SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2001
Commission file numbers: 333-64449-02
333-64449-01
333-64449
Coaxial LLC
Coaxial Financing Corp.
Insight Communications of Central Ohio, LLC
(Exact name of registrants as specified in their respective charters)
Delaware 13-4080422
Delaware 13-4061992
Delaware 13-4017803
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
c/o Insight Communications Company, Inc.
810 Seventh Avenue
New York, NY 10019
(917) 286-2300
(Address and telephone number of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether each Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_] Not Applicable
State the aggregate market value of the common equity held by
non-affiliates of the registrants: Not Applicable
Indicate the number of shares outstanding of the registrants' common
stock: Not Applicable
Forward-Looking Statements
This annual report contains "forward-looking statements," including
statements containing the words "believes," "anticipates," "expects" and words
of similar import, which concern, among other things, the operations, economic
performance and financial condition of the System (as defined below). All
statements other than statements of historical fact included in this annual
report regarding Coaxial LLC, Coaxial Financing Corp. and Insight Communications
of Central Ohio, LLC ("Insight Ohio") or any of the transactions described in
this report, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Such forward-looking statements
are based upon a number of assumptions and estimates, which are inherently
subject to significant uncertainties and contingencies, many of which are beyond
the control of Coaxial LLC, Coaxial Financing Corp. and Insight Ohio, and
reflect future business decisions which are subject to change. Although Coaxial
LLC, Coaxial Financing Corp. and Insight Ohio believe that the expectations
reflected in such forward-looking statements are reasonable, they can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from expectations include,
without limitation:
. the ability of Coaxial LLC and Coaxial Financing Corp. to make
scheduled payments with respect to the Senior Discount Notes (as
defined below) will depend on the financial and operating performance
of Insight Ohio;
. a substantial portion of Insight Ohio's cash flow from operations is
required to be dedicated to the payment of principal and interest on
its indebtedness and the required distributions with respect to its
Series A Preferred Interest and its Series B Preferred Interest,
thereby reducing the funds available to Insight Ohio for its
operations and future business opportunities;
. Coaxial LLC and Coaxial Financing Corp. have no significant assets
other than the common equity of Coaxial Communications of Central
Ohio, Inc. ("Coaxial") owned by Coaxial LLC and notes issued by
Coaxial DJM LLC (an owner of 22.5% of the common equity of Coaxial)
and Coaxial DSM LLC (an owner of 10.0% of the common equity of
Coaxial) to Coaxial LLC; and
. the indenture governing the terms of the Senior Discount Notes
imposes restrictions on Coaxial LLC, Coaxial Financing Corp. and
Insight Ohio and the Senior Credit Facility of Insight Ohio imposes
restrictions on Insight Ohio.
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not intend to update
these forward-looking statements.
PART I
Item 1. Business
In this report, we rely on and refer to information and statistics
regarding the cable television industry and our market share in the sectors in
which we compete. We obtained this information and statistics from various
third-party sources, discussions with our customers and our own internal
estimates. We believe that these sources and estimates are reliable, but we have
not independently verified them and cannot guarantee their accuracy or
completeness.
Overview
Insight Ohio owns and operates a cable television system in the
Columbus, Ohio metropolitan area (the "System"). As of December 31, 2001, the
System passed approximately 191,000 homes and served approximately 86,100 basic
customers in the eastern portion of the City of Columbus and the surrounding
suburban communities. All of the System's customers are served from a single
headend allowing for efficient capital deployment for new services. A headend
processes signals received for distribution to customers over our network.
Insight Communications Company, Inc. ("Insight"), through its wholly-owned
subsidiary Insight Communications Company, L.P., serves as the manager of the
System.
The System
The System is located in the eastern portion of the City of Columbus
and the surrounding suburban communities. The City of Columbus is the 34th
largest designated market area ("DMA") in the United States, is the capital of
Ohio and is the home of The Ohio State University. Besides the state government
and university, the Columbus economy is well diversified with a significant
presence of prominent companies such as The Limited, Merck, Wendy's, Nationwide
Insurance, Quest Communications and Worthington Industries. The area's strong
economy provides for a well-paid employment base with a current unemployment
rate of 3.1%. The median household income of the System's service area is
approximately $47,800 per year, while the median family income is approximately
$57,000 per year. As of December 31, 2001, the System passed approximately
191,000 homes and served approximately 86,100 basic customers from a single
headend.
The System enjoys a high level of population growth in the suburban
communities east of Columbus. Since December 31, 1996, approximately 29,900
homes passed have been added to the System through new plant extensions,
primarily in new housing developments. This represents a 3.5% compound annual
growth rate of homes passed for the System for the five years ended December 31,
2001, as compared to the industry average of 1.0% for the same period.
Portions of the System operate in a competitive environment. Customers
in those areas have access to two wired cable television providers -- Insight
Ohio and WideOpenWest which acquired the assets of Ameritech in December 2001.
The System also competes with direct broadcast satellite television systems
("DBS") and multipoint multichannel distribution systems ("MMDS"). The areas of
the System served by both Insight Ohio and WideOpenWest pass approximately
130,000 homes, representing 68.1% of the System's total homes passed. In this
competitive environment, the System's basic customers decreased from
approximately 86,000 at the end of 1995, prior to Ameritech's entry into the
marketplace, to approximately 84,200 as of December 31, 1999 but has steadily
increased to approximately 86,100 as of December 31, 2001.
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As of December 31, 2001, the System had 2,750 miles of plant, including
1,713 miles of 870 MegaHertz (MHz) capacity, or "bandwidth," plant and 1,037
miles of 450 MHz. Insight Ohio estimates that approximately 83% of its customers
are served by its upgraded network which enables delivery of an advanced suite
of entertainment, information and communications services, including interactive
digital video, high-speed data access and telephone services. Insight Ohio is
continuing to upgrade the technical capability of the System by increasing its
bandwidth to 870 MHz and activating its reverse plant. Insight Ohio plans to
enhance the technical platform of the System by continuing to upgrade the plant
passing approximately 86% of the homes in the System by the end of 2002.
The Manager
Insight is the eighth largest cable television system operator in the
United States based on customers served after giving effect to the pending
AT&T/Comcast merger transaction. Through its wholly-owned and managed systems,
Insight Communications currently serves approximately 1.4 million customers, 99%
of which are concentrated in the four contiguous states of Indiana, Kentucky,
Illinois and Ohio. In addition to its geographic concentration, our manager's
communications network is tightly-grouped, or "clustered," with approximately
95% of our manager's customers served from fourteen headends after giving effect
to the network upgrades, expected to be substantially completed during 2002. As
a result, the amount of capital necessary to deploy new and enhanced products
and services is significantly reduced on a per home basis because of the large
number of customers served by a single headend. Clustering enables our manager
to efficiently deploy a bundled suite of entertainment, information and
communications services. This combination of geographic concentration and
clustering has enabled Insight Communications to offer, under the Insight
Digital brand, a complete bundle of interactive digital video, high-speed data
access and telephone services.
To facilitate delivery of telephone services, we have entered into a
long-term agreement with AT&T Broadband, LLC that will allow us to deliver to
our customers local telephone service under the AT&T Digital Phone brand. Under
the terms of the agreement, we will lease for a fee certain capacity on our
network to AT&T Broadband. We will provide certain services and support for
which we will receive additional payments. The capital required to deploy
telephone over our networks will be shared, with AT&T Broadband responsible for
switching and transport facilities. Our manager believes that we will be able to
achieve higher penetration levels by marketing our telephone services under the
AT&T Digital Phone brand and leveraging AT&T's telephone expertise with our
strong local presence and established customer relationships.
Insight Business Strategy
Our manager's strategy is to become a competitive, full-service
provider of entertainment, information and communications services. This
strategy is centered on the development of new and enhanced products and
services for the communities served by our networks and consists of the
following elements:
. Focus on operating large, tightly-grouped clusters of cable systems
with attractive technical and demographic profiles;
. Expeditiously upgrade our network;
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. Introduce new and enhanced products and services, including interactive
Insight Digital service, high-speed data service and telephone service;
. Leverage strong local presence to enhance customer and community
relations; and
. Pursue value-enhancing transactions in nearby or adjacent geographies.
Our manager's marketing strategy is to offer our customers a bundled
suite of services. By bundling our products and services, we provide our
customers with an increased choice of services in value-added packages, which we
believe results in higher customer satisfaction, increased use of our services
and greater customer retention. Our manager began deploying new and enhanced
products and services, such as interactive digital video and high-speed data
access, during 1999, and during the first quarter of 2002 will add a telephone
service marketed under the AT&T Digital Phone brand.
The System is an integral part of Insight's long-term business
strategy. The System has a strong market presence in a state capital and
academic center with a diverse, growing economy. All of the System's customers
are served from a single headend allowing for efficient capital deployment for
new services. Moreover, Insight Ohio estimates that it serves approximately 83%
of the subscribers in the System with upgraded network. Insight Ohio began
launching the interactive Insight Digital service on a node-by-node basis in
November 1999, including a video-on-demand and interactive informational service
and launched its high-speed Internet service during the second quarter of 2000.
Nodes are the point of interface between our headend and our network.
System Operating Strategy
The System fits the profile of cable television systems that Insight
seeks to own and operate. The System is large enough to have a significant
market presence and all customers are serviced from one headend. In addition,
Columbus is geographically proximate to other Insight cable systems with a
customer universe having the type of demographic profile that Insight believes
will widely accept new telecommunications offerings. Insight Ohio intends to
aggressively implement Insight's upgrade strategy in Columbus.
Insight is in the process of rebuilding the System to 870 MHz, and
began servicing customers from the rebuilt network in November 1999. Insight
Ohio is currently launching its signature interactive Insight Digital service
with exclusive interactive programming including Local Source, an
Internet-styled information service, and a video-on-demand service by DIVA. As
of December 31, 2001, the System passed 67,200 homes with its digital service
and served approximately 22,600 customers with such service, representing a
penetration level of almost 34%. Management expects to increase revenues as the
System upgrade is completed by increasing the deployment of its digital cable
and adding new services such as high-speed modems and other newly developing
telecommunications services. Insight Ohio has entered into an affiliation
agreement with Road Runner to deploy the Road Runner service over cable modems.
On October 12, 2001 Insight Ohio terminated its relationship with High Speed
Access Corp. who had been doing turnkey support for the Road Runner service. As
of December 31, 2001, approximately 11,500 customers subscribed to the Road
Runner service.
In addition, the System provides exclusive sports programming under the
"Central Ohio Sport!" brand, featuring sporting events from Ohio State
University.
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Overbuild
In 1996, Ameritech obtained a citywide cable television franchise for
the City of Columbus. Ameritech built its citywide franchise, both in our
service area and in the Time Warner service area on the west side of Columbus.
Insight Ohio and Time Warner service virtually distinct areas and therefore do
not compete with one another. In December 2001,WideOpenWest completed its
acquisition of the assets of Ameritech including the franchises to service the
Columbus, Ohio market. As of December 31, 2001, the areas of the System served
by both Insight Ohio and WideOpenWest passed approximately 130,000 homes,
representing 68% of the System's total homes passed.
When the System was acquired by Insight Ohio in August 1999, it
implemented a strategy to end deep discounting as a defense against Ameritech.
Management believed that a relatively small customer loss, caused by
discontinuing discounts, would be preferable in exchange for achieving an
increase in the average monthly revenue per customer. As a result of this
strategy, from June 30, 1998 to December 31, 2001, the average monthly revenue
per customer increased from $43.30 to $53.89 while the number of customers
decreased from 91,100 to 86,100. Since acquisition of the Ameritech system in
December 2001, WideOpenWest has instituted a new marketing program including the
"Hot Box" savings of 50% on premiums and pay-per-view programming.
Technological Developments
Management believes that in order to achieve consistently high levels
of customer service, maintain a strong competitive posture and deploy important
new technologies, a state-of-the-art technical platform needs to be built.
Presently the System is comprised of 2,750 miles of plant passing approximately
191,000 homes resulting in a density of 69.4 homes per mile. Approximately 83%
of the customers are served by a network upgraded to 870 MHz, which enables
delivery of an advanced suite of entertainment, information and communications
services, including our interactive digital video, high-speed data access and
telephone services.
Insight Ohio plans to enhance the technical platform of the System by
continuing to upgrade the plant passing 86% of the homes in the System by
the end of 2002. The capability for high-speed data transmission,
video-on-demand, interactive digital cable, additional analog channels and
telephone services is intended to be provided by further deployment of cable,
known as fiber optic cable, which has a capacity for a very large number of
channels, an increase in the bandwidth to 870 MHz, activation of the reverse
plant to allow two-way communications between the headend and the customer and
the installation of digital equipment.
All of the System's basic customers currently have access to
addressable technology and approximately 80% have addressable converters in
their homes as of December 31, 2001. Addressable technology enables the System
to electronically control the cable television services being delivered to the
customer's home. As a result, the System can electronically upgrade or downgrade
services to a customer immediately, from its customer service center, without
the delay or expense associated with dispatching a technician to the customer's
home. Addressable technology also reduces premium service theft, is an effective
enforcement tool in the collection of delinquent payments and enables the System
to offer pay-per-view services, including movies and special events.
Management believes that active use of fiber optic technology as an
alternative to coaxial cable plays a major role in expanding channel capacity
and improving the performance of the System. Fiber optic strands are capable of
carrying hundreds of video, data and voice channels over extended distances
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without the extensive signal amplification typically required for coaxial cable.
The System will continue to deploy fiber optic cable further reducing amplifier
cascades while improving picture quality and system reliability.
High-speed cable modems and set-top boxes using digital compression
technology have become commercially viable. These developments allow for the
introduction of high-speed data services and Internet access and will increase
the programming services available to customers. Digital compression technology
provides for a significant expansion of channel capacity with up to 12 digital
channels to be carried in the bandwidth of one analog channel. The upgrade of
the System has given the System the ability to package a "Digital Gateway"
brand. For $7.95 customers receive the following services:
. A digital set-top box;
. An interactive navigational program guide for all analog and digital
channels;
. A local, interactive Internet-style information and entertainment
service;
. A multi-channel premium service for customers who separately subscribe
to premium channels, such as HBO and Showtime;
. Video-on-demand; and
. A digital 40-channel audio music service.
Insight Ohio began launching the Insight Digital service in the System
on a node-by-node basis in November 1999, including DIVA's video-on-demand
service and the Local Source interactive information service and as of December
31, 2001 served approximately 22,600 subscribers with its digital service.
Insight Ohio launched the Road Runner high-speed Internet service during the
second quarter of 2000 and served approximately 11,500 customers with this
service as of December 31, 2001.
Marketing, Programming and Rates
Marketing
The System's marketing programs and campaigns are based upon offering a
variety of cable services creatively packaged and tailored to appeal to its
different markets and to segments within its markets. The System surveys its
customer base to ensure that it is meeting the demands of its customers and
stays abreast of its competition in order to effectively counter competitors'
promotional campaigns. The System uses a coordinated array of marketing tactics
to attract and retain customers and to increase premium service penetration,
including door-to-door and direct mail solicitation, telemarketing, media
advertising, local promotional events typically sponsored by programming
services and cross-channel promotion of new services. The rebuild of the plant
allows Insight Ohio to deploy its suite of services including interactive
digital, high-speed data and during the first quarter of 2002, telephone
services. In November 1999, Insight Ohio began to launch its interactive
digital, video-on-demand and Local Source informational product on a
node-by-node basis. Insight Ohio has also deployed its Road Runner high-speed
Internet service. Using a skilled team of marketing professionals, the System
has competed by supporting an innovative variety of marketing activities.
5
Programming
Insight has various contracts to obtain basic and premium programming
for the System from program suppliers whose compensation is typically based on a
fixed fee per customer. Because of our manager's relationship with AT&T
Broadband, we have the right to purchase programming services for our systems
either directly through AT&T Broadband's programming supplier Satellite
Services, Inc. or through our own purchasing power. We believe that Satellite
Services has attractive programming costs. In addition, some program suppliers
provide volume discount pricing structures or offer marketing and launch support
to the System. The System's successful marketing of multiple premium service
packages emphasizing customer value enables the System to take advantage of such
cost incentives. The System's overall programming costs are expected to increase
in the future due to additional programming being provided to its customers,
inflationary increases and other factors affecting the cable television
industry. The System also has various retransmission consent arrangements with
commercial broadcast stations which generally have been renewed through 2003.
None of these consents require payment of fees for carriage.
The System offers a "basic service tier," consisting primarily of local
television channels (network and independent stations) available over-the-air,
and local public, governmental and educational access channels. The System also
offers, for a monthly fee, an expanded basic tier of various
satellite-delivered, non-broadcast channels (such as CNN, ESPN, MTV, TNT, and
USA). In addition to these services, the System provides premium services such
as HBO, Cinemax, Showtime, The Movie Channel and Starz!, which have unique
appeal to various segments of the viewing audience. These services are
satellite-delivered channels consisting principally of feature films, original
programming, live sports events, concerts and other special entertainment
features, usually presented without commercial interruption. Such premium
programming services are offered by the System both on a per-channel basis and
as part of premium service packages designed to enhance customer value and to
enable the System to take advantage of programming agreements offering cost
incentives based on premium service unit growth. Customers may subscribe to one
or more premium service units. A "premium service unit" is a single premium
service for which a customer must pay an additional monthly fee in order to
receive the service.
Management is upgrading the System to digital using fiber optic
technology, which has allowed the System to expand the number of multiplexed
premium screens (additional channels such as Showtime 2 and HBO Family)
providing greater value for the customer. Moreover, the upgrade has given the
System the ability to offer its Insight Digital service including interactive
television and multiple packaging options through the addition of niche
programming services. Management believes that these additional features and
options will increase basic and premium penetration as well as revenue per basic
customer. The System also provides video-on-demand, a digital service consisting
principally of feature films, adult movies, concerts and other special events,
presented without commercial interruption. Such services are offered by the
System on a "per viewing" basis, with customers only paying for programs which
they select for viewing.
Rates
Monthly customer rates for services vary from market to market,
primarily according to the amount of programming provided. As of December 31,
2001, the System's stated monthly basic service rate for residential customers
was $11.47, the System's monthly expanded basic service rates for residential
customers was $18.65, and per-channel premium service rates (not including
special promotions) ranged from $6.95 to $13.95 per service.
6
A one-time installation fee, which the System may wholly or partially
waive during a promotional period, is charged to new customers. The System
charges monthly fees for converters and remote control devices. The System also
charges administrative fees for delinquent payments for service. Customers are
free to discontinue service at any time without additional charge and may be
charged a reconnection fee to resume service. Commercial customers, such as
hotels, motels and hospitals, are charged negotiated monthly fees and a
non-recurring fee for the installation of service. MDU accounts may be offered a
bulk rate in exchange for single-point billing and basic service to all units.
On February 11, 1997, a Petition for Determination of Effective
Competition filed by the prior owner of the System challenging the certification
of the City of Columbus was granted by the FCC. This petition effectively
revoked the City of Columbus' right to regulate the System's basic cable and
equipment rates.
Employees
As of December 31, 2001, the System employed 208 full-time equivalent
employees, none of whom is represented by a union or covered by a collective
bargaining obligation. Management believes that its relations with its employees
are good. Approximately 52% of the full-time employees have tenure of five years
or longer. Although the Columbus area has relatively low unemployment and
competition in hiring is intense, management believes that it will continue to
be successful in attracting and retaining highly qualified employees and
maintaining good working relationships with its current employees.
Customer Service and Community Relations
The System is dedicated to quality customer service. Plans to make
significant system improvements are designed in part to strengthen customer
service through greater system reliability and the introduction of new services.
