<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 September 30, 2000
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, Inc.
810 7th Avenue
New York, New York 10019
(Address of principal executive offices, including zip code)
(917) 286-2300
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Coaxial Communications of Central Ohio, Inc. Not Applicable
Phoenix Associates Not Applicable
Insight Communications of Central Ohio, LLC Not Applicable
================================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 1
Consolidated Statements of Operations and Changes in Shareholders' Equity
(Deficit) for the three months and nine months ended September 30, 2000
and 1999 (unaudited) 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Phoenix Associates
Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 8
Statements of Operations and Changes in Partners' Deficit for the three months
and nine months ended September 30, 2000 and 1999 (unaudited) 9
Statements of Cash Flows for the nine months ended September 30, 2000
and 1999 (unaudited) 10
Notes to Financial Statements (unaudited) 11
Insight Communications of Central Ohio, LLC
Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 14
Statements of Operations and Changes in Members' Deficit for the three
months and nine months ended September 30, 2000 and 1999 (unaudited) 15
Statements of Cash Flows for the nine months ended September 30, 2000
and 1999 (unaudited) 16
Notes to Financial Statements (unaudited) 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PART II OTHER INFORMATION
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 27
</TABLE>
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 882
Investment in equity securities 12,700 -
Subscriber receivables, less allowance for doubtful accounts
of $383 in 1999 - 790
Other accounts receivable, less allowance for doubtful accounts
of $175 in 1999 - 3,136
Prepaid expenses and other current assets - 155
--------- --------
Total current assets 12,700 4,963
Investment in affiliate 179,044 -
Property and equipment, net of accumulated depreciation of
$53,999 in 1999 - 51,455
Intangible assets, net of accumulated amortization of
$322 and $7,600 in 2000 and 1999, respectively 904 1,408
Due from related parties - 158
--------- --------
Total assets $ 192,648 $ 57,984
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations $ - $ 73
Accounts payable - 4,963
Accrued interest 446 1,519
Accrued liabilities - 5,061
Accrued programming - 1,890
--------- --------
Total current liabilities 446 13,506
NOTES PAYABLE:
Senior notes 34,435 34,435
Senior credit facility - 11,000
--------- --------
Total notes payable 34,435 45,435
Capital lease obligations - 43
Other deferred credits - 2,408
--------- --------
Total liabilities 34,881 61,392
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 2000 and 1999 1 1
Paid-in capital 11,501 11,501
Retained earnings (accumulated deficit) 143,965 (14,910)
Accumulated other comprehensive income 2,300 -
--------- --------
Total shareholders' equity (deficit) 157,767 (3,408)
--------- --------
Total liabilities and shareholders' equity (deficit) $ 192,648 $ 57,984
========= ========
</TABLE>
See accompanying notes
1
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 4,150 $ 11,802 $ 28,096 $ 35,195
OPERATING EXPENSES:
Programming and other operating costs 1,622 4,095 10,955 11,898
Selling, general and administrative 991 3,187 6,476 8,625
Depreciation and amortization 969 1,846 5,940 5,093
------------ ------------ ----------- -------------
Total operating expenses 3,582 9,128 23,371 25,616
------------ ------------ ----------- -------------
OPERATING INCOME 568 2,674 4,725 9,579
OTHER INCOME (EXPENSE):
Gain on sale of common equity interest 164,360 - 164,360 -
Other income (expense) (9) 5 31 84
------------ ------------ ----------- -------------
164,351 5 164,391 84
------------ ------------ ----------- -------------
INTEREST INCOME (EXPENSE):
Interest income 6 23 50 109
Interest expense (1,060) (1,035) (3,530) (2,844)
------------ ------------ ----------- -------------
Total interest expense, net (1,054) (1,012) (3,480) (2,735)
------------ ------------ ----------- -------------
NET INCOME 163,865 1,667 165,636 6,928
Shareholders' deficit, beginning of period (1,915) (946) (3,408) (660)
Capital contributions 1,395 - 6,395 -
Capital distributions (7,878) (5,278) (13,156) (10,825)
Unrealized gain on equity securities 2,300 - 2,300 -
------------ ------------ ----------- -------------
Shareholders' equity (deficit), end of period $ 157,767 $ (4,557) $ 157,767 $ (4,557)
============ ============ =========== =============
</TABLE>
See accompanying notes
2
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 165,636 $ 6,928
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of common equity interest (164,360) -
Depreciation and amortization 5,940 5,207
Provision for losses on trade accounts receivable 367 664
Changes in operating assets and liabilities:
Subscriber receivables (516) (389)
Other accounts receivable, prepaid expenses and other
current assets 113 (1,197)
Accounts payable and accrued liabilities 490 1,076
Accrued interest (748) (678)
Due to related parties 302 110
------------------- -----------------
Net cash provided by operating activities $ 7,224 $ 11,721
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (19,943) (16,009)
Decrease in cash upon sale of common equity interest (3,604) -
Increase in other intangible assets (3) (158)
------------------- -----------------
Net cash used in investing activities $ (23,550) $ (16,167)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations - (96)
Capital distributions (10,556) (10,825)
Capital contributions 12,000 -
Borrowings under senior credit facility 14,000 11,000
------------------- -----------------
Net cash provided by financing activities $ 15,444 $ 79
------------------- -----------------
NET DECREASE IN CASH (882) (4,367)
CASH AND CASH EQUIVALENTS, beginning of period 882 8,709
------------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 4,342
=================== =================
</TABLE>
See accompanying notes
3
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Business Organization And Purpose
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its ownership of preferred interests (discussed
below), has a 30% voting interest in Insight Communications of Central Ohio, LLC
("Insight Ohio"). Insight Ohio operates a cable television system 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
Coaxial's cable system ("the System") described below, the issuance of the
senior notes described in Note 6, and the issuance of the senior discount notes
by the Company's majority shareholder, during 1998 the three individuals who
previously owned the outstanding stock of the Company contributed their stock to
three separate limited liability companies. Accordingly, the Company is a
subsidiary of Coaxial LLC, which owns 67 1/2% of its outstanding stock.
