<PAGE>
================================================================================
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1999
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 charters)
Ohio 31-0975825
Florida 59-1798351
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
c/o Insight Communications Company, L.P.
126 East 56/th/ Street
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 371-2266
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Coaxial Communications of Central Ohio, Inc. Not Applicable
Phoenix Associates Not Applicable
Insight Communications of Central Ohio, LLC Not Applicable
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Operations and Changes in
Shareholders' (Deficit) Equity for the three months ended
June 30, 1999 and 1998 and for the six months ended June 30,
1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998 (unaudited) 3
Notes to Interim Consolidated Financial Statements (unaudited) 4
Phoenix Associates
Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 10
Statements of Operations and Changes in Partners' Deficit
for the three months ended June 30, 1999 and 1998 and for
the six months ended June 30, 1999 and 1998 (unaudited) 11
Statements of Cash Flows for the six months ended June 30, 1999
and 1998 (unaudited) 12
Notes to Interim Financial Statements (unaudited) 13
Insight Communications of Central Ohio, LLC
Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998 16
Statements of Operations and Changes in Members' Deficit for
the three months ended June 30, 1999 and for
the six months ended June 30, 1999 (unaudited) 17
Statement of Cash Flows for the six months
ended June 30, 1999 (unaudited) 18
Notes to Interim Financial Statements (unaudited) 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
</TABLE>
<PAGE>
PART II OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K 29
</TABLE>
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
Cash................................................................... $ 2,265 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $438 and $306 in 1999 and 1998 969 1,186
Other accounts receivable, less allowance for doubtful accounts
of $145 in 1999 and 1998 1,629 1,520
Prepaid expenses and other current assets 237 166
--------------- --------------
Total current assets 5,100 11,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 80,698 71,032
Equipment 7,744 7,102
Furniture 349 333
Leasehold improvement 71 71
--------------- --------------
89,122 78,798
Less-Accumulated depreciation and amortization (50,122) (46,898)
--------------- --------------
Total property and equipment, net 39,000 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,385 7,385
Deferred financing costs and other 1,643 1,447
--------------- --------------
9,028 8,832
Less-Accumulated amortization (7,497) (7,399)
--------------- --------------
Total intangible assets, net 1,531 1,433
DUE FROM RELATED PARTIES 158 149
--------------- --------------
Total assets $ 45,789 $ 45,063
=============== ==============
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,171 3,230
Accrued interest 1,307 1,250
Accrued liabilities 4,716 4,404
--------------- --------------
Total current liabilities 10,267 9,007
Senior notes payable 34,435 34,435
Capital lease obligations 105 105
Other liabilities 1,172 1,146
Due to related parties 756 1,030
--------------- --------------
Total liabilities 46,735 45,723
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT):
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 1999 and 1998 1 1
Paid-in capital 27,777 11,501
Accumulated (deficit) (28,724) (12,162)
--------------- --------------
Total shareholders' (deficit) (946) (660)
--------------- --------------
Total liabilities and shareholders' (deficit) $ 45,789 $ 45,063
=============== ==============
</TABLE>
See accompanying notes
1
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Operations and Changes in Shareholder's (Deficit)
Equity
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---------- --------- -------- --------
<S> <C> <C> <C> <C>
TOTAL REVENUES $11,697 $11,784 $23,393 $23,268
OPERATING EXPENSES:
Service and administrative 6,560 7,384 13,241 14,867
Depreciation and amortization 1,647 1,372 3,247 2,688
---------- -------- -------- --------
Total operating expenses 8,207 8,756 16,488 17,555
---------- -------- -------- --------
OPERATING INCOME 3,490 3,028 6,905 5,713
OTHER INCOME 79 (59) 79 (115)
INTEREST INCOME (EXPENSE), net
Interest income--related parties - 1,115 - 2,183
Interest income 9 - 86 23
Interest expense--related parties - (403) - (792)
Interest expense (905) (874) (1,809) (1,680)
---------- -------- -------- --------
Total interest (expense), net (896) (162) (1,723) (266)
---------- -------- -------- --------
NET INCOME 2,673 2,807 5,261 5,332
SHAREHOLDERS' (DEFICIT) EQUITY, beginning of period (3,178) 55,709 (660) 54,327
CAPITAL DISTRIBUTIONS (441) - (5,547) (1,143)
---------- -------- -------- --------
SHAREHOLDERS' (DEFICIT) EQUITY, end of period $ (946) $58,516 $ (946) $58,516
