix Associates Report of Independent Auditors - Ernst & Young LLP F-15
Financial Statements:
Phoenix Associates Balance Sheets at December 31, 1998 and December 31, 1997 F-16
Phoenix Associates Statements of Operations and Change in Partner's Deficit for the years ended December
31, 1998, 1997, and 1996 F-17
Phoenix Associates Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 F-18
Phoenix Associates Notes to Financial Statements F-19
Insight Communications of Central Ohio, LLC Report of Independent Auditors - Ernst & Young LLP F-24
Financial Statements:
Insight Communications of Central Ohio, LLC Balance Sheet at December 31, 1998 F-25
Insight Communications of Central Ohio, LLC Statements of Operations and Changes in Members' Deficit for
the year ended December 31, 1998 F-26
Insight Communications of Central Ohio, LLC Statements of Cash Flows for the year ended December 31, 1998 F-27
Insight Communications of Central Ohio, LLC Notes to Consolidated Financial Statements F-28
Central Ohio Operating Unit Report of Independent Auditors - Arthur Andersen LLP F-32
Financial Statements:
Central Ohio Cable System Operating Unit Statements of Net Assets to be Contributed at December 31,
1997 and December 31, 1996 F-33
Central Ohio Cable System Operating Unit Statements of Operations Related to Net Assets to be Contributed F-34
for the years ended December 31, 1997, 1996 and 1995
Central Ohio Cable System Operating Unit Statements of Cash Flows for the years ended December 31, 1997, F-35
1996 and 1995
Central Ohio Cable System Operating Unit Notes to Financial Statements F-36
The following consolidated financial statement schedule of Coaxial
Communications of Central Ohio, Inc. is included in item 14(d):
Report of Independent Auditors - Arthur Andersen LLP
Report of Independent Auditors - Ernst & Young LLP
Schedule II Valuation and Qualifying Accounts
</TABLE>
(b) Reports on Form 8-K:
None.
(c) Exhibits
2.1 Contribution Agreement by and between Insight Holdings of Ohio, LLC,
as assignee of Insight Communications Company, L.P., and Coaxial
Communications of Central Ohio, Inc. dated as of June 30, 1998 (the
"Contribution Agreement")*
2.2 Amendment to Contribution Agreement dated as of July 15, 1998*
2.3 Second Amendment to Contribution Agreement dated as of August 21,
1998*
3.1(a) Articles of Incorporation of Coaxial Communications of Central Ohio,
Inc. filed January 22, 1980*
3.1(b) Certificate of Merger of BroadBand Services, Inc., Cablenet
International Corporation, Coaxial Communications of Reynoldsburg,
Inc., Coaxial Communications Cable Operations, Inc. and Telecinema
of Columbus, Inc., merging into Coaxial Communications of Central
Ohio, Inc. filed December 26, 1986*
3.1(c) Amended Articles of Incorporation of Coaxial Communications of
Central Ohio, Inc. filed December 26, 1986*
3.1(d) Amended Articles of Incorporation of Coaxial Communications of
Central Ohio, Inc. filed August 14, 1998*
3.2 Amended Regulations (By-Laws) of Coaxial Communications of Central
Ohio, Inc.*
3.3 Phoenix Associates Partnership Agreement*
18
<PAGE>
3.4 Certificate of Formation of Insight Communications of Central Ohio,
LLC filed July 23, 1998*
3.5 Operating Agreement of Insight Communications of Central Ohio, LLC
dated August 21, 1998*
4.1 Restructuring Agreement among Coaxial Communications of Central
Ohio, Inc., Phoenix Associates, Insight Communications of Central
Ohio, LLC and CIBC Oppenheimer Corp. dated August 21, 1998*
4.2 Senior Notes Registration Rights Agreement among Coaxial
Communications of Central Ohio, Inc., Phoenix Associates, Insight
Communications of Central Ohio, LLC and CIBC Oppenheimer Corp. dated
August 21, 1998*
4.3 Indenture among Coaxial Communications of Central Ohio, Inc.,
Phoenix Associates, Insight Communications of Central Ohio, LLC,
CIBC Oppenheimer Corp. and Bank of Montreal Trust Company dated
August 21, 1998*
4.4 Pledge Agreement between Coaxial Communications of Central Ohio,
Inc. and Bank of Montreal Trust Company dated August 21, 1998*
10.1 Close Corporation Agreement of Coaxial Communications of Central
Ohio, Inc. dated August 21, 1998 among Coaxial LLC, Coaxial DSM LLC,
Coaxial DJM LLC and Coaxial Communications of Central Ohio, Inc.*
10.2 Management Agreement of Coaxial LLC dated August 21, 1998 among
Insight Holdings of Ohio, LLC, Coaxial LLC and Barry Silverstein*
10.3 Management Agreement of Coaxial DSM LLC dated August 21, 1998 among
Insight Holdings of Ohio, LLC, Coaxial DSM LLC and D. Stevens McVoy*
10.4 Management Agreement of Coaxial DJM LLC dated August 21, 1998 among
Insight Holdings of Ohio, LLC, Coaxial DJM LLC and Dennis J.
McGillicuddy*
10.5 Management Agreement between Coaxial Communications of Central Ohio,
Inc. and Insight Communications of Central Ohio, LLC dated August
21, 1998*
10.6 Assignment Agreement dated as of August 21, 1998 among CIBC
Oppenheimer Corp., the lenders who were a party to the Chase Credit
Facility, The Chase Manhattan Bank, as agent for such lenders,
Coaxial Communications of Central Ohio, Inc., Phoenix Associates,
Coaxial Associates of Columbus I, Coaxial Associates of Columbus II
and Coaxial Associates of Southern Ohio, Inc.*
10.7 Revolving Credit Agreement dated as of October 7, 1998 among Insight
Communications of Central Ohio, LLC, several banks and financial
institutions or entities, and Canadian Imperial Bank of Commerce, as
administrative agent*
19
<PAGE>
16.1 Letter from Arthur Andersen LLP
27.1 Financial Data Schedule for Phoenix Associates**
27.2 Financial Data Schedule for Coaxial Communications of Central Ohio,
Inc.**
27.3 Financial Data Schedule for Insight Communications of Central Ohio,
LLC
____________
* Denotes document filed as an exhibit to Registrants' Registration Statement
on Form S-4 (File Nos. 333-63677, 333-63677-01 and 333-63677-02) and
incorporated herein by reference.
** Previously filed with this annual report on Form 10-K.
20
<PAGE>
Report of Independent Public Accountants
To the Shareholders of
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheet of Coaxial Communications of
Central Ohio, Inc. (an Ohio operation) as of December 31, 1997, and the related
statements of operations and changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coaxial Communications of
Central Ohio, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998
F - 1
<PAGE>
Report of Independent Auditors
The Shareholders
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheet of Coaxial Communications of
Central Ohio, Inc. as of December 31, 1998, and the related statements of
operations and shareholder's deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Coaxial Communications of
Central Ohio, Inc. at December 31, 1998, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
New York, New York
April 5, 1999
F - 2
<PAGE>
<TABLE>
<CAPTION>
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
------------------ ---------------
<S> <C> <C>
ASSETS
Cash............................................................................... $ 8,708,553 $ 574,064
Subscriber receivables, less allowance for doubtful accounts
of $306,000 and $202,000 in 1998 and 1997.......................................... 1,185,646 661,183
Other accounts receivable, less allowance for doubtful accounts
of $145,000 and $172,000 in 1998 and 1997.......................................... 1,520,301 1,040,582
Prepaid expenses and other current assets.......................................... 166,347 223,262
------------------ ---------------
Total current assets............................................................... 11,580,847 2,499,091
PROPERTY AND EQUIPMENT, at cost:
Land and Land Improvements......................................................... 260,000 -
CATV systems....................................................................... 71,031,956 64,949,357
Equipment.......................................................................... 7,102,002 7,082,619
Furniture.......................................................................... 333,026 246,232
Leasehold improvement.............................................................. 71,360 220,231
------------------ ---------------
78,798,344 72,498,439
Less-Accumulated depreciation and amortization..................................... (46,898,251) (42,699,293)
------------------ ---------------
Total property and equipment, net.................................................. 31,900,093 29,799,146
INTANGIBLE ASSETS, at cost:
Franchise costs.................................................................... 7,385,000 7,385,000
Deferred financing costs and other................................................. 1,447,334 2,661,399
------------------ ---------------
8,832,334 10,046,399
Less-Accumulated amortization...................................................... (7,399,733) (8,951,090)
------------------ ---------------
Total intangible assets, net....................................................... 1,432,601 1,095,309
DUE FROM RELATED PARTIES........................................................... 149,321 76,261,666
------------------ ---------------
TOTAL ASSETS....................................................................... $ 45,062,862 $109,655,212
================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of notes payable................................................... $ - $ 369,860
Current portion of capital lease obligations....................................... 123,187 213,103
Accounts payable................................................................... 3,229,719 2,804,766
Accrued interest................................................................... 1,249,889 1,690,147
Accrued liabilities................................................................ 4,404,317 3,596,922
------------------ ---------------
Total current liabilities.......................................................... 9,007,112 8,674,798
NOTES PAYABLE:
Senior Notes....................................................................... 34,435,092 -
Affiliated entities................................................................ - 2,933,236
Other.............................................................................. - 26,437,957
------------------ ---------------
Total notes payable................................................................ 34,435,092 29,371,193
Capital Lease Obligations.......................................................... 105,271 194,194
Other Liabilities.................................................................. 1,145,867 -
Due to related parties............................................................. 1,029,369 17,088,121
------------------ ---------------
Total liabilities.................................................................. 45,722,711 55,328,306
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 1998 and 1997; $1 par value.............................. 1,080 1,080
Paid-in capital.................................................................... 9,501,170 9,501,170
Retained earnings (deficit)........................................................ (10,162,099) 44,824,656
------------------ ---------------
Total shareholders' equity (deficit)............................................... (659,849) 54,326,906
Total liabilities and shareholders' equity (deficit)............................... $ 45,062,862 $109,655,212
================== ===============
</TABLE>
See accompanying notes
F - 3
<PAGE>
<TABLE>
<CAPTION>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------------------ ------------------------ --------------------
<S> <C> <C> <C>
TOTAL REVENUES.......................... 47,955,737 48,229,487 50,417,825
OPERATING EXPENSES:
Service and administrative.............. 29,694,622 28,889,394 26,932,679
Severance and transaction structure 4,822,078 - -
costs..................................