Other related entities affiliated with Coaxial include Coaxial LLC, Coaxial DJM
LLC, Coaxial DSM LLC, (collectively, the "Coaxial Entities"), Phoenix Associates
("Phoenix"), Coaxial Financing Corp., Coaxial Communications of Southern Ohio,
Inc., Coaxial Associates of Columbus I, Coaxial Associates of Columbus II,
Paxton Cable Television, Inc. and Paxton Communications, Inc.
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owned 25% of the non-voting common equity and
IHO owned 75% of the non-voting common equity of Insight Ohio. Coaxial also owns
a $140 million Series A preferred equity interest and a $30 million Series B
preferred equity interest of Insight Ohio (Note 5).
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity
interest. The purchase price was 800,000 shares of common stock of Insight's
general partner, Insight Communications Company, Inc. ("ICCI") and cash in the
amount of $2.6 million. In connection with the purchase, Insight Ohio's
operating agreement was amended to, among other things, remove certain
participating rights of the principals of Coaxial and the Coaxial Entities, and
vest in the common equity interests of Insight Ohio 70% of its total voting
power and in the preferred equity interests 30% of its total voting power. As a
result of this transaction, Coaxial recorded a gain on the sale of its common
equity interest of approximately $164.4 million which is equal to the difference
between the value of the shares of ICCI common stock and cash received ($13.0
million) as compared to Coaxial's investment in Insight Ohio (net liability of
$151.4 million) as of the transaction date. As discussed more fully in Note 3,
the accompanying consolidated financial statements include the accounts of
Insight Ohio through August 8, 2000.
Insight Ohio is prohibited by the terms of its indebtedness from making
distributions to ICCI. Insight Ohio's conditional guarantee of the senior notes
and the senior discount notes (Note 6) remains in place. If at any time the
senior notes or the senior discount notes are repaid or significantly modified,
or in any case after August 15, 2008, the principals of the Coaxial Entities may
require ICCI to purchase their preferred interests in the Coaxial Entities for a
purchase price equal to the difference, if any, of $32.6 million less the then
market value of the 800,000 shares of ICCI common stock issued on August 8,
2000.
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 months and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
4
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Basis of Presentation (Continued)
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
3. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
through August 8, 2000, the accompanying financial statements include the
accounts of Insight Ohio through such date. All intercompany balances have been
eliminated in consolidation. Since Insight Ohio had a members' deficiency, the
accompanying financial statements do not include a minority interest liability
for Insight's 75% common equity interest in Insight Ohio for the period prior to
August 8, 2000.
As a result of the sale of its common equity interest and change in voting
interest (Note 1), Coaxial no longer consolidates the accounts of Insight Ohio
subsequent to August 8, 2000.
Investment in Equity Securities
Equity securities consists of 800,000 shares of common stock of ICCI Note 1).
These securities are classified as available-for-sale under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115"). In accordance with SFAS No. 115,
available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133, which was amended by SFAS No. 137, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS No. 133 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company does not anticipate the adoption of SFAS No. 133 to have a material
impact on its financial statements.
4. Comprehensive Income
For the three months ended September 30, 2000, total comprehensive income was
$166.2 million (net income of $163.9 million plus an unrealized gain of $2.3
million). For the nine months ended September 30, 2000, total comprehensive
income was $167.9 million (net income of $165.6 million plus an unrealized gain
of $2.3 million). For the three months and nine months ended September 30, 1999,
there were no items of other comprehensive income.
5. Investment in Affiliate
In connection with the Contribution Agreement discussed in Note 1, Insight Ohio
issued to Coaxial a $140 million Series A preferred equity interest and a $30
million Series B preferred equity interest (the "Preferred Interests"). These
voting Preferred Interests provide for distributions to Coaxial and indirectly
to Phoenix and Coaxial LLC in amounts equal to the payments required on the
senior notes and the senior discount notes (Note 6). During the three months and
nine months ended September 30, 2000, Insight Ohio distributed $7.0 million and
$14.0 million, respectively, to Coaxial. Of such amounts, Coaxial distributed
$5.3 million and $10.6 million, respectively to Phoenix. During the three months
and nine months ended September 30, 1999, Insight Ohio distributed $7.0 million
and $13.8 million, respectively to Coaxial. Of such amounts, Coaxial distributed
$5.3 million and $10.4 million to Phoenix. These distributions were used by
Coaxial and Phoenix to make semi-annual interest payments on the senior notes.
The preferred interest investment balance at September 30, 2000 includes the
accretion of the discount on the senior discount notes. As interest payments on
the senior discount notes do not commence until 2003, there have been no
distributions on the Series B preferred equity interest.
5
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Notes Payable
Notes payable at September 30, 2000 and December 31, 1999 consisted of senior
notes with an outstanding principal balance of $34,435,000 and borrowings under
Insight Ohio's senior credit facility of $11,000,000 at December 31, 1999.
On August 21, 1998, Coaxial and Phoenix Associates completed an offering of $140
million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million was
allocated to Phoenix and $34.4 million was allocated to Coaxial. Interest is
payable in cash semi-annually on each February 15 and August 15. Interest
payments commenced on February 15, 1999. The Senior Notes are secured by the
outstanding Series A preferred interest in Insight Ohio (Note 5) and
conditionally guaranteed by Insight Ohio. The Series A preferred interest has a
liquidation preference of $140 million and pays distributions in an amount equal
to the payments on the Senior Notes. The Series A preferred interest is owned by
Coaxial and is pledged to Harris Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. The Senior Notes contain covenants that, among
other things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of
their Restricted Subsidiaries to incur additional indebtedness; pay dividends
and make distributions; issue stock of subsidiaries to third parties; make
certain investments; repurchase stock; create liens; enter into transactions
with affiliates; enter into sale and leaseback transactions; create dividend or
other payment restrictions affecting Restricted Subsidiaries; merge or
consolidate in a transaction involving all or substantially all of the assets of
Coaxial, Phoenix and their Restricted Subsidiaries, taken as a whole; transfer
or sell assets; use distributions on the Series A preferred interest or Series B
preferred interest for any purpose other than required payments of interest and
principal on the Senior Notes or Senior Discount Notes, respectively; and swap
assets. Coaxial, as joint and several issuer, with Phoenix, of the Senior Notes,
provides the funding that will allow Phoenix to repay its share of the notes
payable, as Phoenix has no operations.
7. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's results of
operation or financial position.
8. Recent Developments
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. AT&T Broadband would be required to install
and maintain the necessary switching equipment, and would be the local exchange
carrier of record. It is expected that Insight Ohio will market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On August 15, 2000, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T Broadband, entered into definitive
agreements with Insight and AT&T Broadband for the acquisition of additional
cable television systems, including Insight Ohio. Through a series of
transactions, Insight Midwest will acquire all of Insight's wholly-owned systems
serving approximately 279,600 customers, including the approximately 84,200
customers served by Insight Ohio and including systems which Insight will
purchase from AT&T Broadband. At the same time, Insight Midwest will acquire
from AT&T Broadband systems serving approximately 248,800 customers. Insight
Ohio will become an unrestricted subsidiary under the indentures governing
Insight Midwest's senior notes and will be prohibited by the terms of its
indebtedness from making distributions to Insight Midwest. Upon completion of
the transaction, Insight Midwest will remain equally owned by Insight and AT&T
Broadband, and Insight will continue to serve as the general partner and manage
and operate the Insight Midwest systems. The
6
<PAGE>
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Recent Developments (Continued)
consummation of these transactions is subject to several conditions, including
the receipt of all necessary regulatory approvals.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, as noted above, for financing purposes,
Insight Ohio will be an unrestricted subsidiary under the indentures of Insight
Midwest. Insight Ohio's conditional guarantee of the Senior Notes and the Senior
Discount Notes will remain in place.
7
<PAGE>
PHOENIX ASSOCIATES
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ - $ -
Interest receivable 332 215
--------- ---------
Total current assets 332 215
OTHER ASSETS:
Due from related parties 406 406
Notes receivable--related parties 550 550
Deferred financing fees, net of accumulated amortization
of $984 and $627 in 2000 and 1999, respectively 2,816 3,173
--------- ---------
Total other assets 3,772 4,129
--------- ---------
Total assets $ 4,104 $ 4,344
========= =========
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
Interest payable $ 1,378 $ 4,017
--------- ---------
Total current liabilities 1,378 4,017
NOTES PAYABLE 105,565 105,565
--------- ---------
Total liabilities 106,943 109,582
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT (102,839) (105,238)
--------- ---------
Total liabilities and partners' deficit $ 4,104 $ 4,344
========= =========
</TABLE>
See accompanying notes
8
<PAGE>
PHOENIX ASSOCIATES
STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
EXPENSES $ - $ - $ - $ -
INTEREST INCOME (EXPENSE):
Interest income--related parties 39 - 117 -
Interest expense (2,758) (2,757) (8,274) (8,266)
------------ ------------ ------------ ------------
Total interest expense, net (2,719) (2,757) (8,157) (8,266)
------------ ------------ ------------ ------------
NET LOSS (2,719) (2,757) (8,157) (8,266)
PARTNERS' DEFICIT, beginning of period (105,398) (105,159) (105,238) (104,993)
CAPITAL CONTRIBUTIONS 5,278 5,278 10,556 10,621
------------ ------------ ------------ ------------
PARTNERS' DEFICIT, end of period $(102,839) $(102,638) $(102,839) $ (102,638)
============ ============ ============ ============
</TABLE>
See accompanying notes
9
<PAGE>
PHOENIX ASSOCIATES
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months ended September 30,
2000 1999
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,157) $ (8,266)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Amortization of deferred financing fees 357 349
Changes in operating assets and liabilities:
Interest receivable (117) -
Accrued interest (2,639) (2,463)
----------- ----------
Net cash used in operating activities $(10,556) $(10,380)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 10,556 10,621
Change in other intangibles - (241)
----------- ----------
Net cash provided by financing activities $ 10,556 $ 10,380
----------- ----------
NET INCREASE (DECREASE) IN CASH - -
CASH, beginning of period - -
----------- ----------
CASH, end of period $ - $ -
=========== ==========
See accompanying notes
10
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix has no operations. Its ability to satisfy debt and other obligations is
dependent upon funding from related entities, which are under the common control
of the owners of Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 4, along with an affiliate, Coaxial Communications
of Central Ohio, Inc. ("Coaxial").
Phoenix is owned by three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial DJM
LLC, Coaxial DSM LLC (the "Coaxial Entities"), Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC ("Insight Ohio"), Coaxial Communications of
Southern Ohio, Inc., Coaxial Associates of Columbus I, Coaxial Associates of
Columbus II, Paxton Cable Television, Inc. and Paxton Communications, Inc.
On June 30, 1998, as amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owned 25% of the non-voting common equity and
IHO owned 75% of the non-voting common equity of Insight Ohio. Coaxial also owns
a $140 million Series A preferred equity interest and a $30 million Series B
preferred equity interest of Insight Ohio (the "Series A Preferred Interest" and
"Series B Preferred Interest", respectively). The voting preferred equity
interests provide for distributions to Coaxial and indirectly to Phoenix and
Coaxial LLC in amounts equal to the payments required on the senior notes and
senior discount notes described in Note 4. Coaxial will make distributions that
will enable Phoenix to fund the required payments on the senior notes.
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity
interest. The purchase price was 800,000 shares of common stock of Insight's
general partner, Insight Communications Company, Inc. ("ICCI") and cash in the
amount of $2.6 million. In connection with the purchase, Insight Ohio's
operating agreement was amended to, among other things, remove certain
participating rights of the principals of Coaxial and the Coaxial Entities, and
vest in the common equity interests of Insight Ohio 70% of its total voting
power and in the preferred equity interests 30% of its total voting power.
Insight Ohio is prohibited by the terms of its indebtedness from making
distributions to ICCI. Insight Ohio's conditional guarantee of the senior notes
and the senior discount notes (Note 4) remains in place. If at any time the
senior notes or the senior discount notes are repaid or significantly modified,
or in any case after August 15, 2008, the principals of the Coaxial Entities may
require ICCI to purchase their preferred interests in the Coaxial Entities for a
purchase price equal to the difference, if any, of $32.6 million less the then
market value of the 800,000 shares of ICCI common stock issued on August 8,
2000.
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 months and nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
11
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
2. Basis of Presentation (Continued)
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133, which was amended by SFAS No. 137, established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS No. 133 is
effective for all quarters of fiscal years beginning after June 15, 2000.