========== ======== ======== ========
EARNINGS PER COMMON SHARE:
Basic and Diluted $ 2,475 $ 2,599 $ 4,871 $ 4,937
========== ======== ======== ========
Weighted average number of common shares 1,080 1,080 1,080 1,080
=========== ========= ========== ========
</TABLE>
See accompanying notes
2
<PAGE>
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,261 $ 5,332
Adjustments to reconcile net income to
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 3,322 3,037
Loss on disposals of property and equipment - 55
Changes in operating assets and liabilities
Subscriber receivables 217 555
Other accounts receivable, prepaid expenses and
other current assets (180) (1,040)
Accounts payable, accrued liabilities and other 1,279 408
Accrued interest 57 (170)
Due to related parties (283) -
--------------- ---------------
Net cash provided by operating activities 9,673 8,177
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (10,324) (2,759)
Increase in intangible assets (196) -
Due from related parties - (7,302)
--------------- ---------------
Net cash used in investing activities (10,520) (10,061)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - 1,250
Principal payments on notes payable - (57)
Principal payments on deferred compensation - (128)
Costs incurred in debt financing - (263)
Principal payments on capital lease obligations (50) (140)
Capital distributions (5,547) (1,143)
Increase in amounts due to related parties - 2,058
--------------- ---------------
Net cash (used in) provided by financing activities (5,597) 1,577
--------------- ---------------
NET (DECREASE) IN CASH (6,444) (307)
CASH, beginning of period 8,709 574
--------------- ---------------
CASH, end of period $ 2,265 $ 267
=============== ===============
</TABLE>
See accompanying notes
3
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30,1999
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 4(a), and the issuance of the Discount Notes
by the Company's majority shareholder and an affiliate 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 June 30, 1999, 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 and
indirectly to Phoenix and Coaxial LLC in amounts equal to the payments required
on the senior and senior discount notes. IHO serves as the manager of Insight
Ohio.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
4
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at June 30, 1999, the accompanying financial statements include the accounts of
Insight Ohio. All intercompany balances have been eliminated in consolidation.
At June 30, 1999, 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.
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 June 30, 1999, the carrying value of the Senior Notes approximate their fair
value.
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the hook-
up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscriber advance billings are
netted within accounts receivable in the accompanying financial statements.
Collections on subscriber advance billings at June 30, 1999 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 June 30, 1999, the Company
had no significant concentrations of credit risk.
5
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs are
expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
CATV systems 10 to 15 years
Equipment 5 years
Furniture 5 years
Leasehold improvements Life of lease
At June 30, 1999 the Company had net assets held under capital leases of
$178,000.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
The Company reviews its property and equipment and other long term assets when
events or changes in circumstances indicate the carrying amounts may not be
recoverable. When such conditions exist, management estimates the future cash
flows from operations or disposition. If the estimated undiscounted future cash
flows are less than the carrying amount of the asset, an adjustment to reduce
the carrying amount would be recorded, and an impairment loss would be
recognized. The Company does not believe that there is an impairment of such
assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
Franchise costs 7 to 15 years
Deferred financing costs Term of related debt
Deferred financing costs relate to costs, primarily legal fees and bank facility
fees incurred to negotiate and secure long term financing (see note 4). 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
4), the Company repaid the outstanding indebtedness under its prior debt
facility. The Company amortized to interest expense deferred financing costs of
approximately $39,000 and $75,000 for the three and six months ended June 30,
1999 and $207,000 and $349,000 for the three and six months ended June 30, 1998.
Home Office Expenses
Home office expenses of approximately $336,000 and $731,000 for the three and
six months ended June 30, 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
management fee which approximated $351,000 and $727,000 for the three and six
months ended June 30, 1999.