Management seeks a high level of customer satisfaction by also employing a
well-trained staff of customer service representatives and experienced field
technicians.
The System is dedicated to fostering strong community relations in the
communities served by the System. The System supports local charities and
community causes through staged events and promotional campaigns, including
Children's Hospital Miracle Network Telethon, the Penny-A-Day for Children
Program and Red Cross Blood Drive donations. The System also installs and
provides free cable television service and Internet access to public schools,
government buildings and not-for-profit hospitals in its franchise areas. The
System has teamed up with its neighboring cable operator Time Warner to develop
a local sports package called "Central Ohio Sport!" which features Ohio State
University sporting events on an exclusive basis to cable customers. Management
believes that its relations with the communities in which the System operates
are generally excellent.
Franchises
Cable television systems are generally operated under non-exclusive
franchises granted by local governmental authorities. These franchises typically
contain many conditions, such as:
. time limitations on commencement and completion of construction;
. conditions of service, including number of channels, types of programming and
the provision of free service to schools and certain other public
institutions; and
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. the maintenance of insurance and indemnity bonds.
The provisions of local franchises are subject to federal regulation
under the Communications Act of 1934, as amended (the "Communications Act").
The System provides cable television service to residents of 42
governmental jurisdictions. Within each of these governmental jurisdictions, the
System operates under authority granted by the local community or the State of
Ohio. Actual franchise agreements are maintained with the 28 jurisdictions that
possess the legal basis to grant such franchises consistent with federal and
state law. These franchises, which are non-exclusive, provide for the payment of
fees to the issuing authority. In the System, such franchise fees are passed
through directly to the customers. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the Cable Communications
Policy Act of 1984 (the "1984 Cable Act" and, together with the 1992 Cable Act,
the "Cable Acts") prohibit franchising authorities from imposing franchise fees
in excess of 5% of gross revenue and also permit the cable television system
operator to seek renegotiation and modification of franchise requirements if
warranted by changed circumstances.
The majority of the System's basic customers are in governmental
jurisdictions that require a franchise. The table below groups all of the
System's governmental jurisdictions by date of expiration of the authority to
operate and presents the approximate number and percentage of basic customers
for each group as of December 31, 2001.
Percentage of
Number of Percentage of Total Basic
Year of Franchise Expiration Franchises Total Franchises Customers
- ---------------------------- ---------- ---------------- ---------
Expired* ............................... 2 7.1% 0.6%
2002 and 2003 .......................... 4 14.3% 2.6%
2004 and beyond ........................ 22 78.6% 96.8%
----- -------- -------
Total ............................ 28 100.0% 100.0%
===== ======== =======
- ----------------
* Such franchises are operated on a month-to-month basis and are in the process
of being renewed.
The Cable Acts provide, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is denied and the franchising authority acquires ownership of the
system or effects a transfer of the system to another person, the operator
generally is entitled to the "fair market value" for the system covered by such
franchise. In addition, the Cable Acts established comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merits and not as part of a comparative process with
competing applications.
Management believes that it generally has good relationships with its
franchising communities. The System has never had a franchise revoked or failed
to have a franchise renewed. In addition, all of the franchises of the System
eligible for renewal have been renewed or extended at or prior to their stated
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expirations, and no franchise community has refused to consent to a franchise
transfer to the System.
Competition
Cable systems face increasing competition from alternative methods of
receiving and distributing their core video business. Both wireline and wireless
competitors have made inroads in competing against incumbent cable operators.
The extent to which a cable operator is competitive depends, in part, upon its
ability to provide to customers, at a reasonable price, a greater variety of
programming and other communications services than are available off-air or
through alternative delivery sources and upon superior technical performance and
customer service.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies, in particular direct broadcast satellite television systems
operators, that have the potential to provide increased competition to cable
systems. Congress has also enacted legislation which permits direct broadcast
satellite companies to retransmit local television signals, eliminating one of
the objections of consumers about switching to satellites.
The 1996 Telecommunications Act makes it easier for local exchange
telephone companies and others to provide a wide variety of video services
competitive with services provided by cable systems. Various local exchange
telephone companies currently are providing video services within and outside
their telephone service areas through a variety of distribution methods,
including the deployment of broadband cable networks and the use of wireless
transmission facilities. Local exchange telephone companies in various states
have either announced plans, obtained local franchise authorizations or are
currently competing with our cable communications systems. Local exchange
telephone companies and other companies also provide facilities for the
transmission and distribution to homes and businesses of interactive
computer-based services, including the Internet, as well as data and other
non-video services. The ability of local exchange telephone companies to
cross-subsidize video, data and telecommunication services also poses some
threat to cable operators.
Cable television systems are operated under non-exclusive franchises
granted by local authorities thereby allowing more than one cable system to be
built in the same area. Although the number of municipal and commercial
overbuild cable systems is small, the potential profitability of a cable system
is adversely affected if the local customer base is divided among multiple
systems. Additionally, constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We believe that in order
to be successful, a competitor's overbuild would need to be able to serve the
homes in the overbuilt area on a more cost-effective basis than we can. Any such
overbuild operation would require either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming. The major source of competition for the System is the wireline
overbuild by WideOpenWest. WideOpenWest has overbuilt approximately 130,000
homes passed in the System's service area, or approximately 68% of the total
homes in the service territory as of December 31, 2001.
Franchised cable systems compete with private cable systems for the
right to service condominiums, apartment complexes and other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television systems often enter into exclusive
agreements with apartment building owners or homeowners' associations that
preclude franchised cable television operators from serving residents of such
private complexes. However, the 1984 Cable Act gives franchised cable operators
the right to use existing compatible easements within their franchise areas on
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements,
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cable operators may not be unfairly denied access or discriminated against with
respect to access to the premises served by those easements. Conflicting
judicial decisions have been issued interpreting the scope of the access right
granted by the 1984 Cable Act, particularly with respect to easements located
entirely on private property.
The 1996 Telecom Act may exempt some of our competitors from regulation
as cable systems. The 1996 Telecom Act amends the definition of a "cable system"
such that providers of competitive video programming are only regulated and
franchised as "cable systems" if they use public rights-of-way. Thus, a broader
class of entities providing video programming, including operators of satellite
master antenna television systems, may be exempt from regulation as cable
television systems under the 1996 Telecom Act. This exemption may give these
entities a competitive advantage over us. As of December 31, 2001, the System
passed approximately 448 multiple dwelling unit ("MDU") complexes within its
service territory and had entry agreements, either exclusive or non-exclusive,
with complexes totaling approximately 65,300 MDUs. As of December 31, 2001, the
System provided programming to approximately 32,500 of these MDUs, or 50% of the
total MDUs passed.
Direct broadcast satellite television systems use digital video
compression technology to increase the channel capacity of their systems. Direct
broadcast satellite television systems' programming is currently available to
individual households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar Communications Corporation. Direct broadcast satellite
television systems have some advantages over cable systems that were not
upgraded, such as greater channel capacity and digital picture quality. In
addition, legislation has been enacted which permits direct broadcast satellite
television systems to retransmit the signals of local television stations in
their local markets. However, direct broadcast satellite television systems have
a limited ability to offer locally produced programming, and do not have a
significant local presence in the community. In addition, direct broadcast
satellite television systems packages can be more expensive than cable,
especially if the subscriber intends to view the service on more than one
television in the household. Finally, direct broadcast satellite television
systems do not have the same full two-way capability, which we believe will
limit their ability to compete in a meaningful way in high-speed data and voice
communications. Management estimates that there were approximately 13,400 direct
broadcast satellite customers in the System's service areas as of December 31,
2001.
Several telephone companies are introducing digital subscriber line
technology, which allows Internet access over traditional phone lines at data
transmission speeds greater than those available by a standard telephone modem.
Although these transmission speeds are not as great as the transmission speeds
of a cable modem, we believe that the transmission speeds of digital subscriber
line technology are sufficiently high that such technology will compete with
cable modem technology. The FCC is currently considering its authority to
promulgate rules to facilitate the deployment of these services and regulate
areas including high-speed data and interactive Internet services. We cannot
predict the outcome of any FCC proceedings, or the impact of that outcome on the
success of our Internet access services or on our operations.
Additionally, the FCC adopted regulations allocating frequencies in the
31 Gigahertz (GHz) band for a new service that can be used to provide video
services similar to multipoint multichannel distribution systems, which transmit
television channels from a fixed station to multiple receiving facilities
located at fixed points. The FCC has completed spectrum auctions for local
multipoint distribution service licenses.
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As we expand our offerings to include telephone services, our AT&T
branded services will be subject to competition from existing providers,
including both local exchange telephone companies and long-distance carriers.
The telecommunications industry is highly competitive and many telephone service
providers may have greater financial resources than we have, or have established
relationships with regulatory authorities. We cannot predict the extent to which
the presence of these competitors will influence customer penetration in our
telephone service areas. While our manager intends to add our telephone service
offering to its various markets, the service has only recently been launched in
selected markets and has not yet achieved any material penetration levels.
Other new technologies may become competitive with services that cable
communications systems can offer. Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect of ongoing or future
developments on the cable communications industry or on our operations.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
Federal Legislation
The principal federal statute governing the cable television industry
is the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-ownership
between cable television systems and other communications businesses, carriage
of television broadcast programming, cable rates, consumer protection and
customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
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Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation
for premium channels and optional non-basic program tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the previous statutory and FCC rate regulation standards. The 1992 Cable
Act replaced the FCC's old standard for determining effective competition, under
which most cable television systems were not subject to rate regulation, with a
statutory provision that resulted in nearly all cable television systems
becoming subject to rate regulation of basic service. The 1996 Telecom Act
expanded the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except direct broadcast satellite television systems. Satisfaction of this test
deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable
Act required the FCC to adopt a formula for franchising authorities to assure
that basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers, other than per-channel or per-program services, in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring basic customers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of compliance; required the FCC to adopt
regulations to establish, on the basis of actual costs, the price for
installation of cable service, remote controls, converter boxes and additional
outlets; and allowed the FCC to impose restrictions on the retiring and
rearrangement of cable services under certain limited circumstances. The 1996
Telecom Act limited the class of complainants regarding cable programming
service tier rates to franchising authorities only, and ended FCC regulation of
cable programming service tier rates on March 31, 1999. The 1996 Telecom Act
also relaxes existing uniform rate requirements by specifying that such
requirements do not apply where the operator faces effective competition, and by
exempting bulk discounts to multiple dwelling units, although complaints about
predatory pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation
of basic service rates. Local franchising authorities are empowered to order a
reduction of existing rates which exceed the maximum permitted level for basic
services and associated equipment, and refunds can be required. The FCC adopted
a benchmark price cap system for measuring the reasonableness of existing basic
service rates. Alternatively, cable operators have the opportunity to make
cost-of-service showings which, in some cases, may justify rates above the
applicable benchmarks. The rules also require that charges for cable-related
equipment, converter boxes and remote control devices, for example, and
installation services be unbundled from the provision of cable service and based
upon actual costs plus a reasonable profit. The regulations also provide that
future rate increases may not exceed an inflation-indexed amount, plus increases
in certain costs beyond the cable operator's control, such as taxes, franchise
fees and increased programming costs. Cost-based adjustments to these capped
rates can also be made in the event a cable television operator adds or deletes
channels. There is also a streamlined cost-of-service methodology available to
justify a rate increase on the basic tier for "significant" system upgrades.
As a further alternative, in 1995 the FCC adopted a simplified
cost-of-service methodology which can be used by "small cable systems" owned by
"small cable companies." A "small system" is defined as a cable television
system which has, on a headend basis, 15,000 or fewer basic customers. A "small
cable company" is defined as an entity serving a total of 400,000 or fewer basic
customers that is not affiliated with a larger cable television company, that is
to say that a larger cable television company does not own more than a 20
percent equity share or exercise de jure control. This small system rate-setting
methodology almost always results in rates that exceed those produced by the
cost-of-service rules applicable to larger
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cable television operators. Once the initial rates are set they can be adjusted
periodically for inflation and external cost changes as described above. When an
eligible "small system" grows larger than 15,000 basic customers, it can
maintain its then current rates but it cannot increase its rates in the normal
course until an increase would be warranted under the rules applicable to
systems that have more than 15,000 customers. When a "small cable company" grows
larger than 400,000 basic customers, the qualified systems it then owns will not
lose their small system eligibility. If a small cable company sells a qualified
system, or if the company itself is sold, the qualified systems retain that
status even if the acquiring company is not a small cable company. We were a
"small cable company" prior to the October 30, 1998 completion of the AT&T
Broadband transaction but we no longer enjoy this status and as a result, we are
no longer entitled to this benefit. However, as noted above, the systems with
less than 15,000 customers owned by us prior to the completion of the AT&T
Broadband transaction remain eligible for "small system" rate regulation.
Finally, there are regulations which require cable television systems
to permit customers to purchase video programming on a per channel or a per
program basis without the necessity of subscribing to any tier of service, other
than the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later thanOctober 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, that is to say that the system is located in the station's area of
dominant influence, to elect every three years whether to require the cable
television system to carry the station, subject to certain exceptions, or
whether the cable television system will have to negotiate for "retransmission
consent" to carry the station. The next election between must-carry and
retransmission consent will be October 1, 2002. A cable television system is
generally required to devote up to one-third of its activated channel capacity
for the carriage of local commercial television stations whether pursuant to
mandatory carriage requirements or the retransmission consent requirements of
the 1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger of:
(i) a 50 mile radius from the station's city of license; or (ii) the station's
Grade B contour, a measure of signal strength. Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable television systems
have to obtain retransmission consent for the carriage of all "distant"
commercial broadcast stations, except for certain "superstations," which are
commercial satellite-delivered independent stations such as WGN. To date,
compliance with the "retransmission consent" and "must carry" provisions of the
1992 Cable Act has not had a material effect on us, although this result may
change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
recently completed a rulemaking proceeding on the carriage of television signals
in high definition and digital formats. The outcome of this proceeding could
have a material effect on the number of services that a cable operator will be
required to carry. Local television broadcast stations transmitting solely in a
digital format are entitled to carriage. Stations transmitting in both digital
and analog formats, which is permitted during the current transition period,
have no carriage rights for the digital format during the transition.
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Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of a distant station when such
programming has also been contracted for by the local station on an exclusive
basis. FCC regulations also enable television stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable television system to delete or "black out" such programming from
other television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984 Cable
Act, such payments cannot exceed 5% of a cable television system's annual gross
revenues. Under the 1996 Telecom Act, franchising authorities may not exact
franchise fees from revenues derived from telecommunications services, although
they may be able to exact some additional compensation for the use of public
rights-of-way. Franchising authorities are also empowered, in awarding new
franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures
and criteria designed to protect incumbent franchisees against arbitrary denials
of renewal and to provide specific grounds for franchising authorities to
consider in making renewal decisions, including a franchisee's performance under
the franchise and community needs. Even after the formal renewal procedures are
invoked, franchising authorities and cable television operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
Similarly, if a franchising authority's consent is required for the purchase or
sale of a cable television system or franchises, such authority may attempt to
impose burdensome or onerous franchise requirements in connection with a request
for such consent. Historically, franchises have been renewed for cable
television operators that have provided satisfactory services and have complied
with the terms of their franchises. At this time, we are not aware of any
current or past material failure on our part to comply with our franchise
agreements. We believe that we have generally complied with the terms of our
franchises and have provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a
cable television operator seeks to enforce its renewal rights which could make
it easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it fails to respond to a written notice
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from the cable television operator of its failure or inability to cure. Courts
may not reverse a denial of renewal based on procedural violations found to be
"harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require
cable television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers providing video programming directly to customers within their local
exchange telephone service areas. Consequently, the 1996 Telecom Act permits
telephone companies to compete directly with operations of cable television
systems. Under the 1996 Telecom Act and FCC rules adopted to implement the 1996
Telecom Act, local exchange carriers may provide video service as broadcasters,
common carriers, or cable operators. In addition, local exchange carriers and
others may also provide video service through "open video systems," a regulatory
regime that may give them more flexibility than traditional cable television
systems. Open video system operators (including local exchange carriers) can,
however, be required to obtain a local cable franchise, and they can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
In general, open video system operators must make their systems available to
programming providers on rates, terms and conditions that are reasonable and
nondiscriminatory. Where carriage demand by programming providers exceeds the
channel capacity of an open video system, two-thirds of the channels must be
made available to programmers unaffiliated with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers from
purchasing a greater than 10% ownership interest in a cable television system
located within the local exchange carrier's telephone service area, prohibits
cable operators from purchasing local exchange carriers whose service areas are
located within the cable operator's franchise area, and prohibits joint ventures
between operators of cable television systems and local exchange carriers
operating in overlapping markets. There are some statutory exceptions, including
a rural exemption that permits buyouts in which the purchased cable television
system or local exchange carrier serves a non-urban area with fewer than 35,000
inhabitants, and exemptions for the purchase of small cable television systems
located in non-urban areas. Also, the FCC may grant waivers of the buyout
provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repealed the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act were eliminated in 1996, although
the parallel FCC regulations prohibiting broadcast/cable common-ownership
remained in effect. The U.S. Court of Appeals for the District of Columbia
circuit has recently struck down these rules. The FCC's rules also generally
prohibit cable operators from offering satellite master antenna service separate
from their franchised systems in the same franchise area, unless the cable
operator is subject to "effective competition" there.
The 1996 Telecom Act amended the definition of a "cable system" under
the Communications Act so that competitive providers of video services will be
regulated and franchised as "cable systems" only if
15
they use public rights-of-way. Thus, a broader class of entities providing video
programming may be exempt from regulation as cable television systems under the
Communications Act.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of subscribers which a single cable television operator can serve. In
general, no cable television operator can have an attributable interest in cable
television systems which serve more than 30% of all multichannel video
programming subscribers nationwide. Attributable interests for these purposes
include voting interests of 5% or more, unless there is another single holder of
more than 50% of the voting stock, officerships, directorships and general
partnership interests. The FCC has also adopted rules which limit the number of
channels on a cable television system which can be occupied by national video
programming services in which the entity which owns the cable television system
has an attributable interest. The limit is 40% of the first 75 activated
channels. The U.S. Court of Appeals for District of Columbia Circuit upheld the
constitutionality of these rules. A petition for certiorari was denied by the
Supreme Court. However, the U.S. Court of Appeals for District of Columbia
Circuit reversed and remanded the horizontal and vertical ownership rules for
further proceedings on non-constitutional grounds.
The 1996 Telecom Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators over competitors
and requires such programmers to sell their programming to other multichannel
video distributors. This provision limits the ability of vertically integrated
cable programmers to offer exclusive programming arrangements to cable
companies. The prohibition on certain types of exclusive programming
arrangements is set to expire on October 5, 2002, unless the FCC determines that
extension of the prohibition is necessary to preserve and protect competition in
video programming distribution. We expect the FCC to make a determination on
this issue soon.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable television operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
television operator was found to have violated the customer privacy provisions
of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and
other costs. Under the 1992 Cable Act, the privacy requirements were
strengthened to require that cable television operators take such actions as are
necessary to prevent unauthorized access to personally identifiable information.
Certain of these requirements were modified by the Electronic Communications
Privacy Act of 2001.