Phoenix does not anticipate that the adoption of SFAS No. 133 will have a
material impact on its financial statements.
4. Notes Payable
Notes payable at September 30, 2000 and December 31, 1999 consisted of Senior
Notes with an outstanding principal balance of $105,565,000.
On August 21, 1998, Coaxial and Phoenix completed an offering of $140 million
10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million was allocated
to Phoenix and $34.4 million was allocated to Coaxial. Interest is payable in
cash semi-annually on each February 15 and August 15. Interest payments
commenced on February 15, 1999. The Senior Notes are secured by the outstanding
Series A Preferred Interest in Insight Ohio and conditionally guaranteed by
Insight Ohio. The Series A Preferred Interest has a liquidation preference of
$140 million and pays distributions in an amount equal to the payments on the
Senior Notes. The Series A Preferred Interest is owned by Coaxial and is pledged
to Harris Trust Company, as trustee, for the benefit of the holders of the
Senior Notes. Coaxial will utilize cash distributions made by Insight Ohio on
the Series A Preferred Interest to make payments on the Senior Notes. The Senior
Notes contain covenants that, among other things, restrict the ability of
Coaxial, Phoenix, Insight Ohio and any of their Restricted Subsidiaries to:
incur additional indebtedness; pay dividends and make distributions; issue stock
of subsidiaries to third parties; make certain investments; repurchase stock;
create liens; enter into transactions with affiliates; enter into sale and
leaseback transactions; create dividend or other payment restrictions affecting
Restricted Subsidiaries; merge or consolidate in a transaction involving all or
substantially all of the assets of Coaxial, Phoenix and their Restricted
Subsidiaries, taken as a whole; transfer or sell assets; use distributions on
the Series A Preferred Interest or Series B Preferred Interest for any purpose
other than required payments of interest and principal on the Senior Notes or
Senior Discount Notes, respectively; and swap assets. Phoenix is a co-issuer and
joint and several obligor of the debt, along with Coaxial.
5. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations or financial position.
12
<PAGE>
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
6. Recent Developments
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. AT&T Broadband would be required to install
and maintain the necessary switching equipment, and would be the local exchange
carrier of record. It is expected that Insight Ohio will market the telephone
services both independently and as part of a bundle of services.
Contribution of Insight Ohio
On August 15, 2000, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T Broadband, entered into definitive
agreements with Insight and AT&T Broadband for the acquisition of additional
cable television systems, including Insight Ohio. Through a series of
transactions, Insight Midwest will acquire all of Insight's wholly-owned systems
serving approximately 279,600 customers, including the approximately 84,200
customers served by Insight Ohio and including systems which Insight will
purchase from AT&T Broadband. At the same time, Insight Midwest will acquire
from AT&T Broadband systems serving approximately 248,800 customers. Insight
Ohio will become an unrestricted subsidiary under the indentures governing
Insight Midwest's senior notes and will be prohibited by the terms of its
indebtedness from making distributions to Insight Midwest. Upon completion of
the transaction, Insight Midwest will remain equally owned by Insight and AT&T
Broadband, and Insight will continue to serve as the general partner and manage
and operate the Insight Midwest systems. The consummation of these transactions
is subject to several conditions, including the receipt of all
necessary regulatory approvals.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, as noted above, for financing purposes,
Insight Ohio will be an unrestricted subsidiary under the indentures of Insight
Midwest. Insight Ohio's conditional guarantee of the Senior Notes and the Senior
Discount Notes will remain in place.
13
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------- -----------------
(Unaudited) (Note 2)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,591 $ 882
Subscriber receivables, less allowance for doubtful accounts
of $186 and $383 in 2000 and 1999, respectively 1,180 790
Other accounts receivable, less allowance for doubtful accounts
of $80 and $175 in 2000 and 1999, respectively 3,003 3,136
Prepaid expenses and other current assets 273 155
--------- ---------
Total current assets 10,047 4,963
Property and equipment, net of accumulated depreciation of
$61,621 and $53,999 in 2000 and 1999, respectively 71,684 51,455
Intangible assets, net of accumulated amortization of
$7,529 and $7,395 in 2000 and 1999, respectively 301 388
Due from related parties 28 158
--------- ---------
Total assets $ 82,060 $ 56,964
========= =========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 20 $ 73
Accounts payable 6,048 4,963
Accrued interest 453 212
Accrued liabilities 2,148 5,060
Series A Preferred Dividend Payable 1,750 5,250
Accrued programming 3,993 1,890
--------- ---------
Total current liabilities 14,412 17,448
Capital lease obligations 43 43
Other deferred credits 2,096 2,408
Due to related parties 815 -
Series A Preferred Interest 140,000 140,000
Series B Preferred Interest 39,044 35,556
Senior credit facility 25,000 11,000
--------- ---------
Total liabilities and preferred interests 221,410 206,455
Members' deficit (139,350) (149,491)
--------- ---------
Total liabilities and members' deficit $ 82,060 $ 56,964
========= =========
</TABLE>
See accompanying notes
14
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
----------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 12,435 $ 11,802 $ 36,381 $ 35,195
OPERATING EXPENSES:
Programming and other operating costs 4,864 4,095 14,197 11,898
Selling, general and administrative 2,939 3,187 8,424 8,625
Depreciation and amortization 2,863 1,846 7,756 5,093
----------------- --------------- --------------- -------------
Total operating expenses 10,666 9,128 30,377 25,616
----------------- --------------- --------------- -------------
OPERATING INCOME 1,769 2,674 6,004 9,579
OTHER INCOME (EXPENSE) (5) 5 35 84
INTEREST INCOME (EXPENSE):
Interest expense (633) (135) (1,381) (147)
Interest income 27 23 71 109
----------------- --------------- --------------- -------------
Total interest expense, net (606) (112) (1,310) (38)
----------------- --------------- --------------- -------------
NET INCOME 1,158 2,567 4,729 9,625
Accrual of preferred interests (4,699) (4,571) (13,988) (13,292)
----------------- --------------- --------------- -------------
Loss attributable to common interests (3,541) (2,004) (9,259) (3,667)
Members' deficit, beginning of period (150,209) (146,901) (149,491) (144,718)
Capital contributions 14,400 - 19,400 -
Capital distributions - - - (520)
----------------- --------------- --------------- -------------
Members' deficit, end of period $(139,350) $(148,905) $(139,350) $(148,905)
================= =============== =============== =============
</TABLE>
See accompanying notes
15
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ ---------
<S> <C> <C>
Net income $ 4,729 $ 9,625
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,756 5,093
Provision for losses on trade accounts receivable 588 664