Depreciation and amortization........... 5,311,198 5,256,142 5,349,810
------------------------------------------------------------------------
Total operating expenses................ 39,827,898 34,145,536 32,282,489
------------------------------------------------------------------------
OPERATING INCOME........................ 8,127,839 14,083,951 18,135,336
OTHER EXPENSES.......................... (421,420) (321,732) (320,456)
OTHER INCOME............................ - 50,276 72,072
INTEREST INCOME (EXPENSE), NET..........
Interest income--related parties........ 2,846,304 4,296,510 5,210,678
Interest income......................... 34,919 69,990 29,449
Interest expense--related parties....... (1,019,299) (2,412,417) (2,639,915)
Interest expense........................ (3,483,983) (3,183,800) (3,026,260)
------------------------------------------------------------------------
Total interest expense, net............. (1,622,059) (1,229,717) (426,048)
------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 6,084,360 12,582,778 17,460,904
Extraordinary loss on extinguishment 846,641 - -
of debt................................
------------------------------------------------------------------------
NET INCOME 5,237,719 12,582,778 17,460,904
SHAREHOLDERS' EQUITY, beginning of year 54,326,906 42,332,295 37,018,958
CAPITAL DISTRIBUTIONS................... (82,787,365) (588,167) (12,147,567)
SHAREHOLDER CONTRIBUTIONS............... 22,562,891 - -
------------------------------------------------------------------------
SHAREHOLDERS' (DEFICIT) EQUITY, end of
year................................... $ (659,849) $54,326,906 $ 42,332,295
========================================================================
EARNINGS PER COMMON SHARE:
Basic and diluted....................... $ 4,850 $ 11,651 $ 16,168
========================================================================
Weighted average number of common
shares.................................. 1,080 1,080 1,080
========================================================================
</TABLE>
SEE ACCOMPANYING NOTES
F - 4
<PAGE>
<TABLE>
<CAPTION>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------------- ----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income.......................................... $ 5,237,719 $ 12,582,778 $ 17,460,904
Adjustments to reconcile Net Income to
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization....................... 5,531,861 5,805,111 5,857,277
Extraordinary loss on extinguishment of debt........ 846,641 - -
Loss on disposals of property and equipment......... - 77,452 69,187
Changes in operating assets and liabilities.........
Subscriber receivables.............................. (524,463) 182,395 (252,414)
Other accounts receivable, prepaid expenses and other
current assets...................................... (422,804) 324,515 580,500
Accounts payable.................................... 424,953 421,658 (361,633)
Accrued interest.................................... (440,258) 175,521 39,320
Accrued liabilities................................. 1,941,947 (691,513) 1,026,569
Deferred compensation............................... - (255,808) (41,260)
Deferred income..................................... - - (9,613)
-------------------------------------- -------------------
Net cash provided by operating activities........... $ 12,595,596 $ 18,622,109 $ 24,368,837
-------------------------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and
equipment........................................... (7,369,406) (5,570,385) (5,998,166)
Proceeds from disposal of property and equipment.... 11,315 25,753 17,667
Due from related parties............................ 3,887,871 (9,697,288) (13,570,306)
-------------------------------------- -------------------
Net cash used in investing activities............... $ (3,470,220) $(15,241,920) $(19,550,805)
-------------------------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............. 34,435,092 750,000 5,500,000
Principal payments on notes payable................. (26,807,817) (5,680,764) (2,114,000)
Costs incurred in debt financing.................... (1,447,335) (117,064) -
Principal payments on capital lease obligations..... (178,839) (264,649) (234,630)
Contributions to capital of insight ohio............ 10,000,000 - -
Capital distributions............................... - (588,167) (12,147,567)
Capital contributions......... 2,000,000
(Decrease) Increase in amounts due to related (18,991,988) 2,188,723 4,414,315
parties............................................
-------------------------------------- -------------------
Net cash used in financing activities. $ (990,887) $ (3,711,921) $ (4,581,882)
-------------------------------------- -------------------
NET INCREASE (DECREASE) IN CASH..................... 8,134,489 (331,732) 236,150
CASH, beginning of year............................. 574,064 905,796 669,646
-------------------------------------------------------------
CASH, end of year................................... $ 8,708,553 $ 574,064 $ 905,796
=============================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest 2,062,317 $ 2,390,851 $ 2,315,231
Capital leases - 56,707 198,985
Deferred compensation - - 2,343,594
</TABLE>
See accompanying notes
F - 5
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. Business Organization And Purpose
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio LLC ("Insight Ohio"), operates a cable television
system which provides basic and expanded cable television services to homes in
the eastern parts of Columbus, Ohio and surrounding areas. In connection with
the contribution of the Company's cable system described below, the issuance of
the Senior Notes described in Note 7(b), and the issuance of the Discount Notes
by the Company's majority shareholder, during 1998 the three individuals who
previously owned the outstanding stock of the Company contributed their stock to
three separate limited liability companies. Accordingly, at December 31, 1998,
the Company was a subsidiary of Coaxial LLC, which owns 67 1/2% of its
outstanding stock.
Other related entities affiliated with Coaxial include Coaxial LLC, Coaxial
Financing Corp., Coaxial DJM LLC, Coaxial DSM LLC, Phoenix Associates
("Phoenix"), Coaxial Communications of Southern Ohio, Inc. ("Southern Ohio"),
Coaxial Associates of Columbus I ("Columbus I"), Coaxial Associates of Columbus
II ("Columbus II"), Paxton Cable Television, Inc. ("Paxton Cable") and Paxton
Communications, Inc. ("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to Insight Ohio, a newly formed subsidiary. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns two
separate series of voting preferred equity (a $140 million preferred equity
interest and a $30 million preferred equity interest) of Insight Ohio. The
voting preferred equity interest will provide for distributions to Coaxial,
Phoenix and Coaxial, LLC in amounts equal to the payments required on the senior
and senior discount notes described in Note 7. IHO serves as the manager of
Insight Ohio.
As a result of the transaction described above, the Company incurred severance
costs and transactions structuring costs totaling $4,822,078, which have been
reflected in the accompanying statements of operations.
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at December 31, 1998, the accompanying financial statements include the accounts
of Insight Ohio. All intercompany balances have been eliminated in
consolidation. At December 31, 1998, Insight Ohio had a members' deficiency,
accordingly, the accompanying financial statements do not include a minority
interest liability for Insight's 75% common equity interest in Insight Ohio.
Cash
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F - 6
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on and off balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current asset and
liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
At December 31, 1998, the carrying value of the Senior Notes approximate their
fair value. At December 31,1997, the carrying amounts of the loan agreement
debt, including term loans and revolving credit loans, approximate fair value as
the underlying instruments were at variable rates that re-priced frequently. At
December 31, 1997, the fair value of notes receivable from related parties and
notes payable to related parties cannot be reasonably and practicably estimated
due to the unique nature of the related underlying transactions and terms.
Refer to Notes 6 and 7 for a discussion of the relative terms. However, given
the terms and conditions of these instruments, if these financial instruments
were with unrelated parties, interest rates and payment terms could be
substantially different than the currently stated rates and terms. The majority
of the related party receivables and payables at December 31, 1997 were settled
at their face value in connection with the contribution agreement and issuance
of the and discount notes during 1998.
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements.