6
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
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.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
4. Notes Payable
Notes payable at June 30, 1999 and December 31, 1998 consisted of:
Lender June 30, 1999 December 31, 1998
------ --------------- ------------------
Senior Notes(a) $34,435,092 $34,435,092
--------------- ------------------
Total $34,435,092 $34,435,092
=============== ==================
Notes payable at June 30, 1999, will mature on August 15, 2006.
7
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(a) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to
Coaxial. Interest 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 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 approximately $1,226,000 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 for the three and six months ended June 30, 1999 was approximately
$39,000 and $75,000. Interest expense on Coaxial's portion of the Senior
Notes excluding amortization of deferred financing costs was approximately
$861,000 and $1,722,000 for the three and six months ended June 30, 1999.
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
bank which provides for revolving credit loans of $25 million to finance
capital expenditures and for working capital and general purposes,
including the upgrade of the 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 June 30, 1999, no amounts were
drawn on the Senior Credit Facility.
8
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Commitments and Contingencies
The Company is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's results of operation or
financial position.
9
<PAGE>
Phoenix Associates
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Interest receivable 57 57
------------- ---------------
Total current assets 57 57
OTHER ASSETS:
Due from related parties 406 406
Notes receivable--related parties 550 550
Deferred financing fees, net 3,410 3,400
------------- --------------
Total other assets 4,366 4,356
------------- --------------
Total assets $ 4,423 $ 4,413
============= ==============
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
INTEREST PAYABLE $ 4,017 $ 3,841
NOTES PAYABLE 105,565 105,565
------------- --------------
Total liabilities 109,582 109,406
------------- --------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT (105,159) (104,993)
------------- --------------
Total liabilities and partners' deficit $ 4,423 $ 4,413
============= ==============
</TABLE>
See accompanying notes
10
<PAGE>
Phoenix Associates
Statements of Operations and Change in Partners' Deficit
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
EXPENSES $ - $ 33 $ - $ 52
INTEREST EXPENSE (INCOME)
Interest income--related parties - (227) - (455)
Interest expense--related parties - 1,053 - 2,061
Interest expense 2,759 2,451 5,509 4,900
------------ --------- -------- ---------
Total interest expense, net 2,759 3,277 5,509 6,506
------------ --------- -------- ---------
NET LOSS 2,759 3,310 5,509 6,558
PARTNERS' DEFICIT, beginning of period 102,641 173,659 104,993 170,411
CAPITAL CONTRIBUTIONS (241) - (5,343) -
------------ --------- -------- ---------
PARTNERS' DEFICIT, end of period $ 105,159 $176,969 $105,159 $ 176,969
============ ========= ======== =========
</TABLE>
See accompanying notes
11
<PAGE>
Phoenix Associates
Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,509) $ (6,558)
Adjustments to reconcile net loss to
NET CASH USED IN OPERATING ACTIVITIES:
Amortization of deferred financing fees (10) -
Changes in operating assets and liabilities:
Other accounts receivable, prepaid expenses, and
other current assets - 1
Accrued interest 176 -
Accounts payable - 32
------------ ------------
Net cash used in operating activities (5,343) (6,525)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in amounts due from related parties - (176)
------------ -----------
Net cash used in investing activities - (176)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - (360)
Capital contributions 5,343 -
Increase in amounts due to related parties - 7,061
------------ ------------
Net cash provided by financing activities 5,343 6,701
------------ ------------
NET INCREASE (DECREASE) IN CASH - -
CASH, beginning of period - -
------------ ------------
CASH, end of period $ - $ -
============ ============
</TABLE>
See accompanying notes
12
<PAGE>
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix has no operations. Its ability to satisfy debt and other obligations is
dependent upon funding from related entities, which are under the common control
of the owners of Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 4, along with an affiliate, Coaxial
Communications of Central Ohio, Inc.
Phoenix is owned by three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial
Financing Corp., Coaxial 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. Coaxial will make distributions which will enable
Phoenix to fund the required payments on the Senior Notes.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
13
<PAGE>
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. 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 June 30, 1999, the carrying value of
Phoenix's financial instruments approximate fair value.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." Statement No.