Changes in certain assets and liabilities:
Subscriber receivables (978) (389)
Other accounts receivable, prepaid expenses and other current assets 15 (1,197)
Accounts payable and accrued liabilities (36) 1,075
Accrued interest 241 126
Due to related parties 945 111
------------ ---------
Net cash provided by operating activities $ 13,260 $ 15,108
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (27,851) (16,009)
Increase in other intangible assets (47) (79)
------------ ---------
Net cash used in investing activities $ (27,898) $ (16,088)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital distributions - (520)
Capital contributions 19,400 -
Principal payments on capital lease obligations (53) (96)
Preferred interest distributions (14,000) (13,771)
Borrowings under senior credit facility 14,000 11,000
------------ ---------
Net cash provided by (used in) financing activities $ 19,347 $ (3,387)
------------ ---------
NET INCREASE (DECREASE) IN CASH 4,709 (4,367)
CASH AND CASH EQUIVALENTS, beginning of period 882 6,709
------------ ---------
CASH AND CASH EQUIVALENTS, end of period $ 5,591 $ 2,342
============ =========
</TABLE>
see accompanying notes
16
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the "Company")
provides basic and expanded cable television services to homes in the eastern
parts of Columbus, Ohio and surrounding areas. The Company was formed on July
23, 1998 in order to acquire substantially all of the assets and liabilities
comprising the cable television system of Coaxial Communications of Central
Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to Insight Ohio
all of the assets and liabilities comprising Coaxial's cable television system
(the "System") for which Coaxial received a 25% non-voting common membership
interest in Insight Ohio as well as 100% of the voting preferred membership
interests of Insight Ohio ("Series A Preferred Interest" and "Series B Preferred
Interest"). In conjunction therewith, Insight Holdings of Ohio, LLC ("IHO"), a
wholly-owned subsidiary of Insight Communications Company, L.P. ("Insight L.P.")
contributed $10 million in cash to Insight Ohio for which it received a 75% non-
voting common membership interest in Insight Ohio.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior Notes
are non-recourse and are secured by all issued and outstanding Series A
Preferred Interest in Insight Ohio and are conditionally guaranteed by Insight
Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related
entities, issued 12 7/8% senior discount notes due 2008 ("Senior Discount
Notes"). The Senior Discount Notes have a face amount of $55,869,000 and
approximately $30,000,000 of gross proceeds was received upon issuance. The
Senior Discount Notes are non-recourse, secured by the issued and outstanding
Series B Preferred Interest in Insight Ohio and 100% of the common stock of
Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial
LLC, and conditionally guaranteed by Insight Ohio. The Preferred Interests have
distribution priorities that provide for distributions to Coaxial. The
distributions from the Series B Preferred Interest will be used to pay dividends
to Coaxial LLC, which dividends will be used to pay interest and principal on
the Senior Discount Notes and the distributions from the Series A Preferred
Interest are used to pay interest and principal on the Senior Notes.
Distributions by Insight Ohio are subject to certain financial covenants and
other conditions set forth in its Senior Credit Facility
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common equity
interest. The purchase price was 800,000 shares of common stock of Insight L.P's
general partner, Insight Communications Company, Inc. ("ICCI") and cash in the
amount of $2.6 million. In connection with the purchase, Insight Ohio's
operating agreement was amended to, among other things, remove certain
participating rights of the principals of Coaxial and certain of its affiliates
(the "Coaxial Entities"), and vest in the common equity of interests of Insight
Ohio 70% of its total voting power and in the Preferred Interests 30% of its
total voting power.
As a result of this transaction, Insight Ohio is prohibited by the terms of its
indebtedness from making distributions to ICCI. Insight Ohio's conditional
guarantee of the Senior Notes and the Senior Discount Notes remains in place. If
at any time the Senior Notes or Senior Discount Notes are repaid or
significantly modified, or in any case after August 15, 2008, the principals of
the Coaxial Entities may require ICCI to purchase their preferred interests in
the Coaxial Entities for a purchase price equal to the difference, if any, of
$32.6 million less the then market value of 800,000 shares of ICCI's common
stock issued on August 8, 2000.
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 months and nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
17
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
2. Basis of Presentation (Continued)
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
3. Summary of Significant Accounting Policies
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133, which was amended by SFAS No. 137, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS No. 133 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company does not anticipate the adoption of SFAS No. 133 to have a material
impact on its financial statements.
4. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a bank
which provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the Company's cable plant and for the introduction of new 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, restrict the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including, in
the event of a payment default under the Senior Credit Facility, distributions
on the Preferred Interests that are required to pay the Senior Notes and the
Senior Discount Notes, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including total leverage, interest coverage and
proforma debt service coverage ratios. As of September 30, 2000, $25 million
was borrowed under the Senior Credit Facility.
5. Commitments and Contingencies
Insight Ohio is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either Insight Ohio's future results of operations
or financial position.
6. Recent Developments
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight L.P. entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. AT&T Broadband would be required to install
and maintain the necessary switching equipment, and would be the local exchange
carrier of record. It is expected that Insight Ohio will market the telephone
services both independently and as part of a bundle of services.
18
<PAGE>
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
6. Recent Developments (continued)
Contribution of Insight Ohio
On August 15, 2000, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight L.P. and AT&T Broadband, entered into definitive
agreements with Insight L.P. and AT&T Broadband for the acquisition of
additional cable television systems, including Insight Ohio. Through a series
of transactions, Insight Midwest will acquire all of Insight L.P.'s wholly-owned
systems serving approximately 279,600 customers, including the approximately
84,200 customers served by Insight Ohio and including systems which Insight LP.
will purchase from AT&T Broadband. At the same time, Insight Midwest will
acquire from AT&T Broadband systems serving approximately 248,800 customers.