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Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable television system
signal leakage. Periodic testing by cable television operators for compliance
with the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to periodically update its technical standards to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable television system's
use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable television systems
and consumer electronics equipment. These regulations, among other things,
generally prohibit cable television operators from scrambling their basic
service tier. The 1996 Telecom Act directs the FCC to set only minimal standards
to assure compatibility between television sets, VCRs and cable television
systems, and otherwise to rely on the marketplace. Pursuant to the 1992 Cable
Act, the FCC has adopted rules to assure the competitive availability to
consumers of customer premises equipment, such as converters, used to access the
services offered by cable television systems and other multichannel video
programming distributors. Pursuant to those rules, consumers are given the right
to attach compatible equipment to the facilities of their multichannel video
programming distributors so long as the equipment does not harm the network,
does not interfere with the services purchased by other customers and is not
used to receive unauthorized services. As of July 1, 2000, multichannel video
programming distributors, other than operators of direct broadcast satellite
television systems, were required to separate security from non-security
functions in the customer premises equipment which they sell or lease to their
customers and offer their customers the option of using component security
modules obtained from the multichannel video programming distributors with
set-top units purchased or leased from retail outlets. As of January 1, 2005,
multichannel video programming distributors will be prohibited from distributing
new set-top equipment integrating both security and non-security functions to
their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing
an emergency alert system. The rules require all cable television systems to
provide an audio and video emergency alert system message on at least one
programmed channel and a video interruption and an audio alert message on all
programmed channels. The audio alert message is required to state which channel
is carrying the full audio and video emergency alert system message. The FCC
rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install EAS equipment capable
of providing audio and video emergency alert system messages on all programmed
channels by December
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31, 1998. Cable television systems with 5,000 or more but fewer than 10,000
basic customers per headend will have until October 1, 2002 to comply with that
requirement. Cable television systems with fewer than 5,000 basic customers per
headend will have a choice of providing either a national level emergency alert
system message on all programmed channels or installing emergency alert system
equipment capable of providing audio alert messages on all programmed channels,
a video interrupt on all channels, and an audio and video emergency alert system
message on one programmed channel. This must be accomplished by October 1, 2002.
Inside Wiring; Customer Access
In a 1997 order, the FCC established rules that require an incumbent
cable operator upon expiration of a multiple dwelling unit service contract to
sell, abandon, or remove "home run" wiring that was installed by the cable
operator in a multiple dwelling unit building. These inside wiring rules are
expected to assist building owners in their attempts to replace existing cable
operators with new programming providers who are willing to pay the building
owner a higher fee, where such a fee is permissible. Additionally, the FCC has
proposed to restrict exclusive contracts between building owners and cable
operators or other multichannel video programming distributors. The FCC has also
issued an order preempting state, local and private restrictions on over-
the-air reception antennas placed on rental properties in areas where a tenant
has exclusive use of the property, such as balconies or patios. However, tenants
may not install such antennas on the common areas of multiple dwelling units,
such as on roofs. This order limits the extent to which multiple dwelling unit
owners may enforce certain aspects of multiple dwelling unit agreements which
otherwise would prohibit, for example, placement of direct broadcast satellite
television systems television receiving antennae in multiple dwelling unit
areas, such as apartment balconies or patios, under the exclusive occupancy of a
renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by
certain public utilities for use of their poles unless state public service
commissions are able to demonstrate that they adequately regulate the rates,
terms and conditions of cable television pole attachments. A number of states
and the District of Columbia have certified to the FCC that they adequately
regulate the rates, terms and conditions for pole attachments. Illinois, Ohio
and Kentucky, states in which we operate, have made such a certification. In the
absence of state regulation, the FCC administers such pole attachment and
conduit use rates through use of a formula which it has devised. Pursuant to the
1996 Telecom Act, the FCC has adopted a new rate formula for any attaching
party, including cable television systems, which offers telecommunications
services. This new formula will result in higher attachment rates than at
present, but they will apply only to cable television systems which elect to
offer telecommunications services. Any increases pursuant to this new formula
began in 2001, and will be phased in by equal increments over the five ensuing
years. The FCC ruled that the provision of Internet services will not, in and of
itself, trigger use of the new formula. However, the U.S. Court of Appeals for
the Eleventh Circuit held that, since Internet provision is neither a "cable
service" or a "telecommunications service," neither rate formula applies and,
therefore, public utilities are free to charge what they please. The Supreme
Court has recently reversed this decision. The FCC has also initiated a
proceeding to determine whether it should adjust certain elements of the current
rate formula. If adopted, these adjustments could increase rates for pole
attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes
matters regarding a cable television system's carriage of local sports
programming; restrictions on origination and cablecasting by
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cable television operators; rules governing political broadcasts; equal
employment opportunity; deletion of syndicated programming; registration
procedure and reporting requirements; customer service; closed captioning;
obscenity and indecency; program access and exclusivity arrangements; and
limitations on advertising contained in nonbroadcast children's programming.
The FCC has recently issued a Notice of Inquiry covering a wide range
of issues relating to Interactive Television ("ITV"). Examples of ITV services
are interactive electronic program guides and access to a graphic interface that
provides supplementary information related to the video display. In the near
term, cable systems are likely to be the platform of choice for the distribution
of ITV services. The FCC has posed a series of questions including the
definition of ITV, the potential for discrimination by cable systems in favor of
affiliated ITV providers, enforcement mechanisms, and the proper regulatory
classification of ITV service.
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable television operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to
over-the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable television operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable
television systems by pay cable networks, such as HBO, and basic cable networks,
such as USA Network, is licensed by the networks through private agreements with
the American Society of Composers and Publishers, generally known as ASCAP, and
BMI, Inc., the two major performing rights organizations in the United States.
Both the American Society of Composers and Publishers and BMI offer "through to
the viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
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State and Local Regulation
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction, and even from city to city within
the same state, historically ranging from reasonable to highly restrictive or
burdensome. Franchises generally contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable television services provided. The terms and conditions of each
franchise and the laws and regulations under which it was granted directly
affect the profitability of the cable television system. The 1984 Cable Act
places certain limitations on a franchising authority's ability to control the
operation of a cable television system. The 1992 Cable Act prohibits exclusive
franchises, and allows franchising authorities to exercise greater control over
the operation of franchised cable television systems, especially in the area of
customer service and rate regulation. The 1992 Cable Act also allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise and permits states or local franchising authorities
to adopt certain restrictions on the ownership of cable television systems.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments. The 1996 Telecom Act
prohibits a franchising authority from either requiring or limiting a cable
television operator's provision of telecommunications services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. To date, none of
the states in which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at
high speeds via high capacity broadband transmission facilities and cable
modems. We compete with many other providers of Internet access services which
are known as Internet service providers ("ISPs"). ISPs include such companies as
America Online and Mindspring Enterprises as well as major telecommunications
providers, including AT&T and local exchange telephone companies. A number of
local franchising authorities have attempted to require cable companies offering
Internet access service over their broadband facilities to allow access to those
facilities on an unbundled basis to other ISPs. To date, all such efforts have
been overturned in the courts. However, many ISPs and local franchising
authorities have continued to ask the U.S. Congress and the FCC to mandate such
access, or at least to allow local authorities to impose such a requirement.
Although the FCC has thus far declined to impose such an access requirement on
cable companies, the issue remains under consideration. The FCC has recently
decided that cable Internet service should be classified for regulatory purposes
as an "information service" rather than either a "cable service" or a
20
"telecommunications service." Concurrently the FCC has initiated a wide-ranging
rulemaking proceeding in which it seeks comment on the regulatory ramifications
of this classification. Among the issues to be decided are whether the FCC
should permit local authorities to impose an access requirement, whether local
authorities should be prohibited from imposing fees on cable Internet service
revenues, and what regulatory role local authorities should be permitted to
play. The outcome of this proceeding could have a material impact on our
provision of cable Internet service.
There are currently few laws or regulations which specifically
regulate communications or commerce over the Internet. Section 230 of the
Communications Act, added to that act by the 1996 Telecom Act, declares it to be
the policy of the United States to promote the continued development of the
Internet and other interactive computer services and interactive media, and to
preserve the vibrant and competitive free market that presently exists for the
Internet and other interactive computer services, unfettered by federal or state
regulation. One area in which Congress did attempt to regulate content over the
Internet involved the dissemination of obscene or indecent materials. The
provisions of the 1996 Telecom Act, generally referred to as the Communications
Decency Act, were found to be unconstitutional, in part, by the United States
Supreme Court in 1997. In response, Congress passed the Child Online Protection
Act. The constitutionality of this act is currently being challenged in the
courts. Finally, disclosure of customer communications or records is governed by
the Electronic Communications Privacy Act of 2001.
Local Telecommunications Services
The 1996 Telecom Act provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. States are
authorized, however, to impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. State and local governments also retain their authority to manage
the public rights-of-way and may require fair and reasonable, competitively
neutral and non-discriminatory compensation for management of the public
rights-of-way when cable operators provide telecommunications service. State and
local governments must publicly disclose such required payments.
We have entered into a ten-year agreement with AT&T Broadband that
will allow AT&T Broadband to provide to customers telephone services using our
network infrastructure and AT&T Broadband's switching and long distance
transport facilities. Local telecommunications service is subject to regulation
by state utility commissions. Use of local telecommunications facilities to
originate and terminate long distance services, a service commonly referred to
as "exchange access," is subject to regulation both by the FCC and by state
utility commissions. As a provider of local exchange service, AT&T Broadband
would be subject to the requirements imposed upon local exchange carriers by the
1996 Telecom Act. These include requirements governing resale, telephone number
portability, dialing parity, access to rights-of-way and reciprocal
compensation. AT&T Broadband's ability to successfully offer local
telecommunications service will be dependent, in part, on the opening of local
telephone networks by incumbent local telephone companies as required of them by
the 1996 Telecom Act.
In January 1999, the United States Supreme Court held that the FCC has
authority under the Communications Act to establish rules to govern the pricing
of facilities and services provided by incumbent local exchange carriers
("ILECs") to open their local networks to competition. However, on July 18,
2000, the United States Court of Appeals for the Eighth Circuit vacated several
FCC rules concerning interconnection and pricing of ILEC network elements,
including a rule that mandates that ILECs set prices for unbundled network
elements ("UNEs") at the lowest cost network configuration, and
21
another rule that would have required the ILECs to bundle combinations of
network elements at the competing carrier's request. The U.S. Supreme Court is
presently reviewing this decision (consolidated with four other lower court
challenges to the FCC's interconnection rules). In addition, a later FCC order
dealing with certain other UNE issues remanded by the U.S. Supreme Court in its
1999 decision has been appealed to the Eighth Circuit. In the meantime, in
December 2001 the FCC instituted a new rulemaking proceeding to reevaluate the
list of available UNEs. The FCC has also initiated rulemaking proceedings to
establish uniform ordering and provisioning performance standards for resale and
UNEs, and for special access services. The outcome of these court proceedings
and FCC rulemakings will have an effect on AT&T Broadband's ability to compete
in the telecommunications marketplace.
Item 2. Properties
The System's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headend and distribution systems and customer house drop equipment for
its cable television systems. The signal receiving apparatus includes a tower,
antenna, ancillary electronic equipment and earth stations for reception of
satellite signals. The headend, consisting of associated electronic equipment
necessary for the reception, amplification and modulation of signals, is located
near the receiving devices. Most basic customers of the System utilize
converters that can be addressed by sending coded signals from the headend
facility over the cable network. The System's distribution system consists
primarily of coaxial and fiber optic cables and related electronic equipment.
The System owns parcels of real property for signal reception sites
(one antenna tower and one headend). The System also leases one small office and
one hub location. Management believes that its properties, both owned and
leased, are in suitable condition adequate for the System's operations.
The System's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The physical
components of the System require periodic upgrading to improve system
performance and capacity.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which any of the
Registrants is a party or to which any of their properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the holders of the Senior
Discount Notes during the three months ended December 31, 2001.
22
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
There is no public trading market for the equity of Coaxial LLC,
Coaxial Financing Corp. and Insight Ohio. There are three individual holders of
the equity of Coaxial LLC and Coaxial Financing Corp., and the common equity of
Insight Ohio is held by Insight Holdings of Ohio, LLC, a wholly-owned subsidiary
of Insight Midwest, L.P.
23
Item 6. Selected Financial Data
Coaxial LLC and Coaxial Financing Corp. were formed on July 24, 1998.
As such, these entities were not in existence for a portion of the 1997
historical period presented in the following tables. The historical information
of Coaxial Communications of Central Ohio, Inc. for the year ended December 31,
1997 is shown as it represents the predecessor entity which has been
consolidated by Coaxial LLC as of and for the years ended December 31, 2001,
2000, 1999 and 1998. As a result of the August 8, 2000 purchase by Insight of
the remaining 25% common equity interest in Insight Ohio and certain amendments
to Insight Ohio's operating agreement, the operating results of Coaxial LLC
include the operating results of Insight Ohio only through August 8, 2000.
The following tables present selected historical financial data for
Coaxial LLC and Insight Ohio as of and for the five years ended December 31,
2001 and selected historical financial data for Coaxial Financing Corp. for
2001, 2000, 1999 and 1998. The 1997 financial information includes the financial
information of the Central Ohio Cable System Operating Unit as it represents the
predecessor to Insight Ohio. These tables should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto included
elsewhere in this report.
Coaxial LLC
(dollars in thousands, except customer data)
Year ended December 31,
-----------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Revenues ................................................... $ - $ 28,096 $ 46,747 $ 47,956 $ 48,229
Operating expenses:
Programming and other operating costs ................... - 10,955 16,863 18,130 17,974
Selling, general and administrative ..................... - 6,476 10,756 11,565 10,915
Severance and transaction structure costs ............... - - - 4,822 -
Depreciation and amortization ........................... 764 6,702 7,871 5,471 5,256
---------- ---------- ---------- ---------- ----------
Total operating expenses .............................. 764 24,133 35,490 39,988 34,145
Operating income (loss) .................................... (764) 3,963 11,257 7,968 14,084
Interest expense, net ................................... (17,626) (17,983) (16,968) (6,489) (1,230)
Gain on sale of common equity interest(1) ............... - 171,460 - - -
Dividend on preferred interests ......................... 19,432 7,882 - - -
Other income (expense) .................................. - 31 92 (421) (271)
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item .................... 1,042 165,353 (5,619) 1,058 12,583
Extraordinary loss on extinguishment of debt ............ - - - (847) -
---------- ---------- ---------- ---------- ----------
Net income ................................................. $ 1,042 $ 165,353 $ (5,619) $ 211 $ 12,583
========== ========== ========== ========== ==========
Financial Ratios and Other Data:
Capital expenditures ....................................... - 19,943 26,656 7,369 5,570
Net cash provided by (used in) operating activities ........ (3,444) 7,224 19,043 13,053 18,622
Net cash used in investing activities ...................... - 20,950 26,754 3,470 15,242
Net cash provided by (used in) financing activities ........ 3,444 12,844 (116) (1,449) (3,712)
Operating Data: (at end of period, except average
and annualized data) .......................................
Homes passed (4) ........................................... 190,959 184,427 178,310 171,753 166,306
Basic customers (5) ........................................ 86,042 85,415 84,236 87,637 91,873
Basic penetration (6) ...................................... 45.1% 46.3% 47.2% 51.0% 55.2%
Premium service units (7) .................................. 66,684 84,648 98,202 90,032 80,013
Premium penetration (8) .................................... 77.5% 99.1% 116.6% 102.7% 87.1%
Average monthly revenue per basic customer (9) ............. - $ 48.87 $ 45.33 $ 44.52 $ 44.67
System Cash Flow per basic customer (10) ................... - $ 237.83 $ 239.28 $ 224.21 $ 231.62
24
Balance Sheet Data: (at the end of the period)
Total assets ............................................... $ 229,127 $ 222,125 $ 74,011 $ 60,318 $ 109,655
Total debt ................................................. 185,713 180,281 186,556 172,760 47,236
Total liabilities .......................................... 190,963 185,531 206,470 186,747 55,328
Total member's equity (deficit) ............................ 38,164 36,594 (132,459) (126,429) 54,327
25
Coaxial Financing Corp.
(in thousands)
Period from July 24,
1998 (inception)
Year ended December 31, through December 31,
-------------------------------------------------------------------
2001 2000 1999 1998
-------------------------------------------------------------------
Statement of Operations Data:
Expenses:
Amortization $ (136) $ (136) $ (136) $ (48)
Interest Expense (5,432) (4,725) (4,046) (1,510)
-------------------------------------------------------------------
Net Loss $ (5,568) $ (4,861) $ (4,182) $ (1,558)
===================================================================
Balance Sheet Data
(at the end of the period)
Total assets $ 899 $ 1,035 $ 1,171 $ 1,307
Total debt 45,713 40,281 35,556 31,510
Total liabilities 45,713 40,281 35,556 31,510
Total shareholders' deficit (44,814) (39,246) (34,385) (30,203)
26
Insight Communications of Central Ohio, LLC
(dollars in thousands, except customer data)
Central Ohio
Cable
System
Insight Communications of Operating
Central Ohio, LLC Unit
----------------- ----
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Statement of Operations Data: $ 55,494 $ 49,749 $ 46,747 $ 47,956 $ 48,229
Revenue
Operating costs and expenses:
Programming and other operating costs 22,129 19,509 16,863 18,130 17,974
Selling, general and administrative 10,745 10,069 9,321 9,701 9,417
Severance and transaction structure costs - - - 4,822 -
Management fee 1,664 1,493 1,435 493 -
Home office - - - 1,371 1,498
Depreciation and amortization 13,397 10,882 7,148 5,311 5,238
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses 47,935 41,953 34,767 39,828 34,127
---------- ---------- ---------- ---------- ----------
Operating income 7,559 7,796 11,980 8,128 14,102
Interest expense (income), net 1,682 1,792 297 (59) (70)
Other expense (income) 279 274 (92) 422 271
---------- ---------- ---------- ---------- ----------
Net income $ 5,598 $ 5,730 $ 11,775 $ 7,765 $ 13,901
========== ========== ========== ========== ==========
Financial Ratios and Other Data:
System Cash Flow (2) $ 22,620 $ 20,171 $ 20,563 $ 20,125 $ 20,838
System Cash Flow margin 40.8% 40.5% 43.9% 42.0% 43.2%
Operating Cash Flow (3) 20,956 18,678 19,128 18,261 19,340
Capital expenditures 28,409 35,982 26,656 7,369 5,529
Net cash provided by operating activities 23,023 15,995 22,425 14,399 19,454
Net cash used in investing activities 28,534 36,073 26,754 6,679 5,554
Net cash provided by (used in) financing 6,500 20,365 (1,498) (1,585) (14,232)
activities
Operating Data: (at end of period, except
average and annualized data)
Homes passed (4) 190,959 184,427 178,310 171,753 166,306
Basic customers (5) 86,042 85,415 84,236 87,637 91,873
Basic penetration (6) 45.1% 46.3% 47.2% 51.0% 55.2%
Premium service units (7) 66,684 84,648 98,202 90,032 80,013
Premium penetration (8) 77.5% 99.1% 116.6% 102.7% 87.1%
Average monthly revenue per basic customer (9) $ 53.89 $ 48.87 $ 45.33 $ 44.52 $ 44.67
System Cash Flow per basic customer (10) $ 263.64 $ 237.83 $ 239.28 $ 224.22 $ 231.62
Balance Sheet Data: (at end of the period)
Total assets $ 98,657 $ 83,359 $ 56,964 $ 41,967 $ 33,553
Total debt, including preferred interests 210,713 205,281 186,673 171,666 407
Total liabilities 48,364 45,164 19,782 15,248 -
Total member's deficit (135,420) (142,086) (149,491) (144,719) -
Net assets to be contributed - - - - 25,571
27
Notes To Selected Financial and Operating Data
(1) Represents gain on sale of remaining equity interests in Insight Ohio
to Insight Inc.