Collections on subscriber advance billings at December 31, 1998 and 1997 were
not significant.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The Company's
customer base consists of a number of homes concentrated in the central Ohio
area. The Company continually monitors the exposure for credit losses and
maintains allowances for anticipated losses. As of December 31, 1998, the
Company had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
At December 31, 1998 the Company had net assets held under capital leases of
$228,458.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
F - 7
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate to costs, primarily legal fees and bank facility
fees incurred to negotiate and secure long term financing (see note 7). These
costs are being amortized on a straight-line basis over the life of the
applicable loans. In connection with the issuance of the Senior Notes (see note
7), the Company repaid the outstanding indebtedness under its prior debt
facility. Accordingly, the accompanying statement of operations for the year
ended December 31, 1998 includes an extraordinary loss of $846,641 on early
extinguishment of such debt. The Company amortized to interest expense deferred
financing costs of approximately $52,000, $549,000 and $508,000 in 1998, 1997,
and 1996, respectively.
Home Office Expenses
Home office expenses of approximately $1,371,000, $1,498,000, and $1,697,000 in
1998, 1997 and 1996 (included in selling and administrative expenses) include
billings for legal fees, management fees, salaries, travel and other management
expenses for services provided by an affiliated services company. Effective
August 21, 1998, IHO provides such services for which it earns a management fee
(see note 6).
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily for
campaign and telemarketing-related efforts was approximately $2,152,000,
$1,025,000, and $1,060,000 in 1998, 1997 and 1996, respectively.
Earnings Per Share
In 1998, the Company adopted SFAS No. 128, "Earnings per Share" ("SFAS No.
128"), which established new standards for computing and presenting earnings per
share was effective for financial statements issued for periods ending after
December 15, 1997. Prior periods have been restated to reflect the adoption of
SFAS No. 128 which did not have a significant impact upon the Company's earnings
per share.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This pronouncement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. The Company believes this statement does not
have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). This
pronouncement establishes standards for reporting information about operating
segments in annual and interim financial statements. The Company believes this
statement does not have a material effect on the financial statements as the
Company operates in one business segment.
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
F - 8
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. Income Taxes
Coaxial is a Subchapter S corporation. Therefore, each shareholder reports his
distributive share of income or loss on his respective income tax return. As a
result, the Company does not provide for Federal or State income taxes in its
accounts. In the event that the Subchapter S corporation election is terminated,
deferred taxes related to book and tax temporary differences would be required
to be reflected in the financial statements.
4. 401(k) Plan
The Company sponsored various 401(k) Plan (the "Plans") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employee's wages. Company
contributions to the Plans approximated $145,000, $133,000 and $111,000 in 1998,
1997 and 1996, respectively.
5. Workers' Compensation Reserves
Coaxial is partially self-insured for workers' compensation benefits. The
amounts charged to expense for workers' compensation were approximately $40,000,
$89,200, and $110,200 for 1998, 1997 and 1996, respectively, and were based on
actual and estimated claims incurred. The liability for workers' compensation
obligations, as of December 31, 1998 and 1997, is approximately $75,918 and
$78,000, respectively.
6. Related Party Transactions
Effective August 21, 1998, the Company entered into a management agreement with
IHO which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues. Fees
under this management agreement of $492,713 for the period from August 21, 1998
through December 31, 1998 are recorded in home office expenses.
Coaxial has a receivable from a related party as of December 31, 1997 of $98,584
relating to the leasing of fiber optic facilities. On June 29, 1998, the
related party bought out the lease for approximately $347,000.
Coaxial pays rent to a partnership owned by Coaxial's shareholders for two
facilities. Total charges for rent were approximately $63,000 in 1998, $99,500
in 1997 and $72,000 in 1996.
At December 31, 1997, Coaxial advanced funds to and received advances from
related entities for working capital and debt service requirements. During
August 1998, in connection with the issuance of the Senior Notes described in
Note 7(b), the amounts relating to debt service requirements were settled.
Coaxial recognized interest income of approximately $2,846,300 in 1998,
$4,296,500 in 1997, $5,210,700 in 1996 and interest expense of approximately
$1,019,300 in 1998 $914,300 in 1997, $1,039,900 in 1996 related to such
advances. During 1998, Coaxial advanced funds to and received advances from
related entities for working capital requirements in the amount of $149,321 and
$1,029,369 respectively.
F - 9
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related Party Transactions (continued)
Advances to and from related entities as of December 31, 1998 and 1997 are as
follows:
1998 1997
----------------------------------------
Advances to:
Southern Ohio $ 102,445 $ -
Phoenix - 72,439,984
Paxton - 2,361,387
Columbus I - 1,357,768
Other 46,876 102,527
----------------------------------------
Due from related entities $ 149,321 $76,261,666
========================================
Advances from:
Insight $1,029,369 $ -
Columbus II - 662,178
Southern Ohio - 16,425,943
----------------------------------------
Due to related entities $1,029,369 $17,088,121
========================================
Southern Ohio, Phoenix, Paxton, Columbus I and Columbus II are under the control
of the shareholders of Coaxial.
Through December 31, 1995, Coaxial had an agreement with a key officer to defer
certain discretionary compensation amounts each year. On January 1, 1996,
Coaxial entered into an unsecured note payable to this officer in the amount of
$2,343,947, which represented all vested deferred compensation at December 31,
1995. During 1996, this officer earned additional discretionary compensation in
the amount of $193,140. This amount was added to the unpaid December 31, 1996
principal balance of the above note and the payment amount was adjusted
accordingly. As of December 31, 1997 the outstanding balance of the note was
$2,046,880. The note was payable in equal monthly installments of $21,322 plus
accrued interest at the prime rate (8.50% at December 31, 1997), and was
scheduled to mature in December 2005. Interest expense on the note was $184,810
in 1997 and $185,005 in 1996. Pursuant to the Contribution Agreement, amounts
outstanding were paid during 1998.
Other related party transactions are described in Note 7.
F - 10
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable
Notes payable at December 31, 1998 and 1997 consisted of:
Lender 1998 1997
------ ----------------------------------
Columbus I(a) - $ 2,467,137
Columbus II(a) - 466,099
----------------------------------
Total related parties - 2,933,236
Senior Notes(b) $34,435,092 -
Banks(c) - 24,760,937
Retired officer(d) - 2,046,880
34,435,092 29,741,053
Less current portion - 369,860
----------------------------------
Total $34,435,092 $29,371,193
==================================
Notes payable at December 31, 1998, will mature on August 15, 2006.
(a) In November, 1982, Columbus I and Columbus II exchanged all of their assets
and certain liabilities with Coaxial for common stock and notes. These
notes bore interest at a rate of 20% and had been scheduled to mature on
October 31, 1997. A portion of these notes ($5,066,764) had been assigned
and was payable to the former Limited Partners of Columbus I and Columbus
II as part of their consideration when they sold their partnership interest
to the General Partners. The maturity date of the remaining notes (payable
to Columbus I and Columbus II) was extended to October 31, 2002. Interest
expense was approximately $375,300, $1,498,100 and $1,600,000 in 1998,
1997 and 1996, respectively, related to the notes payable. During 1998,
these notes payable were settled pursuant to the Contribution Agreement.
(b) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15, commencing
on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interests in Insight Ohio. The Series A Preferred
Interests have a liquidation preference of $140.0 million and pay
distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are owned by Coaxial and are
pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions
made by Insight Ohio on the Series A Preferred Interests to make payments
on the Senior Notes. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to: incur additional indebtedness; pay
dividends and make distributions; issue stock of subsidiaries to third
parties; make certain investments; repurchase stock; create liens; enter
into transactions with affiliates; enter into sale and leaseback
transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving
all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the Senior Notes or Discount Notes, respectively; and swap
assets. In connection with the issuance of the Senior Notes, the Company
incurred financing fees of $1,147,193 that are being amortized over the
life of the Senior Notes. Coaxial, as joint and several issuer, with
Phoenix, of the Senior Notes, provides the funding that will allow Phoenix
to repay its share of the notes payable, as Phoenix has no operations.
Amortization expense for deferred financing costs related to the Senior
Notes at December 31, 1998 was $51,945. Interest expense on Coaxial's
portion of the Senior Notes was $1,249,889 for the year ended December 31,
1998.
F - 11
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable (continued)
(b) (continued)
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
group of banks and other financial institutions. The Senior Credit Facility
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the
upgrade of the System's cable plant and for the introduction of new video
services. The Senior Credit Facility has a six-year maturity, with
reductions to the amount of the commitment commencing after three years. The
amount available for borrowing is reduced by any outstanding letter of
credit obligations. Insight Ohio's obligations under the Senior Credit
Facility are secured by substantially all the tangible and intangible assets
of Insight Ohio. Loans under the Senior Credit Facility bear interest, at
Insight Ohio's option, at the prime rate or at a Eurodollar rate. In
addition to the index rates, Insight Ohio pays an additional margin
percentage tied to its ratio of total debt to adjusted annualized operating
cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including distributions on the Preferred Interests that are required to pay
the Senior Notes and the Discount Notes in the event of a payment default
under the Senior Credit Facility, create liens on assets, make investments,
make acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including with respect to total leverage, interest
coverage and pro forma debt service coverage. Management does not expect
that such covenants will materially impact the ability of Insight Ohio to
operate its business. As of December 31, 1998, no amounts were drawn on the
Senior Credit Facility.