Insight Ohio will become an unrestricted subsidiary under the indentures
governing Insight Midwest's senior notes and will be prohibited by the terms of
its indebtedness from making distributions to Insight Midwest. Upon completion
of the transaction, Insight Midwest will remain equally owned by Insight L.P.
and AT&T Broadband, and Insight L.P. will continue to serve as the general
partner and manage and operate the Insight Midwest systems. The consummation of
these transactions is subject to several conditions, including the receipt of
all necessary regulatory approvals.
Although the financial results of Insight Ohio will be consolidated into Insight
Midwest as a result of this transaction, as noted above, for financing purposes,
Insight Ohio will be an unrestricted subsidiary under the indentures of Insight
Midwest. Insight Ohio's conditional guarantee of the Senior Notes and the Senior
Discount Notes will remain in place.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Forward-Looking Statements
This report contains "forward-looking statements," including statements
containing the words "believes," "anticipates," "expects" and words of similar
import, which concern, among other things, the operations, economic performance
and financial condition of the System (as defined below). All statements other
than statements of historical fact included in this report regarding Coaxial
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 Interest and its Series B Preferred Interest, 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 Interest 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.
Offering of Senior Discount Notes and 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 10%
Senior Notes due in 2006 (the "Senior Notes"), in connection with a Financing
Plan (the "Financing Plan") which included the contribution of Coaxial's cable
television system (the "System") to Insight Ohio. On February 16, 1999, Coaxial
and Phoenix consummated an exchange of registered Senior Notes for their
privately issued Senior Notes. The Senior Notes are guaranteed on a conditional
basis by Insight Ohio. As a result of the Financing Plan, Coaxial and Phoenix
have only nominal assets except for Coaxial's ownership[ of the 30% voting
Series A Preferred Interest and Series B Preferred Interest in Insight Ohio
(together, "Preferred Interests").
As part of the Financing Plan, one of the owners of Coaxial ("Coaxial LLC")
and an affiliated corporation ("Coaxial Financing Corp.") completed on August
21, 1998 a private offering (the "Senior Discount Notes Offering") of
$55,869,000 aggregate principal amount at maturity of their 12 7/8% Senior
Discount Notes due in 2008 (the "Senior Discount Notes"). Coaxial LLC and
Coaxial Financing Corp. have only nominal assets except for Coaxial LLC's
ownership of 67.5% of the common stock of Coaxial and notes of Coaxial DJM LLC
and Coaxial DSM LLC (the other two owners of Coaxial), which notes are secured
by the remaining 32.5% of the common stock of Coaxial. In February 16, 1999,
Coaxial LLC and Coaxial Financing Corp. consummated an exchange of
20
<PAGE>
registered Senior Discount Notes for their privately issued Senior Discount
Notes. The Senior Discount Notes are 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 B Preferred Interest
will be used to pay dividends to the Individual LLCs, which dividends will be
used to pay interest and principal on the Senior Discount Notes and the
distributions from the Series A Preferred Interest will be used to pay interest
and principal on the Senior Notes. Distributions by Insight Ohio will be subject
to certain financial covenants and other conditions set forth in its Senior
Credit Facility.
Coaxial 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.
Insight serves as the manager of the System.
The following discussion relates to the operations of Insight Ohio for the
three months and nine months ended September 30, 2000 compared to the three
months and nine months ended September 30, 1999. The financial statements of
Insight Ohio are included in the consolidated financial statements of Coaxial
through August 8, 2000 (see "Recent Developments" below). The historical
operating results of Coaxial reflect the actual results of the System through
August 8, 2000 in addition to certain financing activities unrelated to the
operation of the System. These financing activities relate primarily to the
offering of the Senior 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 appear
elsewhere in this report under the heading "Coaxial Communications of Central
Ohio, Inc."
Recent Developments
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common
equity interest. The purchase price was 800,000 shares of common stock of
Insight's general partner, Insight Communications Company, Inc. ("ICCI") and
cash in the amount of $2.6 million. In connection with the purchase, Insight
Ohio's operating agreement was amended to, among other things, remove certain
participating rights of the principals of Coaxial and the Coaxial Entities, and
vest in the common equity interests of Insight Ohio 70% of its total voting
power and in the preferred equity interests 30% of its total voting power.
Insight Ohio is prohibited by the terms of its indebtedness from making
distributions to ICCI. Insight Ohio's conditional guarantee of the Senior Notes
and the Senior Discount Notes remains in place. If at any time the Senior Notes
or the Senior Discount Notes are repaid or significantly modified, or in any
case after August 15, 2008, the principals of the Coaxial Entities may require
ICCI to purchase their preferred interests in the Coaxial Entities for a
purchase price equal to the difference, if any, of $32.6 million less the then
market value of the 800,000 shares of ICCI common stock issued on August 8,
2000.
Telephony Agreements
On July 17, 2000, Insight Ohio and other affiliates of Insight entered into
definitive agreements with AT&T Broadband, LLC for the provision by AT&T
Broadband of all-distance telephone service utilizing Insight Ohio's cable
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay Insight Ohio a monthly per
line access fee. AT&T Broadband will also pay Insight Ohio for marketing,
installation and billing support. AT&T Broadband would be required to install
and maintain the necessary switching equipment, and would be the local exchange
carrier of record. It is expected that Insight Ohio will market the telephone
services both independently and as part of a bundle of services.
21
<PAGE>
Contribution of Insight Ohio
On August 15, 2000, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight and AT&T Broadband, entered into definitive
agreements with Insight and AT&T Broadband for the acquisition of additional
cable television systems, including Insight Ohio. Through a series of
transactions, Insight Midwest will acquire all of Insight's wholly-owned systems
serving approximately 279,600 customers, including the approximately 84,200
customers served by Insight Ohio and including systems which Insight will
purchase from AT&T Broadband. At the same time, Insight Midwest will acquire
from AT&T Broadband systems serving approximately 248,800 customers. Insight
Ohio will become an unrestricted subsidiary under the indentures governing
Insight Midwest's senior notes and will be prohibited by the terms of its
indebtedness from making distributions to Insight Midwest. Upon completion of
the transaction, Insight Midwest will remain equally owned by Insight and AT&T
Broadband, and Insight will continue to serve as the general partner and manage
and operate the Insight Midwest systems. The consummation of these transactions
is subject to several conditions, including the receipt of all necessary
regulatory approvals.