(2) Represents Operating Cash Flow (as defined below in Note 3) plus home
office expense for periods prior to the acquisition of the System, and
Operating Cash Flow plus management fees for periods after or which
give effect to the acquisition of the System. Management believes that
System Cash Flow is a meaningful measure of performance because it is
commonly used in the cable television industry to analyze and compare
cable television companies on the basis of operating performance,
leverage and liquidity. However, System Cash Flow is not intended to
be a performance measure that should be regarded as an alternative to,
or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted
accounting principles. System Cash Flow, as computed by management, is
not necessarily comparable to similarly titled amounts of other
companies. See the financial statements, including the Statements of
Cash Flows, included elsewhere in this report.
(3) Represents earnings before depreciation, amortization, severance and
transaction structure costs, interest expense, other expenses, and
extraordinary item. Management believes that Operating Cash Flow is a
meaningful measure of performance because it is commonly used in the
cable television industry to analyze and compare cable television
companies on the basis of operating performance, leverage and
liquidity. However, Operating Cash Flow is not intended to be a
performance measure that should be regarded as an alternative to, or
more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with generally accepted
accounting principles. Operating Cash Flow, as computed by management,
is not necessarily comparable to similarly titled amounts of other
companies. See the financial statements, including the Statements of
Cash Flows included elsewhere in this report.
(4) Homes passed are the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(5) Basic customers are customers of a cable television system who receive
a package of over-the-air broadcast stations, local access channels
and certain satellite-delivered cable television services, other than
premium services, and who are usually charged a flat monthly rate for
a number of channels.
(6) Basic penetration means basic customers as a percentage of total
number of homes passed.
(7) Premium units mean the number of subscriptions to premium services,
which are paid for on an individual unit basis.
(8) Premium penetration means premium service units as a percentage of the
total number of basic customers. A customer may purchase more than one
premium service, each of which is counted as a separate premium
service unit. This ratio may be greater than 100% if the average
customer subscribes to more than one premium service unit.
28
(9) Represents revenues of the System during the respective period divided
by the months in the period divided by the average number of basic
subscribers (beginning of period plus end of period divided by two)
for such respective period.
(10) Represents Annualized System Cash Flow during the respective period
divided by the average number of basic subscribers (beginning of
period plus end of period divided by two) for such respective period.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
financial statements and related notes that are included elsewhere in this
report.
Offering of Senior Discount Notes and Senior Notes and Acquisition of System by
Insight Ohio
Coaxial LLC and Coaxial Financing Corp. completed on August 21, 1998 a
private offering (the "Senior Discount Notes Offering") of $55,869,000 aggregate
principal amount at maturity of their 12 7/8% Senior Discount Notes due in 2008
(the "Senior Discount Notes") in connection with a Financing Plan (the
"Financing Plan") which included the contribution of Coaxial's cable television
system (the "System") to Insight Ohio. On February 16, 1999, Coaxial LLC and
Coaxial Financing Corp. consummated an exchange of registered Senior Discount
Notes for their privately issued Senior Discount Notes. Coaxial LLC and Coaxial
Financing Corp. have only nominal assets except for Coaxial LLC's ownership of
67.5% of the common stock of Coaxial and notes of Coaxial DJM LLC and Coaxial
DSM LLC (the other two owners of Coaxial), which notes are secured by the
remaining 32.5% of the common stock of Coaxial. The Senior Discount Notes are
guaranteed on a conditional basis by Insight Ohio. The limited liability
companies that own Coaxial are referred to herein as the "Individual LLCs".
As part of the Financing Plan, Coaxial and Phoenix Associates, an
affiliated general partnership, completed a private offering (the "Senior Notes
Offering") of $140,000,000 aggregate principal amount of their 10% Senior Notes
due in 2006 (the "Senior Notes"). On February 16, 1999, Coaxial and Phoenix
consummated an exchange of registered Senior Notes for their privately issued
Senior Notes. The Senior Notes are also guaranteed on a conditional basis by
Insight Ohio. The conditional guarantee of the Senior Discount Notes is
subordinated to the conditional guarantee of the Senior Notes. Coaxial has only
nominal assets except for the Series A Preferred Interest and the Series B
Preferred Interest of Insight Ohio (together the "Preferred Interests").
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series B Preferred Interest
will be used to pay dividends to the Individual LLCs, which dividends will be
used to pay interest and principal on the Senior Discount Notes and the
distributions from the Series A Preferred Interest 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.
Coaxial LLC and Coaxial Financing Corp. do not conduct any business
and are dependent upon the cash flow of Insight Ohio to meet their obligations
under the Senior Discount Notes. Insight LP serves as the manager of the System.
29
On August 8, 2000, Insight LP purchased Coaxial's 25% non-voting
common equity interest in Insight Ohio, resulting in Insight LP owning 100% of
the common equity of Insight Ohio. The purchase price was 800,000 shares of
common stock of Insight and cash paid by Insight to the principals of the
Individual LLCs 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 the Individual LLCs, 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 purchase Coaxial LLC no longer consolidates the results of Insight Ohio
subsequent to August 8, 2000.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight LP and an indirect subsidiary of AT&T Broadband,
entered into definitive agreements with Insight LP and certain subsidiaries of
AT&T Corp. ("AT&T Cable Subsidiaries") for the acquisition of additional cable
television systems, including Insight Ohio. Through a series of transactions,
Insight Midwest acquired all of Insight LP's wholly owned systems serving
approximately 280,000 customers, including the approximately 85,400 customers
served by Insight Ohio and including systems which Insight LP purchased from
AT&T Cable Subsidiaries. At the same time, Insight Midwest acquired from AT&T
Cable Subsidiaries systems serving approximately 250,000 customers. Insight Ohio
is an unrestricted subsidiary under the indentures governing Insight and Insight
Midwest's senior notes and is prohibited by the terms of its indebtedness from
making distributions to Insight Midwest. Insight Midwest remains equally owned
by Insight LP and AT&T Broadband, and Insight LP continues to serve as the
general partner and manages and operates the Insight Midwest systems, including
Insight Ohio.
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 Individual LLCs may require Insight LP to
purchase the Preferred Interests 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
Insight Inc. common stock issued on August 8, 2000.
The following discussion relates to the operations of Insight Ohio for
years ended December 31, 2001, 2000 and 1999. The financial statements of
Insight Ohio are included in the consolidated financial statements of Coaxial
through August 8, 2000 and Coaxial was deemed to be a subsidiary of Coaxial LLC
and, as such, the financial statements of Coaxial are included in the
consolidated financial statements of Coaxial LLC. The historical operating
results of Coaxial LLC 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 Discount Notes and Senior Notes discussed above as well as certain
borrowings and repayments of debt with affiliated companies. These activities
resulted in related financing and interest costs. The historical results of
Coaxial LLC appear elsewhere in this report under the heading "Coaxial LLC."
Overview
The System relies on Insight LP, for all of its strategic, managerial,
financial and operational oversight and advice. Insight LP 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 and the Senior Notes, Insight LP receives management fees
of 3.0% of gross operating revenues of the System.
30
Such management fees are payable only after distributions have been made with
respect to the Preferred Interests and only to the extent that such payments
would be permitted by an exception to the restricted payments covenants of the
Senior Notes as well as Insight Ohio's Senior Credit Facility.
Results of Operations
Substantially all of the System's revenue was earned from customer
fees for cable television programming services including premium and
pay-per-view services and ancillary services, such as rental of converters and
remote control devices, installations and from selling advertising. In addition,
the System earns revenue from commissions for products sold through home
shopping networks.
The following table is derived for the periods presented from the
System's financial statements that are included in this report and sets forth
certain statement of operations data for the System:
Year ended December 31,
2001 2000 1999
--------------------------------------------
(in thousands)
Revenue $ 55,494 $ 49,749 $ 46,747
Operating costs and expenses:
Programming and other operating costs 22,129 19,509 16,863
Selling, general and administrative 10,745 10,069 9,321
Management fees 1,664 1,493 1,435
Depreciation and amortization 13,397 10,882 7,148
--------------------------------------------
Total operating costs and expenses 47,935 41,953 34,767
--------------------------------------------
Operating income 7,559 7,796 11,980
EBITDA 20,677 18,404 19,220
Interest expense 1,732 1,883 505
Net income 5,598 5,730 11,775
Net cash provided by operating activities 23,023 15,995 22,425
Net cash used in investing activities 28,534 36,073 26,754
Net cash provided by (used in) financing activities 6,500 20,365 (1,498)
EBITDA represents earnings before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with accounting principles generally accepted in the
United States. EBITDA, as computed by management, is not necessarily comparable
to similarly titled amounts of other companies. Adjusted EBITDA, otherwise
referred to as operating cash flow, represents revenue less programming and
other operating costs and selling, general and administrative expenses. Refer to
our financial statements, including our statements of cash flows, which appear
elsewhere in this report.
31
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenue for the year ended December 31, 2001 increased $5.7 million or
11.5% to $55.5 million from $49.7 million for the year ended December 31, 2000.
For the year ended December 31, 2001, customers served averaged approximately
85,800 compared to approximately 84,800 during the year ended December 31, 2000.
The increase in revenue was primarily attributable to new product launches,
specifically digital services and high-speed data services.
Revenue by service offering was as follows for the year ended December
31, (in thousands):
2001 2000
Revenue by Revenue by
Service % of Total Service % of Total
Offering Revenue Offering Revenue
------------ ---------- ------------- ------------
Basic $ 29,046 52.3% $ 27,457 55.2%
Premium 6,705 12.1% 6,941 14.0%
Pay-per-view 1,194 2.2% 1,763 3.5%
Digital 3,861 7.0% 1,604 3.2%
Advertising sales 4,385 7.9% 4,781 9.6%
Data services 4,349 7.8% 887 1.8%
Other 5,954 10.7% 6,316 12.7%
------------ --------- ------------- -----------
Total $ 55,494 100.0% $ 49,749 100.0%
============ ========= ============= ===========
RGUs (Revenue Generating Units) were approximately 120,000 as of
December 31, 2001 compared to approximately 103,700 as of December 31, 2000.
This represents an annual growth rate of 15.7%. RGUs represent the sum of basic
and digital video, high-speed data and telephone customers.
Average monthly revenue per basic customer for the year ended December
31, 2001 was $53.89 compared to $48.87 for the year ended December 30, 2000.
Average monthly revenue per basic customer for digital and high-speed data
services was $7.97 for the year ended December 31, 2001 compared to $2.45 for
the year ended December 31, 2000. As of December 31, 2001, there were
approximately 22,600 digital customers compared to approximately 13,400 digital
customers as of December 31, 2000, representing a penetration of 33.6% and
28.1%, respectively. As of December 31, 2001, there were approximately 11,400
high-speed data customers compared to approximately 4,900 high-speed data
customers as of December 31, 2000, representing a penetration of 7.7% and 4.5%,
respectively. High-speed data services were launched during the year ended
December 31, 2000.
Programming and other operating costs increased $2.6 million or 13.4%
to $22.1 million for the year ended December 31, 2001 from $19.5 million for the
year ended December 31, 2000. The increase was primarily attributable to
increased programming rates associated with classic and digital services and to
increased high-speed data costs.
Selling, general and administrative expenses increased $676,000 or 6.7%
to $10.7 million for the year ended December 31, 2001 from $10.1 million for the
year ended December 31, 2000. The increase was primarily attributable to
increased marketing activity and corporate expenses associated with advertising
sales.
32
Management fees are directly related to revenue as these fees are
calculated as approximately 3% of gross revenues.
Depreciation and amortization expense for the year ended December 31,
2001 increased $2.5 million or 23.1% to $13.4 million from $10.9 million for the
year ended December 31, 2000. This increase was primarily attributable to
increased capital expenditures associated with the rebuild of plant and launch
of new services.
EBITDA increased 12.4% to $20.7 million for the year ended December 31,
2001 from $18.4 million for the year ended December 31, 2000. This increase was
primarily due to the 11.5% increase in revenue.
Interest expense for the year ended December 31, 2001 decreased
$151,000 or 8% to $1.7 million from $1.9 million for the year ended December 31,
2000. This decrease was primarily attributable to lower interest rates partially
offset by higher average outstanding borrowings.
For the year ended December 31, 2001, the net income was $5.6 million
primarily for the reasons set forth above.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue for the year ended December 31, 2000 increased $3.0 million or
6.4% to $49.7 million from $46.7 million for the year ended December 31, 1999.
For the year ended December 31, 2000, customers served averaged approximately
84,800 compared to approximately 85,900 during the year ended December 31, 1999.
The increase in revenue was primarily attributable to new product launches,
specifically digital services and high-speed data services.
Revenue by service offering was as follows for the year ended December
31, (in thousands):
2000 1999
Revenue by % of Revenue by
Service Total Service % of Total
Offering Revenue Offering Revenue
------------- ----------- ------------- ------------
Basic $ 27,457 55.2% $ 27,373 58.6%
Premium 6,941 14.0% 6,445 13.8%
Pay-per-view 1,763 3.5% 2,118 4.5%
Digital 1,604 3.2% 15 0.0%
Advertising sales 4,781 9.6% 4,205 9.0%
Data services 887 1.8% 50 0.1%
Other 6,316 12.7% 6,541 14.0%
------------- ---------- ------------- -----------
Total $ 49,749 100.0% $ 46,747 100.0%
============= ========== ============= ===========
RGUs (Revenue Generating Units) were approximately 103,700 as of
December 31, 2000 compared to approximately 85,300 as of December 31, 1999. This
represents an annualized growth rate of 21.6%. RGUs represent the sum of basic
and digital video, high-speed data and telephone customers.
33
Average monthly revenue per basic customer for the year ended December
31, 2000 was $48.87 compared to $45.33 for the year ended December 30, 1999.
Average monthly revenue per basic customer for digital and high-speed data
services was $2.45 for the year ended December 31, 2000. As of December 31,
2000, there were approximately 13,400 digital customers representing a 28.1%
penetration. Digital services were introduced in the latter part of 1999. As of
December 31, 2000, there were approximately 4,900 cable modem customers
representing a penetration of 4.5%. High-speed data services were launched
during the year ended December 31, 2000.
Programming and other operating costs increased $2.6 million or 15.7%
to $19.5 million for the year ended December 31, 2000 from $16.9 million for the
year ended December 31, 1999. The increase was primarily attributable to
increased programming rates associated with digital services.
Selling, general and administrative expenses increased $748,000 or 8.0%
to $10.1 million for the year ended December 31, 2000 from $9.3 million for the
year ended December 31, 1999. The increase was primarily attributable to
increased marketing activity and corporate expenses associated with advertising
sales.
Management fees are directly related to revenue as these fees are
calculated as approximately 3% of gross revenues.
Depreciation and amortization expense for the year ended December 31,
2000 increased $3.7 million or 52.2% to $10.9 million from $7.1 million for the
year ended December 31, 1999. This increase was primarily attributable to
increased capital expenditures associated with the upgrade of the System and
plant expansions.
EBITDA decreased 4.2% to $18.4 million for the year ended December 31,
2000 from $19.2 million for the year ended December 31, 1999. This decrease was
primarily attributable to increased selling, general and administrative costs
and other expenses.
Interest expense for the year ended December 31, 2000 increased $1.4
million or 272.9% to $1.9 million from $505,000 for the year ended December 31,
1999. This increased was primarily attributable to increased outstanding debt
balances.
For the year ended December 31, 2000, the net income was $5.7 million
primarily 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 $28.4 million for the
year ended December 31, 2001. These expenditures were primarily for the upgrade
of the System and plant expansions. Capital expenditures were financed by cash
flows from operations and capital contributions.
Capital expenditures are expected to approximate $35.0 million during
the year ending December 31, 2002 to support new customer additions, capital
replacement and implementation of telephone services.
34
Cash provided by operations for the year ended December 31, 2001 and
2000 was $23.0 million and $16.0 million, respectively. The increase was
primarily attributable to the timing of cash receipts and payments related to
working capital accounts.
Cash used in investing activities for the year ended December 31, 2001
and 2000 was $28.5 million and $36.1 million, respectively, reflecting capital
expenditures to upgrade the System and build plant expansions.
Cash provided by financing activities for the year ended December 31,
2001 was $6.5 million. This was comprised of capital contributions from Insight
Midwest of $20.5 million partially offset by distributions on preferred
interests of $14.0 million. Cash provided by financing activities for the year
ended December 31, 2000 was $20.4 million consisting of borrowings under the
Senior Credit Facility of $14.0 million and capital contributions from Insight
Midwest of $20.4 million partially offset by distributions on preferred
interests of $14.0 million. The $25.0 million Senior Credit Facility was fully
borrowed as of December 31, 2001.
The Senior Credit Facility contains covenants restricting, among other
things, our ability to make capital expenditures, acquire or dispose of assets,
make investments and engage in transactions with related parties. The facility
also requires compliance with certain financial ratios and contains customary
events of default. As of December 31, 2001, the Company was not in compliance
with one of the financial debt covenant requirements relating to the facility.
This non-compliance was waived by our creditor. Additionally, we have amended
this debt covenant requirement with our creditor to reflect our prospective
capital expenditure plans. Given current operating conditions and projected
results of operations, we anticipate full compliance with this credit facility
agreement for the foreseeable future.
The following summarizes our contractual obligations as of December 31,
2001, including periods in which the related payments are due:
2003 2005
2002 to 2004 to 2006 Thereafter Total
-----------------------------------------------------------
Long-term debt $ - $ 25,000 $ - $ - $ 25,000
Operating leases 64 25 16 193 298
Preferred interests 14,000 35,193 175,387 66,659 291,239
-----------------------------------------------------------
Total cash obligations $ 14,064 $ 60,218 $ 175,403 $ 66,852 $ 316,537
===========================================================
Due to the increased capital expenditures, management determined that
cash flows from operations will 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 Midwest has
committed to provide capital contributions to fund cash requirements through the
year ending December 31, 2002. Insight Midwest contributed $20.5 million to
Insight Ohio during the year ended December 31, 2001.
35
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations,"
which is effective for fiscal years beginning after December 15, 2001 and
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. This
pronouncement is not expected to have a material impact on the results of
operations or statements of position for Coaxial LLC, Coaxial Financing Corp.
and Insight Ohio (the "Companies").
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 supersedes FASB Statement
No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. The Companies will adopt this pronouncement
beginning January 1, 2002. This pronouncement is not expected to have a material
impact on the results of operations or statement of position for the Companies.
Critical Accounting Policies
Fixed Assets
As of December 31, 2001, the carrying value of the System's property
and equipment totaled $91.7 million, which represents approximately 93% of total
assets. Fixed assets include costs capitalized for labor and overhead incurred
in connection with the installation of cable systems and is stated at cost.
Depreciation for buildings, cable system equipment, furniture, fixtures and
office equipment is calculated using the straight-line method over estimated
useful lives ranging from 3 to 30 years. Building improvements are amortized
using the straight-line method over shorter of the remaining terms of the leases
or the estimated lives of the improvements.
Allowance for Doubtful Accounts
The System maintains allowances for doubtful accounts for estimated
losses from its customers' inability to make payments. In order to estimate the
appropriate level of this allowance, the System analyzes historical bad debts,
current customer credit-worthiness, current economic trends and changes in
customer payment patterns. If the financial condition of customers were to
deteriorate and to impair their ability to make payments, additional allowances
might be required in future periods.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Companies 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.
The Companies 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. A hypothetical 100 basis point increase in interest rates along
the entire interest rate yield curve would increase projected annual interest
expense by
36
approximately $250,000. The Senior Notes issued by Coaxial and Phoenix bear
interest at fixed rates.