(c) On November 15, 1994, Coaxial, Phoenix, Southern Ohio, Columbus I and
Columbus II (collectively referred to as the borrowers), executed a loan
agreement with a lead bank and several other financial institutions. In
connection with the Senior Note issuance the Company repaid all the
outstanding balances under the loan agreement and recognized an
extraordinary loss of $846,641 relating to the refinancing of debt.
Amortization expense for deferred financing related to this bank debt at
December 31, 1998 was $442,840. Interest expense on this facility was
approximately $1,537,100, $2,284,500, and $1,920,500 in 1998, 1997 and 1996,
respectively.
The funds borrowed under the loan agreement were allocated to the following
entities as of December 31,1997:
Revolving
Entity Term Loan Loan
-----------------------------------------------------------------
Coaxial $ 16,760,937 $ 8,000,000
Phoenix 105,925,208 -
Southern Ohio 20,568,238 8,000,000
Columbus I 2,385,682 -
Columbus II 1,359,935 -
------------------------------------
Total $147,000,000 $16,000,000
====================================
(d) In January 1996, Coaxial issued an unsecured note payable to a key officer
for deferred compensation. The officer retired in 1997. The related
note payable was paid during 1998 pursuant to the Contribution Agreement.
F - 12
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable (continued)
At December 31, 1997, the borrowers had entered into an interest-rate swap
agreement to modify the interest characteristics of its outstanding debt from a
floating rate to a fixed rate basis. This agreement involved the payment of
fixed rate amounts in exchange for floating rate interest receipts over the life
of the agreement without an exchange of the underlying principal amount. The
differential to be paid or received was accrued as interest rates change and was
recognized as an adjustment to interest expense related to the debt. At
December 31, 1997 the borrowers had entered into interest rate swap agreements
effectively fixing the interest rate to 5.87% on $40 million notional value of
debt. These swap agreements were terminated in 1998.
8. Operating Lease Agreements
The Company leases land for tower locations, office equipment, office space,
vehicles and the use of utility poles under various operating lease agreements.
Rental expense for all operating leases was approximately $105,700 in 1998,
$218,500 in 1997 and $160,500 in 1996. These amounts exclude year-to-year
utility pole leases of $191,100, $186,400, and $182,700, respectively, which
provide for payments based on the number of poles used.
Minimum rental commitments required under non-cancelable operating leases are as
follows:
1999 $38,400
2000 26,400
2001 and thereafter 200
---------------------
$65,000
=====================
9. Capital Lease Agreements
Coaxial leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under the leases are as follows:
For the years ending December 31,
1999 $ 138,909
2000 81,174
2001 30,225
2002 3,003
-----------------
253,311
Less: Amount representing interest (24,853)
Less: Current portion of capital lease obligations (123,187)
-----------------
Long-term capital lease obligations $ 105,271
=================
10. Contingencies
The Company is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's results of operation or
financial position.
F - 13
<PAGE>
Report of Independent Public Accountants
To the Shareholders of
Phoenix Associates.
We have audited the accompanying balance sheet of Phoenix Associates (a Florida
partnership), as of December 31, 1997, and the related statements of operations
and changes in partners' deficit and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Associates as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As indicated in Note 1, Phoenix Associates has no operations. Its ability to
satisfy debt and other obligations is dependent upon funding from related
entities, which are under the common control of the owners of Phoenix
Associates.
/s/ Arthur Andersen LLP
Columbus, Ohio
July 17, 1998
F - 14
<PAGE>
Report of Independent Auditors
The General Partners
Phoenix Associates
We have audited the accompanying balance sheet of Phoenix Associates (a Florida
partnership) as of December 31, 1998, and the related statements of operations
and partners' deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Associates at December
31, 1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
As indicated in Note 1, Phoenix Associates has no operations. Its ability to
satisfy debt and other obligations is dependent upon funding from related
entities, which are under the common control of the owners of Phoenix
Associates.
/s/ Ernst & Young LLP
New York, New York
April 5, 1999
F - 15
<PAGE>
<TABLE>
<CAPTION>
Phoenix Associates
Balance Sheets
As of December 31, 1998 and 1997
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ - $ 247
Interest receivable............................................... 56,868 -
Other accounts receivable......................................... - 1,067
---------------------------------------------
Total current assets.............................................. 56,868 1,314
OTHER ASSETS:
Due from related parties.......................................... 406,222 6,409,505
Notes receivable--related parties................................. 550,297 775,643
Deferred financing fees, net of accumulated amortization
of $159,502..................................................... 3,399,729 -
Advances to partners.............................................. - 768,000
---------------------------------------------
Total other assets................................................ 4,356,248 7,953,148
---------------------------------------------
Total assets...................................................... $ 4,413,116 $ 7,954,462
=============================================
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Current portion of notes payable.................................. $ - $ 720,600
Interest payable.................................................. 3,841,211 -
Accounts payable.................................................. - 973
---------------------------------------------
Total current liabilities......................................... 3,841,211 721,573
---------------------------------------------
NOTES PAYABLE..................................................... 105,564,908 105,204,608
DUE TO RELATED PARTIES............................................ - 72,439,984
---------------------------------------------
Total liabilities................................................. 109,406,119 178,366,165
---------------------------------------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT................................................. (104,993,003) (170,411,703)
---------------------------------------------
Total liabilities and partners' deficit........................... $ 4,413,116 $ 7,954,462
=============================================
</TABLE>
See accompanying notes
F - 16
<PAGE>
<TABLE>
<CAPTION>
Phoenix Associates
Statements of Operations and Change in Partners' Deficit
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
EXPENSES..................................................... $ (61,488) $ (88,879) $ (106,467)
INTEREST INCOME (EXPENSE)
Interest income--related parties............................. 640,121 1,785,142 2,034,542
Interest income.............................................. 1,333 2,826 1,905
Interest expense--related parties............................ (2,665,536) (4,025,789) (5,027,565)
Interest expense............................................. (10,326,240) (9,856,149) (9,498,874)
----------------- ----------------- ---------------
Total interest expense, net.................................. (12,350,322) (12,093,970) (12,489,992)
Loss Before Extraordinary Item............................... (12,411,810) (12,182,849) (12,596,459)
Extraordinary Item--gain on settlement of former limited
partner notes................................................ 100,182 3,315,337 -
----------------- ----------------- ---------------
NET LOSS..................................................... (12,311,628) (8,867,512) (12,596,459)
PARTNERS' DEFICIT, beginning of year......................... (170,411,703) (161,544,191) (148,947,732)
CAPITAL CONTRIBUTIONS........................................ 78,498,328 - -
CAPITAL DISTRIBUTIONS, net................................... (768,000) - -
----------------- ----------------- ---------------
PARTNERS' DEFICIT, end of year............................... $(104,993,003) $(170,411,703) $(161,544,191)
================= ================= ===============
</TABLE>
See accompanying notes
F - 17
<PAGE>
<TABLE>
<CAPTION>
Phoenix Associates
Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................................................ $ (12,311,628) $ (8,867,512) $(12,596,459)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
Gain on settlement of former limited partner notes...... (100,182) (3,315,337) -
Amortization of deferred financing fees................. 159,502 - -
Changes in operating assets and liabilities: - -
Interest receivable................................ (56,868) - -
Other accounts receivable.......................... 1,067 (1,067) -
Interest payable................................... 3,841,211 - -
Accounts payable................................... (973) 618 (91,114)
-------------------- ----------------- --------------------
NET CASH USED IN OPERATING ACTIVITIES: $ (8,467,871) $(12,183,298) $(12,687,573)
-------------------- ----------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in amounts due from related parties. $ 6,003,283 $ (358,820) $ (511,217)
Proceeds from notes receivable.......................... 325,528 4,823,960 -
-------------------- ----------------- --------------------
Net cash provided by (used in)
investing activities.................................... $ 6,328,811 $ 4,465,140 $ (511,217)
-------------------- ----------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable..................... $(105,925,208) $ (745,035) $ (748,625)
Proceeds from issuance of notes payable................. 105,564,908 - -
Contributions from partners, net........................ 78,498,328 - -
(Decrease) increase in amounts due to related parties... (72,439,984) 8,348,350 14,062,205
Increase in deferred financing costs.................... (3,559,231) - -
-------------------- ----------------- --------------------
Net cash provided by financing
activities.............................................. $ 2,138,813 $ 7,603,315 $ 13,313,880
-------------------- ----------------- --------------------
NET INCREASE (DECREASE) IN CASH......................... (247) (114,843) 115,090
CASH, beginning of year................................. 247 115,090 -
-------------------- ----------------- --------------------
CASH, end of year....................................... $ - $ 247 $ 115,090
==================== ================= ====================
</TABLE>
See accompanying notes
F - 18
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix has no operations. Its ability to satisfy debt and other obligations is
dependent upon funding from related entities, which are under the common control
of the owners of Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 5, along with an affiliate, Coaxial
Communications of Central Ohio, Inc.