Although the financial results of Insight Ohio will be consolidated into
Insight Midwest as a result of this transaction, as noted above, for financing
purposes, Insight Ohio will be an unrestricted subsidiary under the indentures
of Insight Midwest. Insight Ohio's conditional guarantee of the Senior Notes and
the Senior Discount Notes will remain in place.
Overview
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, revenues are derived from installation and reconnection fees charged
to basic customers to commence or discontinue service, pay-per-view charges,
digital and high speed data services, late payment fees, advertising revenues
and commissions related to the sale of goods by home shopping services.
System operating expenses consist of programming and other operating costs,
selling, general and administrative expenses, home office expenses and
depreciation and amortization. Programming and other operating costs include
direct costs, such as fees paid to programming suppliers, and costs attributable
to the operation of the System, including wages, salaries, and other costs
related to plant operating activities. 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. Selling, general and administrative expenses include customer
service operations, marketing, billing, expenses related to copyright fees and
bad debt expense.
The System relies on Insight for all of its strategic, managerial, financial
and operational oversight and advice. Insight also centrally purchases
programming and equipment and provides the associated discount to the System. In
exchange for all such services provided to the System and subject to certain
restrictions contained in the covenants with respect to Insight Ohio's Senior
Credit Facility, the Senior Notes and the Senior Discount Notes, Insight is
entitled to receive management fees of 3.0% of gross operating revenues of the
System. Such management fee is payable only after distributions have been made
in respect of the Preferred Interests and only to the extent that such payment
would be permitted by an exception to the restricted payments covenants of the
Senior Notes and the Senior Discount Notes as well as Insight Ohio's Senior
Credit Facility. Such management fee is included in selling, general and
administrative expenses.
22
<PAGE>
Results of Operations
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues for the three months ended September 30, 2000 were $12.4 million
compared to $11.8 million for the three months ended September 30, 1999. For
the three months ended September 30, 2000, customers served averaged 84,469
compared with 84,989 during the same time period in 1999. Revenues for the
three months ended September 30, 2000 were 5.4% higher than the same period for
the prior year due primarily to revenues generated from new product launches,
including digital services and high speed data services, partially offset by a
decrease in analog pay-per-view revenues.
Effective November 1, 1999, the System began activating nodes in rebuilt
areas, increasing the rate for classic service by $1.75 from $14.93 to $16.68.
As of September 30, 2000, there were approximately 35,100 customers receiving
this enhanced service which offers six more channels on the classic service
tier. In addition, customers in rebuilt areas have the opportunity to receive
new products including Insight's interactive digital service (which includes
video on demand) and high speed data access. As of September 30, 2000, there
were approximately 9,700 digital customers representing 28.0% penetration
(digital customers as a percentage of total customers with access to digital
service). Digital revenue for the quarter was approximately $509,000, including
approximately $179,000 for video on demand service. High speed data services
were launched during the second quarter of 2000. As of September 30, 2000,
there were approximately 2,900 cable modem customers, a penetration of 4.0%
(modem customers as a percentage of homes passed with access to high speed data
services). Revenues from high speed data services were approximately $312,000
for the quarter ended September 30, 2000.
Average revenue per customer per month for the three months ended September
30, 2000 totaled $49.07 compared to $46.29 for the three months ended September
30, 1999, primarily as a result of the revenue increases noted above. Despite a
0.6% decrease in average customers served, the average monthly revenue per basic
customer increased approximately 1.8% primarily as a result of the increase in
the rate for classic service in connection with the System's rebuild.
Programming and other operating costs increased to $4.9 million for the three
months ended September 30, 2000 as compared to $4.1 million for the three months
ended September 30, 1999, an increase of approximately $800,000 or 18.8%. An
increase of 18.8% in basic programming expenses from $1.9 million for the three
months ended September 30, 1999 to $2.2 million for the same time period in 2000
reflects increased programming rates as discounts previously realized through
Insight Ohio's affiliation with MediaOne expired in November 1999. Similarly,
pay programming expenses increased 17.5% during the three months ended September
30, 2000 versus the same period of the prior year, to $1.2 million. Basic and
pay programming expenses also increased due to additional channels added in
rebuilt areas. The increased basic and pay programming expense accounted for
approximately $528,000 or 68.7% of the total increase in programming and other
operating costs.
Selling, general and administrative expenses decreased to $2.9 million for the
three months ended September 30, 2000 as compared to $3.2 million for the same
period in the prior year, a decrease of approximately $300,000. The decrease
was primarily attributable to a decrease in marketing costs of approximately
$175,000.
Depreciation and amortization expense for the three months ended September 30,
2000 increased 55.0% over the three months ended September 30, 1999 to
approximately $2.9 million reflecting additional capital expenditures resulting
from upgrades to the System's network.
Operating income for the three months ended September 30, 2000 totaled $1.8
million compared to $2.7 million for the three months ended September 30, 1999
reflecting increased expenses and depreciation, partially offset by increased
revenues.
Net interest expense for the three months ended September 30, 2000 totaled
approximately $606,000 compared to approximately $112,000 for the three months
ended September 30, 1999, primarily resulting from increased borrowings under
the Senior Credit Facility.
23
<PAGE>
Net income of $1.2 million was realized for the three months ended September
30, 2000 compared to net income of $2.6 million for the three months ended
September 30, 1999 for the reasons set forth above.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues for the nine months ended September 30, 2000 were $36.4 million
compared to $35.2 million for the nine months ended September 30, 1999. For the
nine months ended September 30, 2000, customers served averaged 84,480 compared
with 86,123 during the same time period in 1999. Revenues for the nine months
ended September 30, 2000 were 3.4% higher than the same period for the prior
year where revenue from new product launches, increased advertising and pay
revenues more than offset decreases in basic, pay per view and other revenues.
Digital revenue for the nine months ended September 30, 2000 was approximately
$959,000, including approximately $361,000 for video on demand service. High
speed data revenue was approximately $408,000 for the nine months ended
September 30, 2000 and advertising and pay revenue increased by approximately
$439,000 and $309,000 as compared to the nine months ended September 30, 1999.