The fair value of borrowings under Insight Ohio's senior credit
facility approximates carrying value as it bears interest at floating rates. The
fair value and carrying value of the Senior Notes and Senior Discount Notes as
of December 31, 2001 was $143.5 million and $140.0 million and $42.6 million and
$45.7 million, respectively.
Item 8. Financial Statements and Supplementary Data
Reference is made to our consolidated financial statements beginning on
page F-1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
37
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the
executive officers of the Individual LLCs, Coaxial, Insight Ohio, and Insight.
Insight LP is wholly-owned by Insight. Insight LP owns 50% of and is the
general partner of Insight Midwest, which is the parent of Insight Ohio. Insight
LP also serves as manager of the Individual LLCs and Insight Ohio and Insight
thereby effectively controls the management and affairs of the Individual LLCs,
Coaxial and Insight Ohio. The executive officers of Insight are compensated by
Insight. Insight Ohio pays management fees to Insight LP. Sidney Knafel, Michael
Willner and Kim Kelly serve as the directors of Coaxial. None of the executive
officers of Coaxial, Coaxial LLC and Coaxial Financing Corp. are compensated for
their services as such. Coaxial Financing Corp. only has nominal assets and does
not conduct any business.
Name Age Position
---- --- --------
Sidney R. Knafel 71 Chairman of the Individual LLCs, Coaxial, Insight
Ohio and Insight
Michael S. Willner 49 President and Chief Executive Officer of the
Individual LLCs, Coaxial, Insight Ohio, and
Insight
Kim D. Kelly 45 Executive Vice President and Chief Operating and
Financial Officer of the Individual LLCs,
Coaxial, Insight Ohio, and Insight
Sidney R. Knafel, a director of Insight, has been Chairman of the Board
ofInsight Communications since 1985. He was the founder, Chairman and an equity
holder of Vision Cable Communications, Inc. from 1971 until its sale in 1981.
Mr. Knafel is presently the managing partner of SRK Management Company, a
private investment company, and also serves as Chairman of BioReliance
Corporation, a biological testing company. He is a director of NTL Incorporated,
General American Investors Company, Inc.and IGENE Biotechnology, Inc., as well
as several private companies. Mr. Knafel is a graduate of Harvard College and
Harvard Business School.
Michael S. Willner, a director of Insight, co-foundedand has served as
President and Chief Executive Officer since 1985. Previously, Mr. Willner served
as Executive Vice President and Chief Operating Officer of Vision Cable from
1979 through 1985, Vice President of Marketing for Vision Cable from 1977 to
1979 and General Manager of Vision Cable's Bergen County, New Jersey cable
television system from 1975 to 1977. Currently, Mr. Willner is a director of NTL
Incorporated He is Chairman of the National Cable & Telecommunications
Association's Board of Directors and Executive Committee. He also serves on the
boards of C-SPAN, CableLabs and the Walter Kaitz Foundation. Mr. Willner is a
graduate of Boston University's College of Communication and serves on the
school's Executive Committee.
Kim D. Kelly, a director of Insight, has been Executive Vice President
of Insight Communications since 1990. Ms. Kelly has also been Chief Operating
Officer of Insight Communications since January 1998 and was Chief Financial
Officer from 1990 until January 2002. Prior thereto, she
38
served from 1982 to 1990 with Marine Midland Bank, becoming its Senior Vice
President in 1988, with primary responsibility for media lending activities. Ms.
Kelly is Chairperson of the Cable Advertising Bureau's Board of Directors. She
also serves as a member of the National Cable & Telecommunications Association
Subcommittees for Telecommunications Policy, Diversity Initiatives and
Accounting. Ms. Kelly also serves as a director of Bank of New York Hamilton
Funds, and serves on the boards of Cable in the Classroom, The Cable Center and
the Cable & Telecommunications Association for Marketing Educational Foundation.
Ms. Kelly is a graduate of George Washington University.
All executive officers serve at the discretion of the Board of
Directors.
Item 11. Executive Compensation
Coaxial LLC and Coaxial Financing Corp. do not make any payments in
respect of compensation to any of their executive management personnel. Rather,
executive management personnel of Coaxial LLC and Coaxial Financing Corp.
receive compensation from Insight. Accordingly, Insight utilizes its management
fees from Insight Ohio to pay for all of its operating expenses for managing the
day-to-day affairs of the System.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The outstanding shares of common stock of Coaxial are owned by the
Individual LLCs as described in the table below. All of the outstanding shares
of common stock of Coaxial Financing Corp. and all of the outstanding membership
interests of the Individual LLCs are wholly-owned by the individuals indicated
in the footnotes to the table in the same ownership percentages as the
respective Individual LLCs' ownership in Coaxial. Insight LP is the manager of
each of the Individual LLCs and thereby effectively controls the business of
each of such Individual LLCs and Coaxial. Accordingly, Insight LP and members of
its executive management may be deemed to beneficially own (as defined by Rule
13d-3 under the Securities Exchange Act of 1934) all of the outstanding shares
of common stock of Coaxial.
Name and Address of Beneficial Owner Percentage Ownership
------------------------------------ --------------------
Coaxial LLC (1)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242 .................................... 67.5%
Coaxial DJM LLC (2)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242 .................................... 22.5%
Coaxial DSM LLC (3)
c/o Coaxial Communications
5111 Ocean Boulevard, Suite C
Sarasota, FL 34242 .................................... 10.0%
__________
(1) Wholly-owned by Barry Silverstein.
(2) Wholly-owned by Dennis J. McGillicuddy.
(3) Wholly-owned by D. Stevens McVoy.
39
Item 13. Certain Relationships and Related Transactions
Management Fees
In accordance with the Operating Agreement of Insight Ohio, Insight LP
is entitled to be paid management fees for managing the day-to-day operations of
Insight Ohio. Pursuant to the Operating Agreement, subject to certain covenants
in the Indentures, Insight LP is entitled to receive management fees of 3.0% of
gross revenues of Insight Ohio. Fees under this management agreement were
approximately $1.7 million for the year ended December 31, 2001. Insight LP is
also entitled to reimbursement from Insight Ohio for all direct, out-of-pocket
expenses incurred by or on behalf of Insight LP that directly relate to its
management of the business and operations of Insight Ohio, including any such
expenses incurred in connection with the management of Coaxial LLC and Coaxial
Financing Corp. However, Insight LP is not entitled to reimbursement from
Insight Ohio for corporate overhead (including employee bonuses and health,
welfare, retirement, and other employee benefits and overhead expenses of its
corporate office management, development, internal accounting, and finance
management personnel).
Coaxial and Phoenix
All of the outstanding shares of Coaxial's capital stock and all of the
outstanding partnership interests in Phoenix are held indirectly by the same
three individuals, Barry Silverstein, Dennis J. McGillicuddy and D. Stevens
McVoy. Coaxial and Phoenix were co-obligors (along with certain other
affiliates) with respect to the Chase Credit Facility. Coaxial and Phoenix
continue to be co-obligors with respect to the Senior Notes.
Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC
Upon the closing of the Senior Discount Notes offering, Coaxial LLC
(which owns 67.5% of the common equity of Coaxial) loaned 22.5% of the gross
proceeds of the Senior Discount Notes offering (approximately $6.75 million) to
Coaxial DJM LLC (which owns 22.5% of the common equity of Coaxial) and 10% of
such proceeds (approximately $3.0 million) to Coaxial DSM LLC (which owns 10% of
the common equity of Coaxial) in order to allow for distributions to their
respective holders (Barry Silverstein, Dennis J. McGillicuddy and D. Stevens
McVoy, respectively) for purposes of repaying the amounts outstanding under the
Chase Credit Facility. Such loans are evidenced by the LLC Mirror Notes. Each of
the LLC Mirror Notes incorporates the terms of the Senior Discount Notes with
respect to payments and otherwise. Accordingly, Coaxial LLC will rely on the
provisions of the LLC Mirror Notes in requiring payments from Coaxial DJM LLC
and Coaxial DSM LLC in order to make corresponding payments on the Senior
Discount Notes. The LLC Mirror Note issued by Coaxial DJM LLC is in the amount
of $12,570,525 (i.e., 22.5% of the principal amount at maturity of the Senior
Discount Notes) and is secured by 22.5% of the outstanding common equity of
Coaxial. The LLC Mirror Note issued by Coaxial DSM LLC is in the amount of
$5,586,900 (i.e., 10% of the principal amount at maturity of the Senior Discount
Notes) and is secured by 10% of the outstanding common equity of Coaxial.
40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements:
Page
----
Coaxial LLC Report of Independent Auditors - Ernst & Young LLP ................................. F-1
Financial Statements:
Coaxial LLC Consolidated Balance Sheets as of December 31, 2001 and 2000 ............... F-2
Coaxial LLC Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ....................................................... F-3
Coaxial LLC Consolidated Statements of Changes in Members' Equity
(Deficit) for the years ended December 31, 2001, 2000 and 1999 ......................... F-4
Coaxial LLC Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ....................................................... F-5
Coaxial LLC Notes to Consolidated Financial Statements ................................. F-6
Coaxial Financing Corp. Report of Independent Auditors - Ernst & Young LLP ..................... F-12
Financial Statements:
Coaxial Financing Corp. Balance Sheets as of December 31, 2001 and 2000 ................ F-13
Coaxial Financing Corp. Statements of Operations for the year ended
December 31, 2001, 2000 and 1999 ....................................................... F-14
Coaxial Financing Corp. Statements of Changes in Shareholders' Deficit
for the years ended December 31, 2001, 2000 and 1999 ................................... F-15
Coaxial Financing Corp. Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ....................................................... F-16
Coaxial Financing Corp. Notes to Financial Statements .................................. F-17
Coaxial Communications of Central Ohio, Inc. Report of Independent Auditors -
Ernst & Young LLP .............................................................................. F-19
41
Financial Statements:
Coaxial Communications of Central Ohio, Inc. Balance Sheets as of
December 31, 2001 and 2000 ............................................................. F-20
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of
Operations for the years ended December 31, 2001, 2000 and 1999 ........................ F-21
Coaxial Communications of Central Ohio, Inc. Statement of Changes in
Shareholders' Equity (Deficit) for the years ended December 31, 2001,
2000 and 1999. ......................................................................... F-22
Coaxial Communications of Central Ohio, Inc. Consolidated Statements of Cash
Flows for the years ended December 31, 2001, 2000 and 1999. ............................ F-23
Coaxial Communications of Central Ohio, Inc. Notes to Consolidated Financial
Statements ............................................................................. F-24
Phoenix Associates Report of Independent Auditors - Ernst & Young LLP .......................... F-29
Financial Statements:
Phoenix Associates Balance Sheets as of December 31, 2001 and 2000 ..................... F-30
Phoenix Associates Statements of Operations for the years ended December 31,
2001, 2000 and 1999 .................................................................... F-31
Phoenix Associates Statements of Changes in Partners' Deficit for the
years ended December 31, 2001, 2000 and 1999 ........................................... F-32
Phoenix Associates Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999 .................................................................... F-33
Phoenix Associates Notes to Financial Statements ....................................... F-34
Insight Communications of Central Ohio, LLC Report of Independent Auditors -
Ernst & Young LLP .............................................................................. F-38
Financial Statements:
Insight Communications of Central Ohio, LLC Balance Sheets as of December 31,
2001 and 2000 .......................................................................... F-39
42
Insight Communications of Central Ohio, LLC Statements of Operations
and Changes in Members' Deficit for the years ended December 31, 2001,
2000 and 1999 .......................................................F-40
Insight Communications of Central Ohio, LLC Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999 ............... F-41
Insight Communications of Central Ohio, LLC Notes to Financial
Statements ..........................................................F-42
The following consolidated financial statement schedule of Coaxial LLC is
included in item 14(d):
Report of Independent Auditors - Ernst & Young LLP
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K:
None.
(c) Exhibits
2.1 Purchase and Option Agreement, dated as of August 8, 2000, among
Coaxial Communications of Central Ohio, Inc., Insight Communications
of Central Ohio, LLC, Insight Holdings of Ohio, LLC, Insight
Communications Company, L.P., Insight Communications Company, Inc.,
Coaxial LLC, Coaxial DJM LLC, Coaxial DSM LLC, Barry Silverstein,
Dennis J. McGillicuddy, and D. Stevens McVoy (1)
2.2 Asset Contribution Agreement, dated August 15, 2000, by and among,
Command Cable of Eastern Illinois Limited Partnership, MediaOne of
Illinois, Inc., Northwest Illinois TV Cable Company, S/D Cable
Partners, Ltd., TCI American Cable Holdings, L.P., TCO of
Bloomington/Normal, Inc., TCI of Cablevision of Texas, Inc., UACC
Midwest, Inc., United Cable Television of Illinois Valley, Inc.,
United Cable Television of Southern Illinois Valley, Inc., United
Cable Television of Southern Illinois, Inc., TCI of Indiana Holdings,
LLC, Insight Communications Company, L.P, and Insight Midwest, L.P.
("Asset Contribution Agreement") (2)
2.3 Amendment to the Asset Contribution Agreement, dated January 5, 2001
(3)
2.4 Asset Exchange Agreement, dated August 15, 2000, by and between
MediaOne of Illinois, Inc., and Insight Communications Company, L.P.
("Asset Exchange Agreement") (2)
2.5 Amendment to the Asset Exchange Agreement, dated January 5, 2001 (3)
43
2.6 Assets Purchase and Sale Agreement, dated August 15, 2000, by and
between TCI of Illinois, Inc., TCI of Racine, Inc., UACC Midwest,
Inc. and Insight Communications Company, L.P. ("Asset Purchase and
Sale Agreement") (2)
2.7 Amendment to the Asset Purchase and Sale Agreement, dated January 5,
2001 (3)
3.1 Certificate of Incorporation of Coaxial Financing Corp., filed July
24, 1998(4)
3.2 By-Laws of Coaxial Financing Corp.(4)
3.3 Certificate of Formation of Insight Communications of Central Ohio,
LLC filed July 23, 1998 (4)
3.4 Amended and Restated Operating Agreement of Insight Ohio, dated as of
August 8, 2000 (1)
3.5 Certificate of Formation of Coaxial LLC filed July 24, 1998 (4)
3.6 Operating Agreement of Coaxial LLC dated August 21, 1998 (4)
10.1 Indenture among Coaxial LLC, Coaxial Financing Corp., Insight
Communications of Central Ohio, LLC and Bank of Montreal Trust
Company dated August 21, 1998 (4)
10.2 Securities Pledge Agreement between Coaxial Communications of Central
Ohio, Inc. and Bank of Montreal Trust Company dated August 21, 1998
(4)
10.3 Securities Pledge Agreement between Coaxial LLC and Bank of Montreal
Trust Company dated August 21, 1998 (4)
10.4 Securities Pledge Agreement between Coaxial DSM LLC and Coaxial LLC
dated August 21, 1998 (4)
10.5 Securities Pledge Agreement between Coaxial DJM LLC and Coaxial LLC
dated August 21, 1998 (4)
10.6 Mirror Note of Coaxial DJM LLC payable to the order of Coaxial LLC
dated August 21, 1998 (4)
44
10.7 Mirror Note of Coaxial DSM LLC payable to the order of Coaxial LLC
dated August 21, 1998 (4)
10.8 Revolving Credit Agreement dated as of October 7, 1998 among Insight
Communications of Central Ohio, LLC, several banks and financial
institutions or entities, and Canadian Imperial Bank of Commerce, as
administrative agent (4)
10.9 Indenture among Coaxial Communications of Central Ohio, Inc., Phoenix
Associates, Insight Communications of Central Ohio, LLC, CIBC
Oppenheimer Corp. and Bank of Montreal Trust Company dated August 21,
1998 (5)
10.10 Cable Facilities Lease Agreement, dated July 17, 2000, among AT&T
Broadband, LLC and Insight Communications Company, Inc. and certain
of its affiliates, including Insight Ohio (1)
21.1 Subsidiaries of Registrants
(1) Filed as an Exhibit to Insight Communications Company, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 (File No. 0-26677) and incorporated herein by reference.
(2) Filed as an Exhibit to Insight Communications Company, Inc.'s Current
Report on Form 8-K, dated August 15, 2000 (File No. 0-26677) and
incorporated herein by reference.
(3) Filed as an Exhibit to Insight Communications Company, Inc.'s Current
Report on Form 8-K, dated January 5, 2001 (File No. 0-26677) and
incorporated herein by reference.
(4) Filed as an Exhibit to Registrants' Registration Statement on Form
S-4 (File No. 333-64449) and incorporated herein by reference.
(5) Filed as an Exhibit to Registration Statement in Form S-4 (File No.
333-63677) and incorporated herein by reference.
45
Report of Independent Auditors
The Member
Coaxial LLC
We have audited the consolidated financial statements of Coaxial LLC as
of December 31, 2001 and 2000 and for the years then ended, and have issued our
report thereon dated March 12, 2002. Our audits also included the financial
statement schedule listed in Item 14(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
Coaxial LLC
Schedule II - Valuation and Qualifying Accounts
Charged to Charged to
Beginning Costs & Other Ending
Description Balance Expenses Accounts Deductions (1) Balance
----------- ------- -------- -------- -------------- -------
Year ended December 31, 2000
Reserves and allowances deducted
from asset accounts: 558,000 367,000 - (925,000)(2)
Allowance for doubtful accounts -
Year ended December 31, 2001
Reserves and allowances deducted
from asset accounts: - - - -
Allowance for doubtful accounts -
____________
(1) Uncollectible accounts written off, net of recoveries.
(2) Includes reduction of allowance of $210,000 related to the sale of Insight
Ohio on August 8, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Coaxial LLC
Date: March 27, 2002 By: /s/ Michael S. Willner
-----------------------
Michael S. Willner, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board March 27, 2002
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive Officer and Director March 27, 2002
- ----------------------
Michael S. Willner (Principal executive officer)
/s/ Kim D. Kelly Executive Vice President, Chief Operating March 27, 2002
- ----------------
Kim D. Kelly Officer and Director
/s/ Dinesh C. Jain Senior Vice President and Chief Financial March 27, 2002
- ------------------
Dinesh C. Jain Officer (Principal Financial Officer)
/s/ Daniel Mannino Senior Vice President and Controller (Principal March 27, 2002
- ---------------------
Daniel Mannino Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Coaxial Financing Corp.