Phoenix consists of three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial
Financing Corp., Coaxial Communications of Central Ohio, Inc. ("Coaxial"),
Insight Communications of Central Ohio, LLC ("Insight Ohio"), Coaxial
Communications of Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of
Columbus I ("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"),
Paxton Cable Television, Inc. ("Paxton Cable") and Paxton Communications, Inc.
("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a Contribution
Agreement (the "Contribution Agreement") pursuant to which Coaxial contributed
substantially all of the assets and liabilities comprising its cable system to a
newly formed, subsidiary, Insight Ohio, and Insight Holdings of Ohio, LLC
("IHO"), a wholly owned subsidiary of Insight, contributed $10 million in cash
to Insight Ohio. As a result of this Contribution Agreement, Coaxial owns 25% of
the non-voting common equity and IHO owns 75% of the non-voting common equity of
Insight Ohio. Coaxial also owns two separate series (a $140 million preferred
equity interest and a $30 million preferred equity interest of voting preferred
equity) of Insight Ohio. The voting preferred equity interest provides for
distributions to Coaxial equal in amount to the payments on the Senior Notes and
senior discount notes discussed in Note 5. Coaxial is obligated to make
distributions which will enable Phoenix to fund the required payments on the
Senior Notes.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on- and off- balance sheet financial instruments for which it is
practicable to estimate that value. At December 31, 1998 and 1997, the carrying
value of Phoenix's financial instruments approximate fair value.
F - 19
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This pronouncement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. The Company believes this statement does not
have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). This
pronouncement establishes standards for reporting information about operating
segments in annual and interim financial statements. The Company believes this
statement does not have a material effect on the financial statements as the
Company operates in one business segment.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." Statement No.
133 established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Statement No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Phoenix does not anticipate that the
adoption of this Statement will have a material impact on its financial
statements.
3. Income Taxes
Phoenix is a general partnership. Therefore, each partner reports its
distributive share of income or loss on its respective income tax returns. As a
result, Phoenix does not provide for Federal or State income taxes in its
accounts.
4. Related Party Transactions
As of December 31, 1997, Phoenix had advances due from two general partners
aggregating $768,000. Such advances were settled during 1998 in accordance with
the Contribution Agreement.
Phoenix had advanced funds to and received advances from related entities for
working capital and for debt service. During August 1998, in connection with
the issuance of the Senior Notes described in Note 5, these amounts were
settled. A portion of these amounts were settled by a net contribution of
$74,171,097 from the partners. Phoenix recognized interest income of
approximately $234,200 in 1998 and $358,800 in 1997 and $511,200 in 1996 and
interest expense of approximately $2,665,536 in 1998, $4,025,800 in 1997 and
$5,027,600 in 1996 relating to such advances.
Advances to and from related entities as of December 31, 1998 and 1997 are as
follows:
Entity 1998 1997
------ ---- ----
Advances to:
Columbus I $406,222 $ 1,283,596
Columbus II - 721,869
Southern Ohio - 4,404,040
---------------------------------
Due from related entities 406,222 $ 6,409,505
=================================
Advances from Coaxial $ - $72,439,984
=================================
F - 20
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
4. Related Party Transactions (continued)
Phoenix has the following notes and accrued interest receivable from related
parties at December 31, 1998 and 1997:
<TABLE>
1998 1997
-------------------------------------
<S> <C> <C>
Columbus I(a) $ 2,348,892 $ 2,348,892
Columbus II(b) 118,245 443,773
-------------------------------------
Total face amount of notes receivable 2,467,137 2,792,665
Less: Amounts in excess of purchase price (1,916,840) (2,017,022)
-------------------------------------
Net notes and accrued interest receivable $ 550,297 $ 775,643
=====================================
</TABLE>
(a) The $2,348,892 due from Columbus I represents a note, including past due
interest that was added to the principal, which was purchased from CNA
Financial Corporation on November 24, 1982. Interest was payable to Phoenix
monthly, through August 20, 1998, at an annual rate of 20% of the face
amount of the notes receivable. Effective August 21, 1998 the rate was
amended to an annual rate of 5.5%. Phoenix recognized interest income of
approximately $346,900, $1,138,000, and $1,212,800 in 1998, 1997 and 1996,
respectively, related to the note receivable. The principal is due and
payable to Phoenix on October 31, 2002.
(b) The $118,245 due from Columbus II represents a note, including past due
interest that was added to the principal, which were purchased from CNA
Financial Corporation on November 24, 1982. Interest is payable to Phoenix
monthly at an annual rate of 20% of the face amount of the notes
receivable. Phoenix recognized interest income of approximately $59,000,
$288,300, and $310,600 in 1998, 1997 and 1996, respectively, related to the
note receivable. The principal is due and payable to Phoenix on October 31,
2002. In August 1998, in connection with the issuance of the Senior Notes,
a portion of the notes receivable from Columbus II were settled. The
amount in excess of the purchase price relating to these notes was realized
at the time of the settlement. The financial statements reflect an
extraordinary item for the gain on partial settlement of the notes of
$100,182.
Amounts in excess of purchase price represent the difference between the face
amount and the accrued interest receivable on the notes purchased and the price
paid. The amounts in excess of purchase price will be recognized when the
principal due on the notes is received, net of any costs associated with final
settlement.
In 1997, the notes receivable from former Limited Partners of Columbus I and
Columbus II matured. The "amounts in excess of purchase price" relating to these
notes were realized at the time of settlement. The 1997 financial statements
reflect a gain on the settlement of the notes of $3,315,337 (amounts in excess
of purchase price).
These related entities are under the control of the partners of Phoenix. The
partners have represented that substantially all of these amounts will be
settled among the parties.
5. Notes Payable
Notes payable at December 31, 1998 and 1997 consisted of:
Lender 1998 1997
------ --------------------------------------------
Senior Notes (a) $105,564,908 $ -
Banks(b) - 105,925,208
--------------------------------------------
Total $105,564,908 $105,925,208
============================================
Senior Notes payable at December 31, 1998, will mature on August 15, 2006.
F - 21
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
5. Notes Payable (continued)
(a) On August 21, 1998 Coaxial and Phoenix completed an offering of $140
million 10% Senior Notes ("Senior Notes") due 2006. The proceeds of the
Senior Notes were allocated $105.6 million to Phoenix and $34.4 million to
Coaxial. Interest accrues on the Senior Notes from August 21, 1998 and is
payable in cash semi-annually on each February 15 and August 15,
commencing on February 15, 1999. The Senior Notes are secured by the
outstanding Series A Preferred Interests in Insight Ohio. The Series A
Preferred Interests have a liquidation preference of $140.0 million and
pay distributions in an amount equal to the interest payments on the
Senior Notes. All Series A Preferred Interests are owned by Coaxial and
are pledged to Bank of Montreal Trust Company, as trustee, for the benefit
of the holders of the Senior Notes. Coaxial will utilize cash
distributions on the Series A Preferred Interests to make payments on the
Senior Notes including distributions to Phoenix. The Senior Notes contain
covenants that, among other things, restrict the ability of Coaxial,
Phoenix, Insight Ohio and any of their Restricted Subsidiaries to: incur
additional indebtedness; pay dividends and make distributions; issue stock
of subsidiaries to third parties; make certain investments; repurchase
stock; create liens; enter into transactions with affiliates; enter into
sale and leaseback transactions; create dividend or other payment
restrictions affecting Restricted Subsidiaries; merge or consolidate in a
transaction involving all or substantially all of the assets of Coaxial,
Phoenix and their Restricted Subsidiaries, taken as a whole; transfer or
sell assets; use distributions on the Series A Preferred Interests or
Series B Preferred Interests for any purpose other than required payments
of interest and principal on the notes or Discount Notes, respectively;
and swap assets. In connection with the issuance of the Senior Notes,
Phoenix incurred financing fees of $3,559,231 that are being amortized
over the life of the Senior Notes. Amortization expense related to the
deferred financing costs was $159,502 for the year ended December 31,
1998. Interest expense incurred on the Senior Notes excluding amortization
of deferred financing costs was $3,841,211 during 1998. Phoenix is a co-
issuer and joint and several obligor of the debt, along with an affiliate,
Coaxial.
(b) On November 15, 1994, Phoenix, Coaxial, Southern Ohio, Columbus I and
Columbus II (collectively referred to as the borrowers), executed a loan
agreement with a lead bank and several other financial institutions to
replace an existing loan agreement. In connection with the Senior Note
issuance discussed above, on August 21, 1998 the borrowers repaid all
outstanding borrowings under this facility. Interest expense for this
facility for 1998, 1997 and 1996 was $6,325,527, $9,855,120, and
$9,495,420, respectively.
A revolving credit commitment fee of .5% was paid on the average daily
balance available for draw under Phoenix's prior revolving credit loan.
The funds borrowed under the loan agreement were allocated to the
following entities as of December 31, 1997:
Entity Term Loan Revolving Loan
------ --------- --------------
Phoenix $105,925,208 $ -
Coaxial 16,760,937 8,000,000
Southern Ohio 20,568,238 8,000,000
Columbus I 2,385,682 -
Columbus II 1,359,935 -
-------------------------------------------
Total $147,000,000 $16,000,000
===========================================
At December 31, 1997, the carrying amounts of the notes payable (loan agreement
debt) approximate fair value as the underlying instruments are at variable rates
that re-price frequently. At December 31, 1998, the carrying value of the
Senior Notes payable approximate fair value.