133 established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Statement No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Phoenix does not anticipate that the
adoption of this Statement will have a material impact on its financial
statements.
4. Notes Payable
Notes payable at June 30, 1999 and December 31, 1998 consisted of:
<TABLE>
<CAPTION>
Lender June 30, 1999 December 31, 1998
----- --------------------- -----------------------
<S> <C> <C>
Senior Notes (a) $105,565,000 $105,565,000
--------------------- -----------------------
Total $105,565,000 $105,565,000
===================== =======================
</TABLE>
Notes payable at June 30, 1999, will mature on August 15, 2006.
14
<PAGE>
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
4. 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 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 Interest 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
approximately $3,800,000 that are being amortized over the life of the
Senior Notes. Amortization expense related to the deferred financing
costs was approximately $120,000 and $231,000 for the three and six
months ended June 30, 1999. Interest expense incurred on the Senior
Notes excluding amortization of deferred financing costs was
approximately $2,639,000 and $5,278,000 for the three and six months
ended June 30, 1999. Phoenix is a co-issuer and joint and several
obligor of the debt, along with an affiliate, Coaxial.
At June 30, 1999 the carrying value of the Senior Notes payable approximate fair
value.
5. Commitments and Contingencies
The Company is party to or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
of financial position.
15
<PAGE>
Insight Communications of Central Ohio, LLC
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------- -------------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 265 $ 6,709
Subscriber receivables, less allowance for doubtful
Accounts of $438 and $306 in 1999 and 1998 969 1,186
Other accounts receivable, less allowance for doubtful
Accounts of $145 in 1999 and 1998 1,629 1,520
Prepaid expenses and other current assets 237 166
-------------- ---------------
Total current assets 3,100 9,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 80,698 71,032
Equipment 7,744 7,102
Furniture 349 333
Leasehold improvements 71 71
-------------- --------------
89,122 78,798
Less-Accumulated depreciation and amortization (50,122) (46,898)
-------------- --------------
Total property and equipment, net 39,000 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,385 7,385
Other intangible assets 417 300
Less-Accumulated amortization (7,371) (7,348)
-------------- --------------
Total intangible assets, net 431 337
DUE FROM RELATED PARTIES 158 149
-------------- --------------
Total assets $ 42,689 $ 41,967
============== ==============
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 73 $ 123
Accounts payable 4,171 3,230
Accrued liabilities 4,716 4,404
Series preferred A dividend payable 5,250 5,211
Series preferred B dividend payable 3,347 1,438
-------------- --------------
Total current liabilities 17,557 14,406
Capital lease obligations 105 105
Other deferred credits 1,172 1,146
Due to related parties 756 1,029
Preferred A interest 140,000 140,000
Preferred B interest 30,000 30,000
-------------- --------------
Total liabilities and preferred interests 189,590 186,686
Members' deficit (146,901) (144,719)
-------------- --------------
Total liabilities and members' deficit $ 42,689 $ 41,967
============== ==============
</TABLE>
See accompanying notes
16
<PAGE>
Insight Communications of Central Ohio, LLC
Statements of Operations and Changes in Members' Deficit
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
-------------------- --------------------
<S> <C> <C>
REVENUE $ 11,697 $ 23,393
OPERATING EXPENSES:
Service and administrative 6,560 13,241
Depreciation and amortization 1,647 3,247
-------------------- --------------------
Total operating expenses 8,207 16,488
-------------------- --------------------
OPERATING INCOME 3,490 6,905
OTHER INCOME 79 79
Interest expense (6) (12)
Interest income 9 86
-------------------- --------------------
INTEREST INCOME (EXPENSE), net 5 74
-------------------- --------------------
NET INCOME 3,572 7,058
Accrual of preferred interests (4,499) (8,721)
-------------------- --------------------
Loss on common interests (927) (1,663)
MEMBERS' DEFICIT, beginning of period (145,454) (144,718)
Capital Distributions (520) (520)
-------------------- --------------------
Members' Deficit at June 30, 1999 $ (146,901) $ (146,901)
==================== ====================
</TABLE>
See accompanying notes
17
<PAGE>
Insight Communications of Central Ohio, LLC
Statement of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,058
Adjustments to reconcile net income to
NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 3,247
Changes in certain assets and liabilities
Subscriber receivables 217
Other accounts receivable, prepaid expenses and other (180)
current assets
Accounts payable, accrued liabilities and other 1,274
Due to affiliated companies (282)
----------------
Net cash provided by operating activities 11,334