Date: March 27, 2002 By: /s/ Michael S. Willner
----------------------
Michael S. Willner, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board March 27, 2002
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive Officer and Director March 27, 2002
- ----------------------
Michael S. Willner (Principal executive officer)
/s/ Kim D. Kelly Executive Vice President, Chief Operating March 27, 2002
- ----------------
Kim D. Kelly Officer and Director
/s/ Dinesh C. Jain Senior Vice President and Chief Financial March 27, 2002
- -------------------
Dinesh C. Jain Officer (Principal Financial Officer)
/s/ Daniel Mannino Senior Vice President and Controller (Principal March 27, 2002
- ---------------------
Daniel Mannino Accounting Officer)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Insight Communications of Central Ohio, LLC
Date: March 27, 2002 By: /s/ Michael S. Willner
----------------------
Michael S. Willner, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board March 27, 2002
- --------------------
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive Officer and Director March 27, 2002
- ----------------------
Michael S. Willner (Principal executive officer)
/s/ Kim D. Kelly Executive Vice President, Chief Operating March 27, 2002
- ----------------
Kim D. Kelly Officer and Director
/s/ Dinesh C. Jain Senior Vice President and Chief Financial March 27, 2002
- ------------------
Dinesh C. Jain Officer (Principal Financial Officer)
/s/ Daniel Mannino Senior Vice President and Controller (Principal March 27, 2002
- ------------------
Daniel Mannino Accounting Officer)
Report of Independent Auditors
The Member of
Coaxial LLC
We have audited the accompanying consolidated balance sheets of Coaxial LLC (the
"Company") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in members' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2, the Company has no operations. The Company's ability to
satisfy its debt and related interest obligations is dependent upon funding from
a related entity in which it owns preferred equity interests which provide for
distributions in amounts equal to the payments required on its debt.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2001 and 2000 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-1
COAXIAL LLC
BALANCE SHEETS
(in thousands)
December 31, December 31,
2001 2000
------------- -------------
Assets
Investments $ 19,328 $ 18,800
Dividends receivable 5,250 5,250
------------ ------------
Total current assets 24,578 24,050
Deferred financing costs, net of accumulated amortization of $2,567
and $1,803 as of December 31, 2001 and 2000, respectively 3,814 4,578
Investment in affiliate 185,713 180,281
Note receivable - Coaxial DJM LLC 6,750 6,750
Note receivable - Coaxial DSM LLC 3,000 3,000
Interest receivable on notes 5,272 3,466
------------ ------------
Total assets $ 229,127 $ 222,125
============ ============
Liabilities and members' equity
Accrued interest $ 5,250 $ 5,250
------------ ------------
Total current liabilities 5,250 5,250
Senior discount notes 45,713 40,281
Senior notes, including $105.6 million to be paid by
Phoenix Associates (Note 5) 140,000 140,000
------------ ------------
Total liabilities 190,963 185,531
Commitments and contingencies
Members' equity:
In-substance allocation of proceeds related to senior notes to be paid
by Phoenix Associates (Note 2) (70,263) (80,819)
Members' accumulated equity 106,599 116,113
Accumulated other comprehensive income 1,828 1,300
------------ ------------
Total members' equity 38,164 36,594
------------ ------------
Total liabilities and members' equity $ 229,127 $ 222,125
============ ============
See accompanying notes
F-2
COAXIAL LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2001 2000 1999
------------ ------------ ------------
Revenue $ - $ 28,096 $ 46,747
Operating costs and expenses:
Programming and other operating costs - 10,955 16,863
Selling, general and administrative - 6,476 10,756
Depreciation and amortization 764 6,702 7,871
------------ ------------ ------------
Total operating costs and expenses 764 24,133 35,490
Operating income (loss) (764) 3,963 11,257
Other income (expense):
Interest income - related parties 1,806 1,602 1,374
Interest income - 50 208
Interest expense (19,432) (19,635) (18,550)
Dividend on preferred interests 19,432 7,882 -
Other - 31 92
------------ ------------ ------------
Total other income (expense), net 1,806 (10,070) (16,876)
Gain on sale of common equity interest - 171,460 -
------------ ------------ ------------
Net income (loss) $ 1,042 $ 165,353 $ (5,619)
============ ============ ============
See accompanying notes
F-3
COAXIAL LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
(in thousands)
In-substance
contribution Accumulated
(allocation) of other Total
proceeds from Members' comprehensive members'
senior notes equity (deficit) income equity (deficit)
------------------------------------------------------------------------------
Balance, January 1, 1999 $ (101,756) $ (24,673) $ - $ (126,429)
Capital contributions - 214 - 214
Capital distributions - (11,006) - (11,006)
Interest payments made by Phoenix
Associates on senior notes 10,381 - - 10,381
Net loss - (5,619) - (5,619)
------------------------------------------------------------------------------
Balance, December 31, 1999 (91,375) (41,084) - (132,459)
Capital contributions - 5,000 - 5,000
Capital distributions - (13,156) - (13,156)
Interest payments made by Phoenix
Associates on senior notes 10,556 - - 10,556
Net income - 165,353 - 165,353
Unrealized gain on investments - - 1,300 1,300
----------------
Total comprehensive income 166,653
------------------------------------------------------------------------------
Balance, December 31, 2000 (80,819) 116,113 1,300 36,594
Capital distributions - (10,556) - (10,556)
Interest payments made by Phoenix
Associates on senior notes 10,556 - - 10,556
Net income - 1,042 - 1,042
Change in unrealized gain on investments - - 528 528
----------------
Total comprehensive income 1,570
------------------------------------------------------------------------------
Balance, December 31, 2001 $ (70,263) $ 106,599 $ 1,828 $ 38,164
==============================================================================
See accompanying notes
F-4
COAXIAL LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
Operating activities:
Net income (loss) $ 1,042 $ 165,353 $ (5,619)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of common equity interest - (171,460) -
Provision for losses on trade accounts receivable - 367 918
Depreciation and amortization 764 6,702 7,871
Interest expense paid by affiliate 10,556 10,556 10,556
Dividend on preferred interest (19,432) (7,882) -
Accretion of original issue discount on Senior Discount Notes 5,432 4,725 4,046
Changes in operating assets and liabilities:
Trade accounts receivable - (516) 1,028
Launch funds receivable - - (1,474)
Prepaid expenses and other assets - (1,188) (1,681)
Accounts payable and accrued expenses - 567 5,810
Due to related parties - - (2,412)
Due from related parties (1,806) - -
----------- ----------- -----------
Net cash provided by (used in) operating activities (3,444) 7,224 19,043
----------- ----------- -----------
Investing activities:
Purchase of property and equipment - (19,943) (26,656)
Decrease in cash upon sale of common equity interest - (1,004) -
Purchase of intangible assets - (3) (98)
----------- ----------- -----------
Net cash used in investing activities - (20,950) (26,754)
----------- ----------- -----------
Financing activities:
Costs incurred in debt financing - - (212)
Principal payments on capital lease obligations - - (112)
Capital distributions (10,556) (13,156) (11,006)
Proceeds from dividend on preferred interests 14,000 12,000 214
Borrowings under senior credit facility - 14,000 11,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,444 12,844 (116)
----------- ----------- -----------
Net decrease in cash and cash equivalents - (882) (7,827)
Cash and cash equivalents, beginning of year - 882 8,709
----------- ----------- -----------
Cash and cash equivalents, end of year $ - $ - $ 882
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,444 $ 3,444 $ 3,680
Supplemental disclosure of significant non-cash financing activities:
In-substance contribution of proceeds related to senior notes $ 10,556 $ 10,556 $ 10,381
See accompanying notes
F-5
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67 1/2% of the common stock of Coaxial
Communications of Central Ohio, Inc. ("Coaxial"). The Company has one individual
as its sole member.
Coaxial, an Ohio corporation, through its ownership of preferred interests, has
a 30% voting interest in Insight Communications of Central Ohio, LLC ("Insight
Ohio"). Insight Ohio operates a cable television system that 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 and with the issuance of the Senior Notes and Senior Discount
Notes (Note 5) by Coaxial and the Company during 1998, the three individuals who
previously owned the outstanding stock of Coaxial contributed their stock to
three separate limited liability companies. Accordingly, Coaxial is a subsidiary
of the Company, which owns 67 1/2% of Coaxial's outstanding stock.
Other related entities affiliated with the Company in addition to Coaxial,
include 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.
The Company and Coaxial Financing Corp. are co-issuers of the Senior Discount
Notes. Coaxial and Phoenix are co-issuers of the Senior Notes. The ability of
Coaxial Financing Corp., the Company, Coaxial and Phoenix to make scheduled
payments with respect to the Senior Discount Notes and Senior Notes is dependent
on the financial and operating performance of Insight Ohio. The required
distributions on the Series A preferred equity interest and Series B preferred
equity interest to Coaxial are designed to provide the cash flow necessary to
service the debt requirements on the Senior Discount Notes and Senior Notes.
2. Summary of Significant Accounting Policies
Principles of Consolidation
On August 21, 1998, Coaxial and Insight Communications Company, L.P. ("Insight
LP") entered into a contribution agreement (the "Contribution Agreement")
pursuant to which Coaxial contributed substantially all of the assets and
liabilities comprising the System to a newly formed subsidiary, Insight Ohio. In
connection therewith, Insight Holdings of Ohio, LLC ("Insight Holdings"), a
wholly owned subsidiary of Insight LP, contributed $10.0 million in cash to
Insight Ohio. As a result of the Contribution Agreement, Coaxial owned 25% of
the non-voting common equity and Insight Holdings owned 75% of the non-voting
common equity of Insight Ohio. Coaxial also owns a $140.0 million Series A
preferred equity interest and a $30.0 million Series B preferred equity interest
of Insight Ohio.
F-6
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
On August 8, 2000, Insight LP purchased Coaxial's 25% non-voting common equity
interest in Insight Ohio. The purchase price was 800,000 shares of common stock
of Insight LP's general partner, Insight Communications Company, Inc. ("Insight
Inc.") 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. Additionally, the agreement was amended to incorporate 70% of Insight
Ohio's total voting power into the common equity interests of Insight Ohio and
30% of Insight Ohio's total voting power into the preferred equity interests of
Insight Ohio.
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 inter-company 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 Holdings of Ohio LLCs' 75% common equity interest in Insight Ohio
for any period prior to August 8, 2000.
As a result of the sale of Coaxial's common equity interest and change in voting
interest, the Company no longer consolidates the accounts of Insight Ohio
subsequent to August 8, 2000 and consequently has no operations.
Investments
Investments consist of 800,000 shares of common stock of Insight Inc. 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 members' equity (deficit).
Investment in Affiliate
In connection with the Contribution Agreement described in Note 1, Insight Ohio
issued to Coaxial a $140.0 million Series A preferred equity interest ("Series A
Preferred Interest") and a $30.0 million Series B preferred equity interest
("Series B Preferred Interest") (the "Preferred Interests"). These voting
Preferred Interests provide for distributions to Coaxial and indirectly to
Phoenix and the Company in amounts equal to the payments required on the Senior
Notes and the Senior Discount Notes issued by the Company due in August 2008
with a maturity value of $55.9 million. The accreted value of the Senior
Discount Notes was $45.6 million as of December 31, 2001. Additionally, the
Preferred Interests have liquidation preferences equal to the investment in
affiliate balance.
Fair Value of Financial Instruments
The carrying amounts of current assets (excluding investments which are carried
at fair value) and liabilities approximate their fair market value because of
the immediate or short-term maturity of these
F-7
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
financial instruments. The fair value of the Senior Discount Notes and the
Senior Notes was $42.6 million and $143.5 million and $40.8 million and $133.0
million as of December 31, 2001 and 2000, respectively.
Revenue Recognition
Prior to 2001, revenue included service, connection and launch fees. Service
fees were recorded in the month cable television and pay television services
were provided to subscribers. Connection fees were charged for the hook-up of
new customers and were recognized as current revenues. Launch fees were deferred
and amortized over the period of the underlying contract.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees associated with the senior notes and senior discount notes,
which are amortized over the life of the senior notes and senior discount notes,
respectively.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. Marketing and
promotional expense, primarily for campaign and telemarketing-related efforts,
was $758,000 and $1.3 million for the years ended December 31, 2000 and 1999,
respectively.
In-Substance Allocation of Note Proceeds
Since both Phoenix and Coaxial are severally and jointly liable, the Senior
Notes, deferred financing costs and associated interest expense are reflected in
the Company's financial statements as well as a charge to the equity section
representing an in-substance allocation of the proceeds from Phoenix's allocated
portion of the Senior Notes. Coaxial accrues interest on the total Senior Note
balance. When Phoenix makes interest payments, Coaxial reduces accrued interest
payable and records an in-substance contribution to equity.
Comprehensive Income
The Company owns common stock that is classified as available-for-sale and
reported at market value, with unrealized gains and losses recorded as
accumulated other comprehensive income or loss in the accompanying balance
sheets. Comprehensive income for the years ended December 31, 2001 and 2000 is
presented in the accompanying consolidated statements of changes in members'
equity (deficit).
F-8
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which is
effective for fiscal years beginning after December 15, 2001 and requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. This pronouncement is not
expected to have a material impact on the results of operations or statement of
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. The Company will adopt this pronouncement
beginning January 1, 2002. This pronouncement is not expected to have a material
impact on the results of operations or statement of position of the Company.
Income Taxes
The Company is a limited liability company. Therefore, its sole member reports
the income or loss on his income tax return. As a result, the Company does not
provide for federal or state income taxes in its accounts. In the event that the
limited liability company election is terminated, deferred taxes related to book
and tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
member is limited to his investment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
F-9
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 401(k) Plan
Insight Ohio sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. Insight Ohio's
contributions to the Plans, which were equal to a portion of the employees'
contributions up to 5% of the employees' wages, were $75,000 and $120,000 for
the years ended December 31, 2000 and 1999, respectively.
4. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of Insight Ohio
under an operating agreement dated August 21, 1998 that provided for a
management fee equal to 3% of Insight Ohio's gross operating revenues. In
connection with the purchase of Coaxial's 25% common equity interest in Insight
Ohio, Insight Ohio's operating agreement was amended to provide for Insight LP
to serve as manager of Insight Ohio. Fees under this operating agreement were
$870,000 and $1.4 million for the years ended December 31, 2000 and 1999,
respectively. Other related party transactions are described in Note 5.
5. Notes Payable
Senior Notes
On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140.0 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 contain
certain financial and other debt covenants.
The Series A Preferred Interest pays distributions in an amount equal to the
interest payments on the Senior Notes. The Series A Preferred Interest is owned
by Coaxial and is pledged to Bank of New York, 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. Coaxial, as joint and several issuer with Phoenix of the Senior Notes,
provides the funding which allows Phoenix to repay its share of the Senior
Notes, as Phoenix has no operations.
In connection with the issuance of the Senior Notes, Coaxial incurred financing
fees of $5.0 million that are being amortized over the life of the Senior Notes.
Amortization expense for these deferred financing costs was $628,000 for each of
the years ended December 31, 2001, 2000 and 1999. Interest expense on the Senior
Notes was $14.0 million for each of the years ended December 31, 2001, 2000 and
1999.
F-10
COAXIAL LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Notes Payable (continued)
On August 21, 1998, the Company and Coaxial Financing issued Senior Discount
Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes have a
maturity value of $55.9 million and $30.0 million of gross proceeds were
received upon issuance. Of the gross proceeds $19.5 million was contributed by
the sole member of the Company to certain related entities to repay
indebtedness. Of the remaining proceeds, $9.8 million was loaned to two related
entities (Coaxial DJM LLC and Coaxial DSM LLC) by the Company. The Company
received notes payable from these related entities with identical interest and
maturity terms to the Senior Discount Notes. The debt discount of $25.9 million
is being amortized using the effective interest method over five years through
August 15, 2003. Thereafter, interest on the Senior Discount Notes accrues at
127/8% per annum and is payable semi-annually. All of the proceeds from the
Senior Discount Notes were allocated to the Company.
In connection with the issuance of the Senior Discount Notes, the Company
incurred financing fees of approximately $1.4 million that are being amortized
over the life of the Senior Discount Notes. Amortization expense related to the
deferred financing costs was $136,000 for each of the years ended December 31,
2001, 2000 and 1999.
The Senior Discount Notes are non-recourse and secured by all of the common
stock of Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC to
the Company and conditionally guaranteed by Insight Ohio.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions and the transfer or sale of assets. The ability of Coaxial
Financing and the Company to make scheduled payments with respect to the Senior
Discount Notes will depend on the financial and operating performance of Insight
Ohio. The distributions on the Series A and B Preferred Interests equal the
interest payments on the senior notes and senior discount notes.
6. Commitments and Contingencies
Operating Lease Agreements
Through August 8, 2000, the Company leased land for tower locations, office
equipment, office space and vehicles under various operating lease agreements.
Rental expense related to operating lease agreements was $84,000 and $126,000
for the years ended December 31, 2000 and 1999, respectively. These amounts
exclude year-to-year utility pole leases of $114,000 and $191,000 for the year
ended December 31, 2000 and 1999, respectively, which provide for payments based
on the number of utility poles utilized.
F-11
Report of Independent Auditors
The Shareholders
Coaxial Financing Corp.
We have audited the accompanying balance sheets as of December 31, 2001 and 2000
and the related statements of operations, changes in shareholders' deficit and
cash flows of Coaxial Financing Corp. (the "Company") for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, the Company 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 the Company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000 and the results of their operations and cash flows for the each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-12
COAXIAL FINANCING CORP.
BALANCE SHEETS
(in thousands)
December 31, December 31,
2001 2000
------------- --------------
(Note 2)
Assets
Cash $ 1 $ 1
Deferred financing costs, net 898 1,034
------------- --------------
Total assets $ 899 $ 1,035
============= ==============
Liabilities and shareholders' deficit
Senior discount notes $ 45,713 $ 40,281
Shareholders' deficit:
Common stock; $.01 par value; 1,000 shares authorized,
issued and outstanding - -
Paid-in-capital 1 1
In-substance allocation of proceeds related to senior
discount notes to be paid by Coaxial LLC (28,646) (28,646)
Accumulated deficit (16,169) (10,601)
------------- --------------
Total shareholders' deficit (44,814) (39,246)
------------- --------------
Total liabilities and shareholders' deficit $ 899 $ 1,035
============= ==============
See accompanying notes
F-13
COAXIAL FINANCING CORP.
STATEMENTS OF OPERATIONS
(in thousands)
Year Ended December 31,
2001 2000 1999
---------- ------------ ------------
Expenses:
Amortization $ (136) $ (136) $ (136)
Interest (5,432) (4,725) (4,046)
---------- ---------- ----------
Net loss $ (5,568) $ (4,861) $ (4,182)
========== ========== ==========
See accompanying notes
F-14
COAXIAL FINANCING CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
(in thousands)
In-substance
allocation of
Additional proceeds Total
paid-in- from senior Accumulated shareholders'
capital notes deficit deficit
------------ ---------- ------------ -----------
Balance, January 1, 1999 $ 1 $ (28,646) $ (1,558) $ (30,203)
Net loss - - (4,182) (4,182)
------------ --------- ------------ -----------
Balance, December 31, 1999 1 (28,646) (5,740) (34,385)
Net loss - - (4,861) (4,861)
------------ --------- ------------ -----------
Balance, December 31, 2000 1 (28,646) (10,601) (39,246)
Net loss - - (5,568) (5,568)
------------ --------- ------------ -----------
Balance, December 31, 2001 $ 1 $ (28,646) $ (16,169) $ (44,814)
============ ========= ============ ===========
See accompanying notes
F-15
COAXIAL FINANCING CORP.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2001 2000 1999
--------- ---------- ---------
Cash flows from operating activities:
Net loss $ (5,568) $ (4,861) $ (4,182)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization of deferred financing costs 136 136 136
Accretion of original issue discount on senior discount notes
assumed by affiliate 5,432 4,725 4,046
---------- ---------- ----------
Net cash provided by operating activities - - -
---------- ---------- ----------
Net increase in cash - - -
Cash, beginning of period 1 1 1
---------- ---------- ----------
Cash, end of period $ 1 $ 1 $ 1
========== ========== ==========
See accompanying notes
F-16
COAXIAL FINANCING CORP.
NOTES TO FINANCIAL STATEMENTS
1. Organization
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on
July 24, 1998, for the sole purpose of being a co-issuer of the discount notes
described in Note 3, which allows certain investors the ability to be holders of
the debt. The Company has no operations. Three individuals own the outstanding
shares of the Company.
2. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees associated with the senior discount notes, which are amortized
over the life of the senior discount notes.
Fair Value of Financial Instruments
The fair value of the senior discount notes as of December 31, 2001 and 2000 was
$42.6 million and $40.8 million, respectively.