F - 22
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
5. Notes Payable (continued)
At December 31, 1997, Phoenix, with the other borrowers, entered into interest-
rate swap agreements to modify the interest characteristics of its outstanding
debt from a floating rate to a fixed rate basis. These agreements involved the
payment of fixed rate amounts in exchange for floating rate interest receipts
over the life of the agreement without an exchange of the underlying principal
amount. The differential to be paid or received was accrued as interest rates
change and was recognized as an adjustment to interest expense related to the
debt. At December 31, 1997 the borrowers had entered into interest rate swap
agreements effectively fixing the interest rate to 5.87% on $40 million notional
value of debt. At December 31, 1998, no interest rate swap agreements were
outstanding.
F - 23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheet of Insight Communications of
Central Ohio, LLC as of December 31, 1998, and the related statements of
operations and changes in members' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Insight Communications of
Central Ohio, LLC at December 31, 1998, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
April 5, 1999
F - 24
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash...................................................................... $ 6,709
Subscriber receivables, less allowance for doubtful accounts of $306...... 1,186
Other accounts receivable, less allowance for doubtful accounts of $145... 1,520
Prepaid expenses and other current assets................................. 166
---------
Total current assets....................................................... 9,581
Property and equipment, at cost:
Land and Land Improvements................................................ 260
CATV systems.............................................................. 71,032
Equipment................................................................. 7,102
Furniture................................................................. 333
Leasehold improvements.................................................... 71
---------
78,798
Less--Accumulated depreciation and amortization............................ (46,898)
---------
Total property and equipment, net.......................................... 31,900
Intangible assets, at cost:
Franchise costs........................................................... 7,385
Other Intangible Assets................................................... 300
Less--Accumulated amortization............................................ (7,348)
---------
Total intangible assets, net............................................... 337
Due from related parties................................................... 149
---------
Total assets............................................................... $ 41,967
=========
LIABILITIES, PREFERRED INTERESTS, AND MEMBERS' DEFICIT
Current liabilities:
Current portion of capital lease obligations.............................. $ 123
Accounts payable.......................................................... 3,230
Accrued Liabilities....................................................... 4,404
Preferred A Dividend Payable.............................................. 5,211
Preferred B Dividend Payable.............................................. 1,438
---------
Total Current Liabilities.................................................. 14,406
Capital Lease Obligations.................................................. 105
Other Deferred Credits..................................................... 1,146
Due to related parties..................................................... 1,029
Preferred A Interest....................................................... 140,000
Preferred B Interest....................................................... 30,000
---------
Total liabilities and preferred interests.................................. 186,686
Members' deficit........................................................... (144,719)
---------
Total liabilities and members' deficit..................................... $ 41,967
=========
</TABLE>
See accompanying notes.
F - 25
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENT OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Revenues......................................................... $ 47,956
Operating expenses:
Service and administrative...................................... 29,695
Severance and transaction structure costs....................... 4,822
Depreciation and amortization................................... 5,311
---------
Total operating expenses......................................... 39,828
---------
Operating income................................................. 8,128
Other expenses................................................... (422)
Interest income.................................................. 59
---------
Net income....................................................... $ 7,765
Accrual of preferred interests................................... (6,649)
---------
Net income attributable to common interests...................... 1,116
Net assets contributed........................................... $ 25,571
Capital contributions............................................ 10,000
Preferred membership interests................................... (170,000)
Capital distributions............................................ (11,406)
---------
Members' deficit, end of year.................................... $(144,719)
=========
</TABLE>
See accompanying notes.
F - 26
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Cash flows from operating activities:
Net income......................................................................... $ 7,765
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 5,311
Changes in certain assets and liabilities:
Subscriber receivables........................................................... (524)
Other accounts receivable, prepaid expenses and other current assets............. (423)
Accounts payable and accrued expenses............................................ 2,270
--------
Net cash provided by operating activities........................................... $ 14,399
--------
Cash flows from investing activities:
Capital expenditures for property and equipment.................................... (7,369)
Proceeds from disposal of property and equipment................................... 11
Increase in other intangible assets................................................ (300)
Increase in amounts due to/from related parties.................................... 979
--------
Net cash used in investing activities............................................... $ (6,679)
--------
Cash flows from financing activities:
Principal payments on capital lease obligations.................................... (179)
Capital contributions.............................................................. 10,000
Capital distributions.............................................................. (11,406)
--------
Net cash used in financing activities............................................... $ (1,585)
--------
Net increase in cash................................................................ 6,135
Cash, beginning of year............................................................. 574
--------
Cash, end of year................................................................... $ 6,709
========
</TABLE>
See accompanying notes.
F - 27
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the
"Company") was formed on July 23, 1998 in order to acquire all of the assets and
liabilities comprising the cable television system of Coaxial Communications of
Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television systems for which Coaxial received a 25% non-voting common membership
interest in Insight Ohio as well as 100% of the voting preferred membership
interests of Insight Ohio ("Series A and Series B Preferred Interests"). In
conjunction therewith, Insight Holdings of Ohio, LLC ("IHO") contributed $10
million in cash to Insight Ohio for which it received a 75% non-voting common
membership interest in Insight Ohio. The accompanying financial statements
include the operations of the cable television systems contributed by Coaxial to
Insight Ohio, as if the aforementioned contribution had occurred as of January
1, 1998 (the beginning of the year). The amounts included in the accompanying
financial statements for periods prior to August 21, 1998 represent the
operations of the cable system operating unit (the "Operating Unit" and
predecessor to Insight Ohio), which, prior to such date, was an operating unit
within Coaxial. The amounts included in the accompanying financial statements
for the Operating Unit include only those assets, liabilities, revenues, and
expenses directly related to the cable television system contributed to Insight
Ohio. Prior to the contribution of the Operating Unit to Insight Ohio,
the Company had nominal assets and no operations. Insight Ohio provides basic
and expanded cable services to homes in Columbus, Ohio and surrounding areas.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity,
issued $140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior
Notes are non-recourse and are secured by all of the issued and outstanding
Series A Preferred Interest in Insight Ohio and are conditionally guaranteed by
Insight Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC,
related entities, issued 12 7/8% Senior Discount Notes due 2008 ("Discount
Notes"). The Discount Notes have a face amount of $55,869,000 and approximately
$30 million of gross proceeds were received upon issuance. The Discount Notes
are non-recourse, secured by 100% of the common stock of Coaxial, and
conditionally guaranteed by Insight Ohio.
As a result of the transaction described above, Insight Ohio incurred
severance costs and transaction structure costs of approximately $4,822,000
which have been reflected in the accompanying statements of operations.
2. Summary of Significant Accounting Policies
Cash
Insight Ohio considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Values
In December 1991, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", which requires disclosure of fair value
information about both on and off balance sheet financial instruments for which
it is practicable to estimate that value. The carrying amounts of current assets
and liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
F - 28
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
2. Summary of Significant Accounting Policies--(Continued)
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements.
Collections on subscriber advance billings at December 31, 1998 were not
significant.
Concentration of Credit Risk
Financial instruments that potentially subject Insight Ohio to
concentrations of credit risk consist principally of trade accounts receivable.
Insight Ohio's customer base consists of a number of homes concentrated in the
central Ohio area. Insight Ohio continually monitors the exposure for credit
losses and maintains allowances for anticipated losses. As of December 31, 1998,
Insight Ohio had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs
are expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems.................................. 10 to 15 years
Equipment..................................... 5 years
Furniture..................................... 5 years
Leasehold improvements........................ Life of lease
Assets held under capital leases at December 31, 1998 were approximately
$228,000.
Insight Ohio internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Insight Ohio reviews its property, plant and equipment and other long term
assets when events or changes in circumstances indicate the carrying amounts may
not be recoverable. When such conditions exist, management estimates the future
cash flows from operations or disposition. If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount would be recorded, and an impairment loss would be
recognized. Insight Ohio does not believe that there is an impairment of such
assets.
Franchise Costs
Franchise costs are amortized using the straight-line method over the lives
of the related franchises which range from 7 to 15 years.
Home Office Expenses
Home office expenses of approximately $1,373,000 in 1998 (included in
selling and administrative expenses) include billings for legal fees, management
fees, salaries, travel and other management expenses for services provided by an
affiliated services company. Effective August 21, 1998, IHO provides such
services for which it earns a fee (see note 6).
F - 29
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
2. Summary of Significant Accounting Policies--(Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, primarily
for campaign and telemarketing-related efforts, was approximately $2,152,000 in
1998.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This pronouncement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. The Company believes this statement does not
have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). This
pronouncement establishes standards for reporting information about operating
segments in annual and interim financial statements. The Company believes this
statement does not have a material effect on the financial statements as the
Company operates in one business segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. Insight Ohio does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
3. Income Taxes
Effective August 21, 1998, Insight Ohio is a limited liability corporation.