Analog pay-per-view and other revenues decreased approximately $347,000 and
$202,000 during the nine months ended September 30, 2000 as compared to the same
period in the prior year.
Average revenue per customer per month for the nine months ended September 30,
2000 totaled $47.85 compared to $45.41 for the nine months ended September 30,
1999, primarily as a result of the revenue increases noted above. Despite a 1.9%
decrease in average customers served, the average monthly revenue per basic
customer increased 1.4% primarily as a result of the increase in the rate for
classic service in connection with the System's rebuild.
Programming and other operating costs increased to $14.2 million for the nine
months ended September 30, 2000 as compared to $11.9 million for the nine months
ended September 30, 1999, an increase of approximately $2.3 million or 19.3%.
An increase of 23.1% in basic programming expenses from $5.4 million for the
nine months ended September 30, 1999 to $6.6 million for the same time period in
2000 reflects increased programming rates as discounts previously realized
through Insight Ohio's affiliation with MediaOne expired in November 1999.
Similarly, pay programming expenses increased 22.6% during the nine months ended
September 30, 2000 versus the same period of the prior year, to $3.6 million.
Basic and pay programming expenses also increased due to additional channels
added in rebuilt areas. The increased basic and pay programming expense
accounted for approximately $1.9 million or 82.6% of the total increase in
programming and other operating costs.
Selling, general and administrative expenses decreased to $8.4 million for the
nine months ended September 30, 2000 as compared to $8.6 million for the same
period in the prior year, a decrease of approximately $200,000.
Depreciation and amortization expense for the nine months ended September 30,
2000 increased by 52.3% over the nine months ended September 30, 1999 to
approximately $7.8 million reflecting additional capital expenditures resulting
from upgrades to the System's network.
Operating income for the nine months ended September 30, 2000 totaled $6.0
million compared to $9.6 million reflecting increased expenses and depreciation,
partially offset by increased revenues.
Net interest expense for the nine months ended September 30, 2000 totaled
approximately $1.3 million compared to approximately $38,000 for the nine months
ended September 30, 1999, primarily resulting from increased borrowings under
the Senior Credit Facility.
Net income of $4.7 million was realized for the nine months ended September
30, 2000 compared to net income of $9.6 million for the nine months ended
September 30, 1999 for the reasons set forth above.
Liquidity and Capital Resources
The cable television business is a capital-intensive business that generally
requires financing for the upgrade, expansion and maintenance of the technical
infrastructure. Capital expenditures totaled $27.9 million for the nine months
ended September 30, 2000. These expenditures were primarily for the rebuild of
cable plant and for serving new homes. Capital expenditures are financed by cash
flows from operations, borrowings under the Senior Credit Facility and capital
contributions.
24
<PAGE>
Insight continues to further enhance the technical platform of the System by
upgrading the plant serving the majority of customers. The capability for high-
speed data transmission, impulse pay-per-view, digital tiers of service and
additional analog channels is intended to be provided by further deployment of
fiber optics, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications and the installation of digital equipment.
Capital expenditures are expected to approximate $34.6 million during the year
2000 to support not only ongoing plant extensions, new customer additions and
capital replacement, but also to fund the plant upgrade to 870 MHz and to
activate plant for 2-way transmission, which is necessary to facilitate the
deployment of interactive services.
Cash provided by operations for the nine months ended September 30, 2000 was
$13.3 million compared to $15.1 million for the same period in 1999. The
decrease is primarily attributable to an increase in operating expenses during
the nine months ended September 30, 2000 as compared to the same period of the
prior year.
Cash used in investing activities for the nine months ended September 30, 2000
and 1999 was $27.9 million and $16.1 million, respectively, reflecting capital
expenditures to upgrade the System and build plant expansions.
Cash provided by financing activities for the nine months ended September 30,
2000 was $19.3 million. This was comprised primarily of $19.4 million of capital
contributions from Insight and $14.0 million in borrowings under Insight Ohio's
senior credit facility. These increases were partially offset by $14.0 million
of preferred interest distributions. Cash used in financing activities for the
nine months ended September 30, 1999 was $3.4 million consisting primarily of
preferred interest distributions, to be used to pay interest on the Senior
Notes, partially offset by borrowings under the senior credit facility.
In addition to cash flow from operations, Insight Ohio has a $25.0 million
Senior Credit Facility which was fully borrowed at September 30, 2000.
Due to the increased rebuild costs, management had determined that amounts
available under the Senior Credit Facility and cash flows from operations may
not be sufficient to finance the operating and capital requirements of the
System, debt service requirements and distributions on the Preferred Interests
over the next year. As such, Insight has provided a commitment letter to
Insight Ohio to fund any operating shortfall through the year 2000. Insight
contributed $19.4 million to Insight Ohio through September 30, 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133, which was amended by SFAS No.
137, is effective for all quarters of fiscal years beginning after June 15,
2000. Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not anticipate
the adoption of this statement to have a material impact on their respective
financial statements.
25
<PAGE>
Item 3. Quantitative and Qualitative Disclosures 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 Communications of Central Ohio, Inc., Phoenix Associates
and Insight Ohio have not entered into forward or future contracts, purchased
options or entered into swaps.
Insight Ohio's senior credit facility bears interest at floating rates.
Accordingly, Insight Ohio is exposed to potential losses related to changes in
interest rates. The Senior Notes issued by Coaxial and Phoenix bears interest
at a fixed rate.
The fair value of borrowings under Insight Ohio's senior credit facility
approximates carrying value as it bears interest at floating rates. The fair
value and carrying value of the Senior Notes applicable to Coaxial as of
September 30, 2000 was $33.7 and $34.4 million, respectively. The fair value and
carrying value of the Senior Notes applicable to Phoenix as of September 30,
2000 was $103.5 and $105.6 million, respectively.
26
<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
We filed the following report on Form 8-K during the third quarter of the
year ending December 31, 2000:
Current Report on form 8-K filed August 25, 2000.
27
<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: November 20, 2000
By: /s/ Michael S. Willner
--------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
--------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Phoenix Associates
(Registrant)
Dated: November 20, 2000
By:
--------------------------------------
<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: November 20, 2000
By: /s/ Michael S. Willner
--------------------------------------
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
--------------------------------------
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