In-Substance Allocation of Note Proceeds
Since both Coaxial LLC and the Company are severally and jointly liable, the
senior discount notes, deferred financing costs and associated interest expense
are reflected in the Company's financial statements as well as a charge to the
equity section representing an in-substance allocation of the proceeds from the
senior discount notes received by Coaxial LLC in 1998. The Company has accreted
interest on the outstanding balance and will accrue interest when it begins to
become payable in 2003. When Coaxial LLC makes an interest payment or repays the
debt, the Company will reduce accrued interest or the debt balance and record an
in-substance contribution to equity.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which is
effective for fiscal years beginning after December 15, 2001 and requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. This pronouncement is not
expected to have a material impact on the results of operations or statement of
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. The Company will adopt this pronouncement
beginning January 1, 2002. This pronouncement is not expected to have a material
impact on the results of operations or statement of position of the Company.
F-17
COAXIAL FINANCING CORP.
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company has prepared its income tax provision using the liability method in
accordance with Financial Accounting Standards Board Statement No.109,
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse. As of
December 31, 2001 and 2000 the Company had no deferred tax assets or liabilities
and no tax provision to record.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Notes Payable
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior
Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes
have a maturity value of $55.9 million and $30.0 million of gross proceeds were
received upon issuance. Of the gross proceeds, $19.5 million was contributed by
the sole member of Coaxial LLC to certain related entities to repay
indebtedness. In addition, $9.8 million was loaned to two related entities
("Coaxial DJM LLC" and "Coaxial DSM LLC") by Coaxial LLC. The debt discount of
$25.9 million is being amortized, using the effective interest method, over five
years through August 15, 2003. Thereafter, interest on the Senior Discount Notes
accrues at 127/8% per annum and is payable semi-annually. All of the proceeds
from the Senior Discount Notes were allocated to Coaxial LLC.
The Senior Discount Notes are non-recourse, secured by all of the common stock
of Coaxial Communications of Central Ohio, Inc. ("Coaxial") and the notes issued
by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally
guaranteed by Insight Communications of Central Ohio, LLC ("Insight Ohio"), an
affiliate of Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets.
The ability of the Company and Coaxial LLC to make scheduled payments with
respect to the Senior Discount Notes will depend on the financial and operating
performance of Insight Ohio. Although the Company is a co-issuer of the Senior
Discount Notes, it has no substantial assets or any operations and will not have
access to additional sources of cash flow to make any payments on such debt.
F-18
Report of Independent Auditors
The Shareholders
Coaxial Communications of Central Ohio, Inc.
We have audited the accompanying balance sheets of Coaxial Communications of
Central Ohio, Inc. (the "Company") as of December 31, 2001, and 2000, and the
related consolidated statements of operations and changes in shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2, the Company has no operations. The Company's ability to
satisfy its debt and related interest obligations is dependent upon funding from
a related entity in which it owns preferred equity interests which provide for
distributions in amounts equal to the payments required on its debt.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2001, and 2000 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-19
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
BALANCE SHEETS
(in thousands)
December 31,
2001 2000
---------------------------
Assets
Investments $ 19,328 $ 18,800
Dividend receivable 5,250 5,250
---------------------------
Total current assets 24,578 24,050
Deferred financing costs, net of accumulated amortization of $2,112 and
$1,484 as of December 31, 2001 and 2000, respectively 2,915 3,543
Investment in affiliate 185,713 180,281
---------------------------
Total assets $ 213,206 $ 207,874
===========================
Liabilities and shareholders' equity
Accrued interest $ 5,250 $ 5,250
---------------------------
Total current liabilities 5,250 5,250
Senior notes, including $105.6 million to be paid by Phoenix
Associates (Note 5) 140,000 140,000
---------------------------
Total liabilities 145,250 145,250
Commitments and contingencies
Shareholders' equity:
Common stock; $1 par value; 2,000 shares authorized; 1,080 shares
issued and outstanding as of December 31, 2001 and 2000 1 1
Paid in capital 11,501 11,501
In-substance allocation of proceeds related to senior notes to be paid by
Phoenix Associates (Note 2) (70,263) (80,819)
Retained earnings 124,889 130,641
Accumulated other comprehensive income 1,828 1,300
---------------------------
Total shareholders' equity 67,956 62,624
---------------------------
Total liabilities and shareholders' equity $ 213,206 $ 207,874
===========================
See accompanying notes
F-20
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31,
2001 2000 1999
---------------------------------------
Revenue $ - $ 28,096 $ 46,747
Operating costs and expenses:
Programming and other operating costs - 10,955 16,863
Selling, general and administrative - 6,476 10,756
Depreciation and amortization 628 6,474 7,769
----------------------------------------
Total operating costs and expenses 628 23,905 35,388
Operating income (loss) (628) 4,191 11,359
Other income (expense):
Interest income - 50 208
Interest expense (14,000) (14,911) (14,505)
Gain on sale of common equity interest of affiliate - 171,460 -
Dividend on preferred interests 19,432 7,882 -
Other - 31 92
----------------------------------------
Total other income (expense), net 5,432 164,512 (14,205)
----------------------------------------
Net income (loss) $ 4,804 $ 168,703 $ (2,846)
========================================
See accompanying notes
F-21
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
In-substance
contribution
(allocation) of Accumulated Total
proceeds Retained other shareholders'
Common Paid-in- related to earnings comprehensive equity
stock capital senior notes (deficit) income (deficit)
--------------------------------------------------------------------------------------------
Balance, January 1, 1999 $ 1 $ 11,501 $ (101,756) $ (16,134) $ - $ (106,388)
Capital distributions - - - (10,926) - (10,926)
Interest payments made by Phoenix
Associates on senior notes - - 10,381 - - 10,381
Net loss - - - (2,846) - (2,846)
--------------------------------------------------------------------------------------------
Balance, December 31, 1999 1 11,501 (91,375) (29,906) - (109,779)
Capital contributions - - - 5,000 - 5,000
Capital distributions - - - (13,156) - (13,156)
Interest payments made by Phoenix
Associates on senior notes - - 10,556 - - 10,556
Net income - - - 168,703 - 168,703
Unrealized gain on investments - - - - 1,300 1,300
--------------
Total comprehensive income 170,003
--------------------------------------------------------------------------------------------
Balance, December 31, 2000 1 11,501 (80,819) 130,641 1,300 62,624
Capital contributions - - - - -
Capital distributions - - - (10,556) - (10,556)
Interest payments made by Phoenix
Associates on senior notes - - 10,556 - - 10,556
Net income - - - 4,804 - 4,804
Change in unrealized gain on
investments - - - - 528 528
--------------
Total comprehensive income 5,332
--------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 1 $ 11,501 $ (70,263) $ 124,889 $ 1,828 $ 67,956
============================================================================================
See accompanying notes
F-22
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2001 2000 1999
-------------------------------------------------
Operating activities:
Net income (loss) $ 4,804 $ 168,703 $ (2,846)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 628 6,474 7,769
Interest expense paid by affiliate 10,556 10,556 10,556
Provision for losses on trade accounts receivable - 367 918
Gain on sale of common equity interest - (171,460) -
Dividend on preferred interest (19,432) (7,882) -
Changes in operating assets and liabilities:
Trade accounts receivable - (516) 1,028
Launch funds receivable - - (1,474)
Prepaid expenses and other current assets - 415 (1,681)
Accounts payable and accrued expenses - 567 5,811
Due to related parties - - (1,038)
-------------------------------------------------
Net cash provided by (used in) operating activities (3,444) 7,224 19,043
-------------------------------------------------
Investing activities:
Purchase of property and equipment - (19,943) (26,656)
Decrease in cash upon sale of common equity interest - (1,004) -
Increase in intangible assets - (3) (98)
-------------------------------------------------
Net cash used in investing activities - (20,950) (26,754)
-------------------------------------------------
Financing activities:
Costs incurred in debt financing - - (78)
Principal payments on capital lease obligations - - (112)
Capital distributions (10,556) (13,156) (10,926)
Proceeds from dividend on preferred interest 14,000 - -
Capital contributions - 12,000 -
Borrowings under senior credit facility - 14,000 11,000
-------------------------------------------------
Net cash provided by (used in) financing activities 3,444 12,844 (116)
-------------------------------------------------
Net decrease in cash and cash equivalents - (882) (7,827)
Cash and cash equivalents, beginning of year - 882 8,709
-------------------------------------------------
Cash and cash equivalents, end of year $ - $ - $ 882
=================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,444 $ 3,444 $ 3,680
Supplemental disclosure of significant non-cash
financing activities:
In-substance contribution of proceeds related to senior
notes $ 10,556 $ 10,556 $ 10,381
See accompanying notes
F-23
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business Organization and Purpose
Coaxial Communications of Central Ohio, Inc. (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 that provides basic and
expanded cable services to homes in the eastern parts of Columbus, Ohio and
surrounding areas.
In connection with the contribution of the Company's cable system ("the System")
described below and with the issuance of the Senior Notes and Senior Discount
Notes (Note 5) by the Company's majority shareholder, Coaxial LLC 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
the Company's outstanding stock.
Other related entities affiliated with the Company in addition to Coaxial LLC,
include 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 August 21, 1998, the Company and Insight Communications Company, L.P.
("Insight LP") entered into a contribution agreement (the "Contribution
Agreement") pursuant to which the Company contributed substantially all of the
assets and liabilities comprising the System to a newly formed subsidiary,
Insight Ohio. In connection therewith, Insight Holdings of Ohio, LLC ("Insight
Holdings"), a wholly owned subsidiary of Insight LP, contributed $10.0 million
in cash to Insight Ohio. As a result of the Contribution Agreement, the Company
owned 25% of the non-voting common equity and Insight Holdings owned 75% of the
non-voting common equity of Insight Ohio. The Company also owns a $140.0 million
Series A preferred equity interest and a $30.0 million Series B preferred equity
interest of Insight Ohio (Note 2).
On August 8, 2000, Insight LP purchased the Company's 25% non-voting common
equity interest in Insight Ohio. The purchase price was 800,000 shares of common
stock of Insight LP's general partner, Insight Communications Company, Inc.
("Insight Inc.") 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 the Company and the
Coaxial Entities. Additionally, the agreement was amended to incorporate 70% of
Insight Ohio's total voting power into the common equity interests of Insight
Ohio and 30% of Insight Ohio's total voting power into the preferred equity
interests of Insight Ohio.
As a result of this transaction, the Company recorded a gain on the sale of its
common equity interest of $171.5 million which is equal to the difference
between the value of the shares of Insight Inc. common stock and cash received
plus the fair value of a guaranteed security price adjustment ($20.1 million) as
compared to the Company's recorded investment in Insight Ohio (net liability of
$151.4 million) as of the transaction date. The accompanying consolidated
financial statements include the accounts of Insight Ohio through August 8,
2000. As a result of the sale of the Company's common equity interest and change
in voting interest, the Company no longer consolidates the accounts of Insight
Ohio
F-24
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Business Organization and Purpose (continued)
subsequent to August 8, 2000 and consequently has no operations.
Insight Ohio is prohibited by the terms of its indebtedness from making
distributions to Insight Inc. or any of its subsidiaries. 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, the principals of the Coaxial Entities may
require Insight Inc. 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 Insight Inc. common stock
issued on August 8, 2000. The fair value of the aforementioned guaranteed
security price of $32.6 million compared to the market value of the 800,000
shares of Insight Inc. common stock as of the date of acquisition was $7.1
million.
2. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of the Company'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 inter-company 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 Holdings' 75% common equity interest in Insight Ohio for any period
prior to August 8, 2000.
As a result of the sale of its common equity interest and change in voting
interest, the Company no longer consolidates the accounts of Insight Ohio
subsequent to August 8, 2000 and consequently has no operations.
Investments
Investments consist of 800,000 shares of common stock of Insight Inc. These
securities are classified as available-for-sale under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". 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.
Investment in Affiliate
In connection with the Contribution Agreement, Insight Ohio issued to the
Company a $140.0 million Series A preferred equity interest ("Series A Preferred
Interest") and a $30.0 million Series B preferred equity interest ("Series B
Preferred Equity Interest") (the "Preferred Interests"). These voting Preferred
Interests provide for distributions to the Company and indirectly to Phoenix and
Coaxial LLC in amounts equal to the payments required on the Senior Notes and
the Senior Discount Notes issued by Coaxial LLC ("Senior Discount Notes") due in
August 2008 with a maturity value of $55.9 million. The accreted value of the
Senior Discount Notes was $45.6 million as of December 31, 2001.
F-25
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Additionally, the Preferred Interests have liquidation preferences equal to the
investment in affiliate balance.
Fair Value of Financial Instruments
The carrying amounts of current assets (excluding investments which are carried
at fair value) and liabilities approximate their fair market value because of
the immediate or short-term maturity of these financial instruments. The fair
value of the Senior Notes was $143.5 million and $133.0 million as of December
31, 2001 and 2000, respectively.
Revenue Recognition
Prior to 2001, revenue includes service, connection and launch fees. Service
fees are recorded in the month cable television and pay television services are
provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues. Launch fees are deferred and
amortized over the period of the underlying contract.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees incurred to negotiate and secure the senior notes. These costs
are being amortized over the life of the senior notes.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. Marketing and
promotional expense, primarily for campaign and telemarketing-related efforts,
was $758,000 and $1.3 million for the years ended December 31, 2000 and 1999,
respectively.
In-Substance Allocation of Note Proceeds
Since both Phoenix and the Company are severally and jointly liable, the Senior
Notes, deferred financing costs and associated interest expense are reflected in
the Company's financial statements as well as a charge to the equity section
representing an in-substance allocation of the proceeds from Phoenix's allocated
portion of the Senior Notes. The Company accrues interest on the total Senior
Note balance. When Phoenix makes interest payments, the Company reduces accrued
interest payable and records an in-substance contribution to equity.
Comprehensive Income
The Company owns common stock that is classified as available-for-sale and
reported at market value, with unrealized gains and losses recorded as
accumulated other comprehensive income or loss in the accompanying balance
sheets. Comprehensive income for the years ended December 31, 2001 and 2000 is
presented in the accompanying consolidated statements of changes in
shareholders' equity (deficit).
F-26
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which is
effective for fiscal years beginning after December 15, 2001 and requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. This pronouncement is not
expected to have a material impact on the results of operations or statement of
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. The Company will adopt this pronouncement
beginning January 1, 2002. This pronouncement is not expected to have a material
impact on the results of operations or statement of position of the Company.
Income Taxes
The Company is a Subchapter S corporation. Therefore, each shareholder reports
his distributive share of income or loss on his respective income tax return. As
a result, the Company does not provide for federal or state income taxes in its
accounts. In the event that the Subchapter S corporation election is terminated,
deferred taxes related to book and tax temporary differences would be required
to be reflected in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. 401(k) Plan
Insight Ohio sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. Insight Ohio's
contributions to the Plans, which were equal to a portion of the employees'
contributions up to 5% of the employees' wages, were $75,000 and $120,000 for
the years ended December 31, 2000 and 1999, respectively.
F-27
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of Insight Ohio
under an operating agreement dated August 21, 1998 which provided for a
management fee equal to 3% of Insight Ohio's gross operating revenues. In
connection with the purchase of Coaxial's 25% common equity interest in Insight
Ohio, Insight Ohio's operating agreement was amended to provide for Insight LP
to serve as manager of Insight Ohio. Fees under this operating agreement were
$870,000 and $1.4 million for the years ended December 31, 2000 and 1999,
respectively.
5. Notes Payable
On August 21, 1998, the Company and Phoenix Associates completed an offering of
$140.0 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to the Company.
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 contain
certain financial and other debt covenants.
The Series A Preferred Interest pays distributions in an amount equal to the
interest payments on the Senior Notes. The Series A Preferred Interest is owned
by the Company and is pledged to Bank of New York, as trustee, for the benefit
of the holders of the Senior Notes. The ability of the Phoenix and the Company
to make scheduled payments with respect to the Senior Notes will depend on the
financial and operating performance of Insight Ohio. The required payments on
the Series A Preferred Interest equals the distributions to be made to the
Company to service the Senior Notes.
In connection with the issuance of the Senior Notes, the Company incurred
financing fees of $5.0 million that are being amortized over the life of the
Senior Notes. Amortization expense for these deferred financing costs was
$628,000 for each of the years ended December 31, 2001, 2000 and 1999. Interest
expense on the Senior Notes was $14.0 million for each of the years ended
December 31, 2001, 2000 and 1999.
6. Commitments and Contingencies
Operating Lease Agreements
Through August 8, 2000, the Company leased land for tower locations, office
equipment, office space and vehicles under various operating lease agreements.
Rental expense related to operating lease agreements was $84,000 and $126,000
for the years ended December 31, 2000 and 1999, respectively. These amounts
exclude year-to-year utility pole leases of $114,000 and $191,000 for the years
ended December 31, 2000 and 1999, which provide for payments based on the number
of utility poles utilized.
F-28
Report of Independent Auditors
The General Partners
Phoenix Associates
We have audited the accompanying balance sheets of Phoenix Associates (the
"Company") as of December 31, 2001 and 2000, and the related statements of
operations, changes in partners' deficit and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, the Company 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 the Company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-29
PHOENIX ASSOCIATES
BALANCE SHEETS
(in thousands)
December 31,
2001 2000
-----------------------
Assets
Interest receivable $ 531 $ 373
Notes receivable - related parties 550 -
-----------------------
Total current assets 1,081 373
Due from related party 406 406
Notes receivable - related parties - 550
Deferred financing costs, net of accumulated
amortization of $2,112 and $1,484 as
of December 31, 2001 and 2000, respectively 2,915 3,543
-----------------------
Total assets $ 4,402 $ 4,872
=======================
Liabilities and partners' deficit
Interest payable $ 5,250 $ 5,250
-----------------------
Total current liabilities 5,250 5,250
Senior notes, including $34.4 million to be paid by
Coaxial Communications of
Central Ohio, Inc. (Note 4) 140,000 140,000
-----------------------
Total liabilities 145,250 145,250
Commitments and contingencies
Partners' deficit:
In-substance allocation of proceeds related to senior
notes to be paid by Coaxial
Communications of Central Ohio, Inc. (Note 2) (22,877) (26,321)
Partners' accumulated deficit (117,971) (114,057)
-----------------------
Total partners' deficit (140,848) (140,378)
-----------------------
Total liabilities and partners' deficit $ 4,402 $ 4,872
=======================
See accompanying notes
F-30
PHOENIX ASSOCIATES
STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31,
2001 2000 1999
----------------------------------
Expenses:
Amortization $ (628) $ (628) $ (628)
Interest income (expense):
Interest income-related parties 158 158 158
Interest expense (14,000) (14,000) (14,000)
----------------------------------
Total interest expense, net (13,842) (13,842) (13,842)
----------------------------------
Net loss $(14,470) $(14,470) $(14,470)
==================================
See accompanying notes
F-31
PHOENIX ASSOCIATES
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands)
In-substance
contributions
(allocations) Partners'
related to accumulated Total partners'
senior notes deficit deficit
------------------------------------------------
Balance, January 1, 1999 $ (33,209) $(106,294) $(139,503)
Capital contributions - 10,621 10,621
Interest payments made by Coaxial Communications of Central
Ohio, Inc. on senior notes 3,444 - 3,444
Net loss - (14,470) (14,470)
------------------------------------------------
Balance, December 31, 1999 (29,765) (110,143) (139,908)
Capital contributions - 10,556 10,556
Interest payments made by Coaxial Communications of Central
Ohio, Inc. on senior notes 3,444 - 3,444
Net loss - (14,470) (14,470)
------------------------------------------------
Balance, December 31, 2000 (26,321) (114,057) (140,378)
Capital contributions - 10,556 10,556
Interest payments made by Coaxial Communications of Central
Ohio, Inc. on senior notes 3,444 - 3,444
Net loss - (14,470) (14,470)
------------------------------------------------
Balance, December 31, 2001 $ (22,877) $(117,971) $(140,848)
================================================
See accompanying notes
F-32
PHOENIX ASSOCIATES
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2001 2000 1999
--------------------------------
Operating activities:
Net loss $(14,470) $(14,470) $(14,470)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred financing costs 628 628 628
Interest expense paid by affiliate 3,444 3,444 3,444
Changes in operating assets and liabilities:
Interest receivable (158) (158) (158)
Interest payable - - 176
--------------------------------
Net cash used in operating activities (10,556) (10,556) (10,380)
--------------------------------
Financing activities:
Capital contributions 10,556 10,556 10,621
Increase in deferred financing costs - - (241)
--------------------------------
Net cash provided by financing activities 10,556 10,556 10,380
--------------------------------
Net decrease in cash - - -
Cash, beginning of year - - -
--------------------------------
Cash, end of year $ - $ - $ -
================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,556 $ 10,556 $ 10,380
Supplemental disclosure of significant non-cash financing activities:
In-substance contribution related to senior notes to be paid by Coaxial
Communications of Central Ohio, Inc. $ 3,444 $ 3,444 $ 3,444
See accompanying notes
F-33
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Phoenix Associates (the "Company") is a Florida general partnership originally
organized for the 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. The Company has no operations. The Company's ability to satisfy debt
and other obligations is dependent upon funding from related entities, which are
under the common control of the Company's owners. The Company 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").