Therefore, each member reports his distributive share of income or loss on his
respective income tax returns. Prior to August 21, 1998, the Operating Unit was
an operating unit within Coaxial, which in turn was a Subchapter S Corporation.
Therefore, each shareholder reported his distributive share of income or loss on
his respective income tax return. As a result, Insight Ohio does not provide for
Federal or State income taxes in its accounts. In the event that the limited
liability corporation election is terminated, deferred taxes related to book and
tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of Insight Ohio's
members are limited to their respective investments.
4. 401(k) Plan
Insight Ohio sponsors a 401(k) Plan (the "Plan") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plan. Insight Ohio
makes matching contributions equal to a portion of the employee's wages. Insight
Ohio contributions to the Plan approximated $145,000 in 1998.
5. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
group of banks and other financial institutions. The Senior Credit Facility
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity, with reductions to the amount of
the commitment commencing after three years. The amount available for borrowing
is reduced by any outstanding letter of credit obligations. Insight Ohio's
obligations under the Senior Credit Facility are secured by substantially all
the tangible and intangible assets of Insight Ohio. Loans under the Senior
Credit Facility bear interest, at Insight Ohio's option, at the prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the Senior
Credit Facility, create liens on assets, make investments, make acquisitions,
engage in mergers or
F - 30
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
5. Credit Facility--(Continued)
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the Senior
Credit Facility, create liens on assets, make investments, make acquisitions,
engage in mergers or consolidations, engage in certain transactions with
subsidiaries and affiliates and otherwise restrict certain activities. As of
December 31, 1998, no amounts were outstanding on the Senior Credit
Facility.
6. Related Party Transactions
Effective August 21, 1998, the Company entered into a management agreement
with IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues. Fees
under this management agreement aggregated $493,000 for the period from August
21 through December 31, 1998.
Insight Ohio has a receivable from and payable to related parties as of
December 31, 1998 of approximately $149,000 and $1,029,000, respectively,
relating to working capital requirements.
Insight Ohio pays rent to a partnership owned by Coaxial's shareholders for
two facilities. Total charges for rent were approximately $63,000 in 1998.
7. Operating Lease Agreements
Insight Ohio leases land for tower locations, office equipment, office
space, vehicles and the use of utility poles under various operating lease
agreements. Rental expense for all operating leases was approximately $106,000
in 1998. These amounts exclude year-to-year utility pole leases of $191,000
which provide for payments based on the number of poles used.
Minimum rental commitments required under non-cancelable operating leases
are as follows:
1999................. $38,400
2000................. 26,400
2001 and thereafter.. 200
-------
$65,000
=======
8. Capital Lease Agreements
Insight Ohio leases vehicles, computer and other equipment under capital leases.
These leases have terms ranging from four to five years. Future minimum payments
under these leases are as follows:
For the Years Ending December 31,
---------------------------------
1999................................................. $ 139,000
2000................................................. 81,000
2001................................................. 30,000
2002................................................. 3,000
---------
253,000
Less: Amount representing interest................... (25,000)
Less: Current portion of capital lease obligations... (123,000)
---------
Long-term capital lease obligations.................. $ 105,000
=========
9. Commitments and Contingencies
Insight Ohio is party in or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either Insight Ohio's future results of
operations or financial position.
F - 31
<PAGE>
Coaxial Communications of Central Ohio, Inc.:
We have audited the accompanying statements of net assets to be contributed of
Central Ohio Cable System Operating Unit as of December 31, 1997 and the related
statements of operations and cash flows relating to the net assets to be
contributed for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements of net assets to be contributed were
prepared to present the net assets of Central Ohio Cable System Operating Unit
to be contributed to a newly formed company pursuant to the Contribution
Agreement described in Note 10, and is not intended to be a complete
presentation of Central Ohio Cable System Operating Unit.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets to be contributed of Central Ohio Cable
System Operating Unit as described in Note 10, as of December 31, 1997, and the
results of its operations and cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Columbus, Ohio,
July 17, 1998.
F-32
<PAGE>
Central Ohio Cable System Operating Unit
Statements of Net Assets to be Contributed
as of December 31, 1997
<TABLE>
<CAPTION>
December 31,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash................................................. $ 573,989
Subscriber receivables, less allowance for doubtful
accounts of $202,000 ............................... 661,183
Other accounts receivable, less allowance for
doubtful accounts of $172,000 ...................... 1,037,145
Prepaid expenses and other current assets............ 201,429
------------
Total current assets................................... 2,473,746
------------
Property and equipment, at cost:
CATV systems......................................... 64,949,357
Equipment............................................ 6,941,263
Furniture............................................ 211,232
Leasehold improvements............................... 70,409
------------
72,172,261
Less--Accumulated depreciation and amortization...... (42,433,809)
------------
Total property and equipment, net...................... 29,738,452
------------
Intangible assets, at cost:
Franchise rights and other........................... 7,392,000
Less--Accumulated amortization....................... (7,323,026)
------------
Total intangible assets, net........................... 68,974
------------
Other assets:
Due from related parties............................. 98,584
------------
Total other assets..................................... 98,584
------------
Total assets........................................... $ 32,379,756
============
LIABILITIES AND NET ASSETS
Current liabilities:
Current portion of capital lease obligations......... $ 213,103
Accounts payable..................................... 2,804,766
Accrued liabilities.................................. 3,596,922
------------
Total current liabilities.............................. 6,614,791
------------
Capital lease obligations.............................. 194,194
------------
Total liabilities...................................... 6,808,985
Commitments and contingencies
Net assets to be contributed....................... 25,570,771
------------
Total liabilities and net assets....................... $ 32,379,756
============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
----------- -----------
<S> <C> <C>
Operating revenues:
Service fees......................... $44,763,413 $42,544,417
Advertising.......................... 3,072,567 3,373,064
Connection fees...................... 395,673 282,374
Other................................ 2,186,172 2,029,632
----------- -----------
Total operating revenues........... 50,417,825 48,229,487
----------- -----------
Operating expenses:
Service and administrative........... 26,932,679 28,889,394
Depreciation......................... 4,812,346 4,755,017
Amortization......................... 522,216 482,675
----------- -----------
Total operating expenses........... 32,267,241 34,127,086
----------- -----------
Operating income....................... 18,150,584 14,102,401
Other expenses......................... (320,456) (321,732)
Other income........................... 72,072 50,276
Interest income........................ 29,449 69,990
----------- -----------
Net income from net assets to be
contributed (Note 3).................. $17,931,649 $13,900,935
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-34
<PAGE>
Increase (Decrease) In Cash
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 17,931,649 $ 13,900,935
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 5,334,562 5,237,692
Loss on disposals of property and equipment...... 69,187 77,452
Changes in certain assets and liabilities:
(Increase) decrease in assets--
Subscriber receivables....................... (252,414) 182,395
Other accounts receivable, prepaid expenses
and other current assets.................... 580,700 325,215
Increase (decrease) in liabilities--
Accounts payable............................. (361,633) 421,658
Accrued liabilities.......................... (1,317,378) (691,513)
Deferred income.............................. (9,613) --
------------ ------------
Net cash provided by operating activities.... 21,975,060 19,453,834
------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment.. (5,992,164) (5,528,669)
Proceeds from disposal of property and equipment. 17,667 25,753
(Increase) decrease in amounts due from related
parties......................................... 263,559 (50,981)
------------ ------------
Net cash used in investing activities........ (5,710,938) (5,553,897)
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations.... $ (234,630) $ (264,649)
Cash used for activities not included in net
assets to be contributed.......................... (15,793,342) (13,967,020)
------------ ------------
Net cash used in financing activities...... (16,027,972) (14,231,669)
------------ ------------
Net increase (decrease) in cash.................... 236,150 (331,732)
Cash, beginning of year.......................... 669,571 905,721
------------ ------------
Cash, end of year................................ $ 905,721 $ 573,989
============ ============
</TABLE>
Supplemental Disclosure of Investing and Financing Noncash Transactions:
During 1996 and 1997, the Operating Unit entered into capital leases
to acquire vehicles and equipment totaling $198,985 and $56,707 respectively.
The accompanying notes to financial statements are an integral part of these
statements.
F-35
<PAGE>
1. Business Organization And Purpose
Central Ohio Cable System Operating Unit (the Operating Unit or the System),
an operating unit within Coaxial Communications of Central Ohio, Inc.
(Coaxial), operates a cable television system which provides basic and
expanded cable services to homes in Columbus, Ohio and surrounding areas. The
Operating Unit's financial statements include only those assets, liabilities,
revenues and expenses directly related to the cable television system to be
contributed (see Note 10).
All costs pertaining to the Operating Unit are specifically identifiable and
are included in the Operating Unit's financial statements. No allocation of
costs is necessary.
2. Summary Of Significant Accounting Policies
Cash
The Operating Unit considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on- and off-balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current assets and
liabilities approximate their fair market value because of the immediate or
short-term maturity of these financial instruments.