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (10,324)
Increase in other intangible assets (117)
----------------
Net cash used in investing activities (10,441)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital Distributions (520)
Principal payments on capital lease obligations (50)
Preferred interest distributions (6,767)
----------------
Net cash used in financing activities (7,337)
----------------
NET INCREASE IN CASH (6,444)
CASH, beginning of period 6,709
----------------
CASH, end of period $ 265
================
</TABLE>
See accompanying notes
18
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the "Company")
was formed on July 23, 1998 in order to acquire substantially all of the assets
and liabilities comprising the cable television system of Coaxial Communications
of Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television system 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. Insight Ohio provides basic and expanded
cable services to homes in Columbus, Ohio and surrounding areas.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior Notes
are non-recourse and are secured by all issued and outstanding Series A
Preferred Interest in Insight Ohio and are conditionally guaranteed by Insight
Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related
entities, issued 12 7/8% Senior Discount Notes due 2008 ("Discount Notes"). The
Discount Notes have a face amount of $55,869,000 and approximately $30 million
of gross proceeds were received upon issuance. The Discount Notes are non-
recourse, secured by 100% of the common stock of Coaxial, and conditionally
guaranteed by Insight Ohio.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
3. 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.
19
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. 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 June 30, 1999 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 June 30, 1999, 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 June 30, 1999 were $178,000.
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.
20
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Home Office Expenses
Effective August 21, 1998, the Company entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee of equivalent to 3% of Insight Ohio's gross operating revenues.
Fees under this management agreement aggregated $351,000 and $727,000 for the
three and six months ended June 30, 1999.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
4. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a bank
which provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the 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. As of
June 30, 1999, no amounts were drawn on the Senior Credit Facility.
5. Commitments and Contingencies
Insight Ohio is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either Insight Ohio's future results of operations
or financial position.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Forward-Looking Statements
This report contains "forward-looking statements," including statements
containing the words "believes," "anticipates," "expects" and words of similar
import, which concern, among other things, the operations, economic performance
and financial condition of the System (as defined below), 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 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, (i) 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; (ii) 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 the Series A
Preferred Interests (as defined below) and the Series B Preferred Interests (as
defined below), thereby reducing the funds available to Insight Ohio for its
operations and future business opportunities; (iii) 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 (iv) 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.
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 below which
included the contribution of Coaxial's cable television system (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 Series A Preferred
Interest and Series B Preferred Interest of Insight Ohio (together the
"Preferred Interests"). The Senior Notes are guaranteed on a conditional basis
by Insight Ohio.
On August 21, 1998, a Financing Plan was implemented to facilitate the
organization of Insight Ohio, the acquisition of the System by Insight Ohio and
to provide for the System's liquidity and operational and financial flexibility.
Pursuant to the Financing Plan:
. Coaxial contributed to Insight Ohio substantially all of the assets
comprising the System for which Coaxial received a 25% non-voting common
membership interest in Insight Ohio as well as the voting Preferred
Interests in Insight Ohio, which provide for distributions to Coaxial that
will be used to pay interest and principal on the Senior Notes and to pay
dividends to the Individual LLCs that will be used to pay interest and
principal on the Senior Discount Notes;
22
<PAGE>
. 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.
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 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).
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 Insight Ohio.