Operating Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent
of direct selling costs incurred. Any fees in excess of such costs are
deferred and amortized to income over the estimated average period that
subscribers are expected to remain connected to the system.
Concentration of Credit Risk
Financial instruments that potentially subject the Operating Unit to
concentrations of credit risk consist principally of trade accounts
receivable. The Operating Unit's customer base consists of a number of homes
concentrated in the central Ohio area. The Operating Unit continually monitors
the exposure for credit losses and maintains allowances for anticipated
losses. As of December 31, 1997, the Operating Unit had no significant
concentrations of credit risk.
F-36
<PAGE>
2. Summary Of Significant Accounting Policies--(Continued)
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs
are expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Years
-------------
<S> <C>
CATV systems................................................ 10 to 15
Equipment................................................... 5
Furniture................................................... 5
Leasehold improvements...................................... Life of lease
</TABLE>
The Operating Unit internally constructs certain CATV systems.
Construction costs capitalized include payroll, fringe benefits and other
overhead costs associated with construction activity.
The Operating Unit reviews its property, plant and equipment and other
long term assets when events or changes in circumstances indicate the carrying
amounts may not be recoverable. When such conditions exist, management estimates
the future cash flows from operations or disposition. If the estimated
undiscounted future cash flows are less than the carrying amount of the asset,
an adjustment to reduce the carrying amount would be recorded, and an impairment
loss would be recognized. The Operating Unit does not believe that there is an
impairment of such assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Years
-------
<S> <C>
Franchise rights................................................... 7 to 15
</TABLE>
Home Office Expenses
Home office expenses of approximately $1,697,000 and $1,498,000 in 1996
and 1997 (included in selling and administrative expenses) include billings for
legal fees, management fees, salaries, travel and other management expenses for
services provided by an affiliated services company.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily
for campaign and telemarketing-related efforts was approximately $1,060,000 and
$1,025,000 in 1996 and 1997, respectively.
Change in Net Assets
The components of the change in net assets are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Beginning Balance.............................. $ 23,498,549 $ 25,636,856
Net income................................... 17,931,649 13,900,935
Advances, loans and repayments
by Coaxial.................................. (15,793,342) (13,967,020)
------------ ------------
Ending Balance................................. $ 25,636,856 $ 25,570,771
============ ============
</TABLE>
F-37
<PAGE>
2. Summary Of Significant Accounting Policies--(Continued)
Advances, loans and repayments by Coaxial represent cash generated by the
Operating Unit that was used by Coaxial primarily for lending to related parties
and paying of notes payable. The advances, loans and repayments consist of the
following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Advances.................................. $(11,446,090) $(10,519,748)
Loans..................................... 9,914,315 2,938,723
Repayments................................ (14,261,567) (6,385,995)
------------ ------------
(15,793,342) (13,967,020)
============ ============
</TABLE>
3. Income Taxes
The Operating Unit is an operating unit within Coaxial, which is a
Subchapter S corporation. Therefore, each shareholder reports his distributive
share of income or loss on his respective income tax returns. As a result, the
Operating Unit does not provide for Federal or state income taxes in its
accounts.
4. Thrift Plan
The Operating Unit participates in an employer sponsored Thrift Plan (the
Plan) for employees having at least one full year of service. Employees can
contribute up to 6% of their salary to the Plan which is matched 50% by the
Operating Unit. Employees can also contribute an additional 1% to 10% which is
not matched by the Operating Unit. Employees become fully vested in matching
contributions after 5 years. There is no partial vesting. The Operating Unit's
contributed approximately $111,000 and $133,000 to the Plan in 1996 and 1997,
respectively.
5. Workers' Compensation Reserves
The Operating Unit is partially self-insured for workers' compensation
benefits. The amounts charged to expense for workers' compensation were
approximately $110,200 and $89,200 for 1996 and 1997, respectively, and were
based on actual and estimated claims incurred. The liability for workers'
compensation obligations, as of December 31, 1996 and 1997, is approximately
$131,000 and $78,000, respectively.
6. Related Party Transactions
The Operating Unit has a receivable from a related party as of December
31, 1997 and 1996 of $98,584 and $47,603, respectively, relating to the leasing
of fiber optic facilities.
The Operating Unit pays rent to a partnership owned by Coaxial's
shareholders for two facilities. Total charges for rent were approximately
$72,000 in 1996 and $99,500 in 1997.
7. Operating Lease Agreements
The Operating Unit leases land for tower locations, office equipment,
office space, vehicles and the use of utility poles under various operating
lease agreements. Rental expense for all operating leases was approximately
$160,500 in 1996 and $218,500 in 1997. These amounts exclude year-to-year
utility pole leases of $186,400 and $182,700, respectively, which provide for
payments based on the number of poles used.
Minimum rental commitments required under noncancellable operating leases
are as follows:
<TABLE>
<S> <C>
1998.............................................................. $157,214
1999.............................................................. 146,389
2000.............................................................. 89,421
2001.............................................................. 200
--------
$393,224
========
</TABLE>
F-38
<PAGE>
8. Capital Lease Agreements
The Operating Unit leases vehicles, computer equipment and Xerox equipment
under capital leases. These leases have various terms of 4-5 years. Future
minimum payments under the leases are as follows:
<TABLE>
<CAPTION>
For the Years Ending December 31,
---------------------------------
<S> <C>
1998............................................................ $ 244,516
1999............................................................ 124,019
2000............................................................ 66,283
2001............................................................ 24,370
2002............................................................ 3,005
---------
462,193
Less: Amount representing interest.............................. 54,896
Less: Current portion of capital lease obligations.............. 213,103
---------
Long-term capital lease obligations............................. $ 194,194
=========
</TABLE>
As of December 31, 1997, the Operating Unit has assets held under capital
leases as follows:
<TABLE>
<S> <C>
Total costs................................................... $ 1,151,354
Related accumulated amortization.............................. (628,973)
-----------
Net book value as of December 31, 1997........................ $ 522,381
===========
</TABLE>
9. Commitments and Contingencies
The Operating Unit is party in or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Operating Unit's future
results of operations or financial position.
Capital expenditures for the Operating Unit for 1998 are expected to be
approximately $5,515,000.
10. Subsequent Event
On June 30, 1998, Coaxial and Insight Communications Company, L.P.
(Insight) entered into a Contribution Agreement (the Contribution Agreement)
pursuant to which Coaxial will contribute to a newly formed subsidiary (a
limited liability company) of Coaxial (the Operating Company) substantially all
of the assets and liabilities comprising the Operating Unit, and Insight will
contribute $10 million in cash to the Operating Company. As a result of this
Contribution Agreement, Coaxial will own 25% of the non-voting common equity and
Insight will own 75% of the non-voting common equity of the Operating Company,
subject to possible adjustments pursuant to the Contribution Agreement. Coaxial
will also own two separate series of voting preferred equity (a $140 preferred
equity interest and a $30 million preferred equity interest) of the Operating
Company; the voting preferred equity interest will provide for distributions to
Coaxial equal in amount to the payments on the senior and senior discount notes
described below. Insight or an affiliate will serve as the manager of the
Operating Company.
The closing of the Contribution Agreement is conditioned upon, among other
things, the private placement of $140 million senior notes by Coaxial and
Phoenix Associates (a related entity) and the private placement of $30 million
of senior discount notes by the majority shareholder of Coaxial.
F-39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment to this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Coaxial Communications of Central Ohio, Inc.
Date: May 27, 1999 By: /s/ Michael S. Willner
------------------------------------
Michael S. Willner, President
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment to this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Phoenix Associates
By: Phoenix DJM LLC, a general partner
Date: May 27, 1999 By: /s/ Dennis J. McGillicuddy
-----------------------------------
Dennis J. McGillicuddy, Sole Member
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment to this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Insight Communications of Central Ohio LLC
Date: May 27, 1999 By: /s/ Michael S. Willner
---------------------------------
Michael S. Willner, President
<PAGE>
EXHIBIT 16.1
May 28, 1999
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sir/Madam:
We have read the first four paragraphs under Item 9 included in the Form
10-K/A-1 dated May 28, 1999 of Coaxial Communications of Central Ohio, Inc.,
Phoenix Associates and Insight Communications of Central Ohio, Inc. filed with
the Securities and Exchange Commission and are in agreement with the statements
contained therein.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
cc: Mr. Daniel Mannino, Vice President and Controller
Coaxial Communications of Central Ohio, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<NAME> INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
<CIK> 0001070242
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,708,553
<SECURITIES> 0
<RECEIVABLES> 2,705,947
<ALLOWANCES> 451,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,580,847
<PP&E> 78,798,344
<DEPRECIATION> 46,898,251
<TOTAL-ASSETS> 41,967,614
<CURRENT-LIABILITIES> 14,405,659
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (144,718,552)
<TOTAL-LIABILITY-AND-EQUITY> 41,967,614
<SALES> 47,955,737
<TOTAL-REVENUES> 47,955,737
<CGS> 39,827,898
<TOTAL-COSTS> 39,827,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (362,248)
<INCOME-PRETAX> 7,765,591
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,765,591
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,765,591
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