The following discussion relates to the historical operations of Coaxial for
the periods presented. On August 21, 1998, substantially all of the assets and
liabilities comprising the System 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 June 30,
1999. The historical operating results of Coaxial presented below reflect the
actual results of the System in addition to certain financing activities
unrelated to the operation of the System. These financing activities relate
primarily to the offering of the Senior 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
23
<PAGE>
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.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues for the three months ended June 30, 1999 were $11.7 million,
compared to $11.8 million for the three months June 30, 1998. For the three
months ended June 30, 1999, subscribers served averaged 85,995, as compared with
91,476 in 1998. Revenues remained essentially flat despite a 6.0% decrease in
customers as Insight Ohio ended previous management's program of deeply
discounting its rates. Average revenue per customer per month for the three
months ended June 30, 1999 totaled $45.34 versus $42.99 for the three months
ended June 30, 1998.
Service and administrative expenses decreased to $6.5 million for the three
months ended June 30, 1999 compared to $7.4 million for the three months ended
June 30, 1998 a decrease of approximately $824,000 or 12.1%. Basic programming
expenses decreased by 10.2%, from $2.0 million in 1998 to $1.7 million in 1999,
reflecting savings realized through Insight's purchasing discounts. Similarly,
pay programming expenses dropped 18.6% during the three months ended June 30,
1999 versus the three months ended June 30, 1998 to $920,000. The System was
charged home office expenses that included 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 three months ended June 30, 1998, such expenses totaled
approximately $336,000. Upon consummation of the Financing Plan, IHO commenced
management services to the System for which it receives a management fee, which
totaled approximately $351,000 for the three months ended June 30, 1999.
Personnel costs for the three months ended June 30, 1999 totaled approximately
$1.4 million, a decrease of 17.0% from the three months ended June 30, 1998 as
Insight Ohio eliminated duplicative positions upon consummation of the Financing
Plan.
Depreciation and amortization expenses for the three months ended June 30,
1999 increased by 20.0% over the three months ended June 30, 1998 to
approximately $1.6 million reflecting additional capital expenditures incurred
associated with the rebuild of the System's network. Operating Income for the
three
24
<PAGE>
months ended June 30, 1999 totaled $3.5 million, a 15.3% increase over operating
income of $3.0 million reported for the three months ended June 30, 1998.
Net interest expense totaled approximately $896,000 for the three months
ended June 30, 1999 reflecting interest on the Senior Notes issued August 21,
1998.
Net income decreased to $2.7 million for the three months ended June 30, 1999
from net income of $2.8 million for the three months ended June 30, 1998 for the
reasons set forth above.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 were $23.4 million, compared
to $23.3 million for the six months ended June 30, 1998. For the six months
ended June 30, 1999, subscribers served averaged 86,503, as compared with 91,481
in 1998. Revenues remained essentially flat despite a 5.4% decrease in customers
as Insight Ohio ended previous management's program of deeply discounting its
rates. Average revenue per customer per month for the six months ended June 30,
1999 totaled $45.07 versus $42.39 for the six months ended June 30, 1998.
Service and administrative expenses decreased to $13.2 million for the six
months ended June 30, 1999 compared to $14.9 million for the six months ended
June 30, 1998 a decrease of approximately $1.7 million or 11.4%. Basic
programming expenses decreased by 12.5%, from $4.0 million in 1998 to $3.5
million in 1999, reflecting savings realized through Insight's purchasing
discounts. Similarly, pay programming expenses dropped 14.5% during the six
months ended June 30, 1999 versus the six months ended June 30, 1998 to $1.9
million. The System was charged home office expenses that included 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 six months ended June 30,
1998, such expenses totaled approximately $731,000. Upon consummation of the
Financing Plan, IHO commenced management services to the System for which it
receives a management fee, which totaled approximately $727,000 for the six
months ended June 30, 1999. Personnel costs for the six months ended June 30,
1999 totaled approximately $2.8 million, a decrease of 16.9% from the six months
ended June 30, 1998 as Insight Ohio eliminated duplicative positions upon
consummation of the Financing Plan.
Depreciation and amortization expenses for the six months ended June 30, 1999
increased by 20.8% over the six months ended June 30, 1998 to approximately $3.3
million reflecting additional capital expenditures incurred associated with the
rebuild of the System's network. Operating Income for the six months ended June
30, 1999 totaled $6.9 million, a 21.0% increase over operating income of $5.7
million reported for the six months ended June 30, 1998.
Net interest expense totaled approximately $1.7 million for the six months
ended June 30, 1999 reflecting interest on the Senior Notes issued August 21,
1998.
Net income remained essentially flat at $5.3 million for the six months ended
June 30, 1999 from net income of $5.3 million for the six months ended June 30,
1998 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 $4.2
million and $10.3 for the three and six months ended June 30, 1999. These
expenditures were primarily for the rebuild of cable plant and for serving new
homes. Capital expenditures are financed by cash received from the Financing
Plan and cash flows from operations.
IHO is rebuilding 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
25
<PAGE>
in the bandwidth to 870 MHz, activation of the reverse plant to allow two-way
communications and the installation of digital equipment. In addition to cash
flow from operations, Insight Ohio has available a $25 million Senior Credit
facility to support their rebuild program. As of June 30, 1999, no borrowings
had been made under the Senior Credit Facility and $25 million remains available
for borrowing.
Inflation and Changing Prices
Coaxial's costs and expenses are subject to inflation and price fluctuations.
Although changes in costs can be passed through to customers, such changes may
be constrained by competition. Management does not expect inflation to have a
material effect on Coaxial's results of operations.
Year 2000
The Year 2000 will pose a unique set of challenges to those industries
reliant on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. Insight
Ohio and other companies in the same business are vulnerable to their dependence
on distribution and communications systems.
Insight Ohio's greatest Year 2000 exposure is presented by its third party
billing system which is responsible for mailing monthly bills to customers and
maintaining customer data. Insight Ohio has recently implemented the Convergys
billing system. Convergys has informed Insight Ohio that testing of the billing
system was completed by the first quarter of 1999.
Management believes that the remaining systems of Insight Ohio will be fully
Y2K compliant by the end of the third quarter of 1999. Insight Ohio has
completed an inventory of all areas which are at risk and is in the process of
replacing and upgrading all equipment and software as needed. Due to Insight's
affiliation with TCI, Insight Ohio is a member of TCI's Year 2000 task force.
This allows Insight Ohio access to TCI's extensive database which details
various vendors', suppliers' and programmers' Year 2000 compliance. Management
estimates that the total cumulative costs relating to its efforts to make its
systems Y2K compliant will be approximately $120,000, of which approximately
$20,000 has been incurred as of June 30, 1999.
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.
26
<PAGE>
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Coaxial, Phoenix and Insight Ohio do not
anticipate the adoption of this statement to have a material impact on their
respective financial statements.
27
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Coaxial, Phoenix and Insight Ohio do not engage in trading market risk
sensitive instruments and do not purchase hedging instruments or "other than
trading" instruments that are likely to expose any of them to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk. Coaxial, Phoenix and Insight Ohio have not entered into forward or
future contracts, purchased options or entered into swaps.
28
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule of Coaxial Communications of Central Ohio,
Inc.
27.2 - Financial Data Schedule of Phoenix Associates
27.3 - Financial Data Schedule of Insight Communications of Central Ohio,
LLC
(b) Reports on Form 8-K
None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial Communications of Central Ohio, Inc.
(Registrant)
Dated: August 16, 1999
By: /s/ Michael S. Willner
-------------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
-------------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Phoenix Associates
(Registrant)
Dated: August 16, 1999
By: /s/ Dennis J. McGillicuddy
-------------------------------------------
Dennis J. McGillicuddy
Sole Member of Phoenix DJM LLC,
a general partner of Phoenix Associates
(Principal Executive, Financial and
Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Insight Communications of Central Ohio, LLC
(Registrant)
Dated: August 16, 1999
By: /s/ Michael S. Willner
---------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
--------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT
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CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT COMPANY
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<NAME> PHOENIX ASSOCIATES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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<PERIOD-END> JUN-30-1999
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE REGISTRANT COMPANY
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<NAME> INSIGHT COMMUNICATIONS OF CENTRAL OHIO
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