The Company consists of three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with the Company include Coaxial LLC, Coaxial
Financing Corp., Insight Communications of Central Ohio, LLC ("Insight Ohio"),
Coaxial Communications of Southern Ohio, Inc., Coaxial Associates of Columbus I
("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"), Paxton Cable
Television, Inc. and Paxton Communications, Inc.
On August 21, 1998, Coaxial and Insight Communications Company, L.P. ("Insight
LP") 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 ("Insight Holdings"), a wholly owned
subsidiary of Insight LP, contributed $10.0 million in cash to Insight Ohio. As
a result of this Contribution Agreement, Coaxial owned 25% of the non-voting
common equity and Insight Holdings owned 75% of the non-voting common equity of
Insight Ohio.
On August 8, 2000, Insight LP purchased Coaxial's 25% non-voting common equity
interest in Insight Ohio. The purchase price was 800,000 shares of common stock
of Insight LP's general partner, Insight Communications Company, Inc. 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"). Additionally, the agreement was amended to incorporate
70% of Insight Ohio's total voting power into the common equity interests of
Insight Ohio and 30% of Insight Ohio's total voting power into the Preferred
Interests of Insight Ohio.
Coaxial also owns a $140.0 million Series A preferred equity interest and a
$30.0 million Series B preferred equity interest of Insight Ohio the ("Series A
Preferred Interest" and "Series B Preferred Interest," respectively). These
voting preferred equity interests provide for distributions to Coaxial equal in
amount to the payments on the Senior Notes and Senior Discount Notes discussed
in Note 4. Coaxial will make distributions that will enable the Company to fund
the required payments on the senior notes.
F-34
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees incurred to negotiate and secure the senior notes. These costs
are being amortized over the life of the senior notes.
Fair Value of Financial Instruments
The fair value of the Senior Notes was $143.5 million and $133.0 million as of
December 31, 2001 and 2000, respectively.
In-Substance Allocation of Note Proceeds
Since both Coaxial and the Company are severally and jointly liable, the Senior
Notes, deferred financing costs and associated interest expense are reflected in
the Company's financial statements as well as a charge to the equity section
representing an in-substance allocation of the proceeds from Coaxial's allocated
portion of the Senior Notes. The Company accrues interest on the total Senior
Note balance. When Coaxial makes interest payments, the Company reduces accrued
interest payable and records an in-substance contribution to equity.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which is
effective for fiscal years beginning after December 15, 2001 and requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. This pronouncement is not
expected to have a material impact on the results of operations or statement of
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. The Company will adopt this pronouncement
beginning January 1, 2002. This pronouncement is not expected to have a material
impact on the results of operations or statement of position of the Company.
Income Taxes
The Company is a general partnership. Therefore, each partner reports its
distributive share of income or loss on its respective income tax returns. As a
result, the Company does not provide for Federal or State income taxes in its
financial statements.
F-35
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. Related Party Transactions
Due From Related Party
Due from related party of $406,000 represents advances to Columbus I. Interest
accrues on these advances at an annual rate of 5.5%. Interest income recorded on
these advances for each of the years ended December 31, 2001, 2000 and 1999 was
$22,000.
Notes Receivable
The Company had the following notes and accrued interest receivable from related
parties at December 31, 2001 and 2000 (in thousands):
Columbus I $ 2,349
Columbus II 118
---------
Total face amount of notes receivable 2,467
Less: Amounts in excess of purchase price (1,917)
---------
Notes and accrued interest receivable, net $ 550
=========
Columbus I
- ----------
The $2,349,000 due from Columbus I represents a note, including past due
interest that was added to the principal, which was purchased from CNA Financial
Corporation on November 24, 1982. The Company recognized interest income, at an
annual rate of 5.5%, of $129,000 for each of the years ended December 31, 2001,
2000 and 1999. The principal is due and payable to the Company on October 31,
2002.
F-36
PHOENIX ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Related Party Transactions (continued)
Columbus II
- -----------
The $118,000 due from Columbus II represents a note, including past due interest
that was added to the principal, which was purchased from CNA Financial
Corporation on November 24, 1982. The Company recognized interest income, at an
annual rate of 5.5%, of $6,500 for each of the years ended December 31, 2001,
2000 and 1999. The principal is due and payable to the Company on October 31,
2002.
In August 1998, in connection with the issuance of the Senior Notes, a portion
of the notes receivable from Columbus II was settled. The amount in excess of
the purchase price relating to these notes was realized at the time of the
settlement. Amounts in excess of purchase price represent the difference between
the face amount and the accrued interest receivable on the notes purchased and
the price paid. The amounts in excess of purchase price will be recognized when
the principal due on the notes is received, net of any costs associated with
final settlement.
These related entities are under the control of the Company's partners. The
partners have represented that substantially all of these amounts will be
settled among the parties. As a result, these notes are not being accreted to
face value.
4. Notes Payable
On August 21, 1998, Coaxial and the Company completed an offering of $140.0
million 10% Senior Notes ("Senior Notes") due in August 2006. The proceeds of
the Senior Notes were allocated $105.6 million to the Company and $34.4 million
to Coaxial. Interest payments commenced on February 15, 1999. Interest is
payable in cash semi-annually on each February 15 and August 15. The Senior
Notes contain certain financial and other debt covenants.
The Senior Notes are secured by the outstanding Series A Preferred Interest in
Insight Ohio. The Series A Preferred Interest has a liquidation preference of
$140.0 million and pays distributions in an amount equal to the interest
payments on the Senior Notes. The Series A Preferred Interest is owned by
Coaxial and is pledged to Bank of New York, as trustee, for the benefit of the
holders of the Senior Notes. Coaxial will utilize cash distributions on the
Series A Preferred Interest to make payments on the Senior Notes, including
distributions to the Company. Although the Company is a co-issuer of the Senior
Notes, it has no substantial assets or any operations and will not have access
to additional sources of cash flow other than contributions from Coaxial.
In connection with the issuance of the Senior Notes, Coaxial and the Company
incurred financing fees of $5.0 million that are being amortized over the life
of the Senior Notes.
F-37
Report of Independent Auditors
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheets of Insight Communications of
Central Ohio, LLC (the "Company") as of December 31, 2001 and 2000, and the
related statements of operations and changes in members' deficit and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2002
F-38
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEETS
(in thousands)
December 31,
2001 2000
--------------------------
Assets
Cash and cash equivalents $ 2,158 $ 1,169
Trade accounts receivable, net of allowance for doubtful accounts of
$158 and $390 as of December 31, 2001 and 2000, respectively 2,599 2,782
Launch funds receivable 1,327 1,936
Prepaid expenses and other assets 401 437
--------------------------
Total current assets 6,485 6,324
Fixed assets, net 91,673 76,587
Intangible assets, net 499 448
--------------------------
Total assets $ 98,657 $ 83,359
==========================
Liabilities and members' deficit
Accounts payable $ 5,689 $ 5,679
Accrued expenses and other liabilities 1,331 1,383
Accrued programming costs 2,194 3,014
Deferred revenue 1,219 545
Interest payable 232 786
Preferred interest distribution payable 5,250 5,250
Due to affiliates 5,890 1,502
--------------------------
Total current liabilities 21,805 18,159
Deferred revenue 1,559 2,005
Debt 25,000 25,000
--------------------------
Total liabilities 48,364 45,164
Commitments and contingencies
Preferred interests 185,713 180,281
Members' deficit (135,420) (142,086)
--------------------------
Total liabilities and members' deficit $ 98,657 $ 83,359
==========================
See accompanying notes
F-39
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(in thousands)
Year ended December 31,
2001 2000 1999
--------------------------------------------
Revenue $ 55,494 $ 49,749 $ 46,747
Operating costs and expenses:
Programming and other operating costs 22,129 19,509 16,863
Selling, general and administrative 10,745 10,069 9,321
Management fees 1,664 1,493 1,435
Depreciation and amortization 13,397 10,882 7,148
--------------------------------------------
Total operating costs and expenses 47,935 41,953 34,767
Operating income 7,559 7,796 11,980
Other income (expense):
Interest expense (1,732) (1,883) (505)
Interest income 50 91 208
Other (279) (274) 92
--------------------------------------------
Total other expense, net (1,961) (2,066) (205)
Net income 5,598 5,730 11,775
Accrual of preferred interests (19,432) (18,725) (17,928)
--------------------------------------------
Net loss attributable to common interests (13,834) (12,995) (6,153)
Members' deficit, beginning of period (142,086) (149,491) (144,718)
Capital contributions 20,500 20,400 2,000
Capital distributions - - (620)
--------------------------------------------
Members' deficit, end of period $ (135,420) $ (142,086) $ (149,491)
============================================
See accompanying notes
F-40
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2001 2000 1999
------------------------------------------
Operating activities:
Net income $ 5,598 $ 5,730 $ 11,775
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,397 10,882 7,148
Provision for losses on trade accounts receivable 1,352 1,058 918
Changes in operating assets and liabilities:
Trade accounts receivable (1,169) (1,464) 1,028
Launch funds receivable 609 (462) (1,474)
Prepaid expenses and other assets 36 (190) (1,681)
Accounts payable and accrued expenses 10 (1,202) 5,749
Due to affiliates 3,190 1,643 (1,038)
------------------------------------------
Net cash provided by operating activities 23,023 15,995 22,425
------------------------------------------
Investing activities:
Purchase of property and equipment (28,409) (35,982) (26,656)
Purchase of intangible assets (125) (91) (98)
------------------------------------------
Net cash used in investing activities (28,534) (36,073) (26,754)
------------------------------------------
Financing activities:
Principal payments on capital lease obligations - (35) (112)
Capital contributions 20,500 20,400 2,000
Capital distributions - - (620)
Preferred interest distribution (14,000) (14,000) (13,766)
Borrowings under senior credit facility - 14,000 11,000
------------------------------------------
Net cash provided by (used in) financing activities 6,500 20,365 (1,498)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 989 287 (5,827)
Cash and cash equivalents, beginning of year 1,169 882 6,709
------------------------------------------
Cash and cash equivalents, end of year $ 2,158 $ 1,169 $ 882
==========================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,395 $ 1,276 $ 293
See accompanying notes
F-41
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC (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
system of Coaxial Communications of Central Ohio, Inc. ("Coaxial").
On August 21, 1998, Coaxial contributed to the Company 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 as well as
100% of the voting preferred membership interests in the Company (the "Preferred
Interests"). In conjunction therewith, Insight Holdings of Ohio, LLC ("Insight
Holdings"), a wholly-owned subsidiary of Insight Communications Company, L.P.
("Insight LP") contributed $10.0 million in cash to the Company 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
$140.0 million of 10% Senior Notes ("Senior Notes") due in August 2006. The
Senior Notes are non-recourse and are secured by the issued and outstanding
Series A Preferred Interest and are conditionally guaranteed by the Company. On
August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related entities,
issued 12 7/8% Senior Discount Notes due in August 2008 ("Senior Discount
Notes"). The Senior Discount Notes have a face amount of $55.9 million and
resulted in gross proceeds of $30.0 million received upon issuance. The Senior
Discount Notes are non-recourse and are secured by the issued and outstanding
Series B Preferred Interest, 100% of the common stock of Coaxial and the notes
issued by Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC. The Senior
Discount Notes are also conditionally guaranteed by the Company.
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial and indirectly to Phoenix Associates and Coaxial LLC in
amounts equal to the payments required on the Senior Notes and the Senior
Discount Notes. The accreted value of the Senior Discount Notes was $45.7
million as of December 31, 2001. Additionally, the Preferred Interests have
liquidation preferences equal to their carrying value. Distributions by the
Company are subject to certain financial covenants and other conditions set
forth in its Senior Credit Facility.
On August 8, 2000, Insight LP purchased Coaxial's 25% non-voting common equity
interest in the Company. The purchase price was 800,000 shares of common stock
of Insight LP's general partner, Insight Communications Company, Inc. ("Insight
Inc.") and cash in the amount of $2.6 million. In connection with the purchase,
the Company'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"). Additionally, the agreement was amended to
incorporate 70% of the Company's total voting power into the common equity
interests of the Company and 30% of the Company's total voting power into the
Preferred Interests of the Company.
F-42
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
1. Business Organization and Purpose (continued)
The Company is prohibited by the terms of its indebtedness from making
distributions to Insight Inc. The Company'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, the
principals of the Coaxial Entities may require Insight Inc. 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 Insight Inc.'s common stock issued on August 8, 2000. The fair value
of the aforementioned guaranteed security price of $32.6 million compared to the
market value of the 800,000 shares of Insight Inc. common stock as of the date
of acquisition was $7.1 million.
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight LP and an indirect subsidiary of AT&T Broadband,
LLC, completed a series of transactions with Insight LP and certain subsidiaries
of AT&T Corp. (the "AT&T Subsidiaries") for the acquisition of additional cable
television systems valued at approximately $2.2 billion, including the common
equity of the Company (the "AT&T Transactions"). As a result of the AT&T
Transactions, Insight Midwest acquired all of Insight LP's wholly owned systems
serving approximately 280,000 customers, including the approximately 85,000
customers served by the Company and including systems which Insight LP purchased
from the AT&T Subsidiaries. At the same time, Insight Midwest acquired from the
AT&T Subsidiaries systems serving approximately 250,000 customers.
The Company is prohibited by the terms of its indebtedness from making
distributions to Insight Midwest. Insight Midwest remains equally owned by
Insight LP and AT&T Broadband, and Insight LP continues to serve as the general
partner of Insight Midwest and manages and operates the Insight Midwest systems.
Although the financial results of the Company are consolidated into Insight
Midwest as a result of the AT&T Transactions, for financing purposes, the
Company is an unrestricted subsidiary under the indentures of Insight Midwest
and Insight Inc. The Company's conditional guarantee of the Senior Notes and the
Senior Discount Notes remains in place.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their fair
market value because of the immediate or short-term maturity of these financial
instruments.
F-43
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Revenue includes fees received for service, connection and providing advertising
spots. Service fees are recorded in the month the services are provided to
customers. Connection fees are charged for the hook-up of new customers and are
recognized as current revenues. Advertising fees are recorded in the month
advertising spots are aired.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily 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. The Company had no significant
concentrations of credit risk as of December 31, 2001 or 2000.
Property and Equipment
Property and equipment are stated at cost. 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 the statement of operations. Depreciation
and amortization is calculated using the straight-line method over the estimated
useful lives of the related assets as follows:
Cable systems 10 to 15 years
Furniture & equipment 7 years
Leasehold improvements Life of lease
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$13.3 million, $10.9 million and $7.1 million, respectively.
The Company internally constructs certain cable systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Intangible Assets
Franchise costs are amortized over the lives of the related franchises that
range from 7 to 15 years. Other intangible assets are amortized over the
estimated useful lives of the related assets up to 15 years.
F-44
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Long-Lived Assets
The carrying value of long-lived assets is reviewed if facts and circumstances
suggest that that they may be impaired. Upon a determination that the carrying
value of long-lived assets will not be recovered from the undiscounted future
cash flows generated from such assets, the carrying value of such long-lived
assets would be considered impaired and would be reduced by a charge to
operations in the amount of the impairment based on fair value. Management
believes that no impairment of long-lived assets existed at December 31, 2001 or
2000.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. Marketing and
promotional expense, primarily for campaign and telemarketing-related efforts,
was $796,000, $1.3 million and $1.3 million for the years ended December 31,
2001, 2000 and 1999, respectively.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which is
effective for fiscal years beginning after December 15, 2001 and requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. This pronouncement is not
expected to have a material impact on the results of operations or statement of
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions relating to the disposal of a segment of a business of Accounting
Principles Board Opinion No. 30. The Company will adopt this pronouncement
beginning January 1, 2002. This pronouncement is not expected to have a material
impact on the results of operations or statement of position of the Company.
Income Taxes
The Company is a limited liability corporation and does not provide for federal
or state income taxes in its financial statements. In the event that the limited
liability corporation election is terminated, deferred taxes related to book and
tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
members is limited to their respective investments.
F-45
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. 401(k) Plan
The Company sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employees' contribution
up to 5% of the employees' wages. Effective April 1, 2001, 50% of the Company's
matching contribution to the Plan is in the form of Insight Inc. common stock.
Company contributions to the Plans were $176,000, $129,000 and $120,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
4. Credit Facility
The Company has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of up to $25.0 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 from the date of borrowings, 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. The Company's obligations under the Senior Credit Facility are
secured by substantially all the assets of the Company.
The Senior Credit Facility requires the Company to meet certain financial and
other debt covenants. Loans under the Senior Credit Facility bear interest, at
the Company's option, at the prime rate or at a Eurodollar rate. In addition to
the index rates, the Company pays an additional margin percentage tied to its
ratio of total debt to adjusted annualized operating cash flow.
As of December 31, 2001, the Company was not in compliance with one of the
financial debt covenant requirements relating to the Senior Credit Facility.
This non-compliance was waived by the Company's creditor. Additionally, the
creditor amended this debt covenant requirement to reflect the Company's
prospective capital expenditure plans. Additionally, the creditor amended the
timing of the Company's principal payments to be due as follows: $0 (2002); $5.0
million (2003) and $20.0 million (2004).
F-46
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. Credit Facility (continued)
Interest expense including fees paid to the lender was $1.7 million, $1.9
million and $500,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The weighted average interest rate in effect as of December 31,
2001 and 2000 was 4.28% and 8.84%, respectively.
5. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of the Company
under an operating agreement dated August 21, 1998 that provided for a
management fee equal to 3% of the Company's gross operating revenues. In
connection with the purchase of Coaxial's 25% common equity interest in the
Company, the Company's operating agreement was amended to provide for Insight LP
to serve as manager of the Company. Fees under this operating agreement were
$1.7 million, $1.5 million and $1.4 million for the years ended December 31,
2001, 2000 and 1999, respectively.
The Company purchases substantially all of its pay television and other
programming from affiliates of AT&T Broadband. Charges for such programming were
$6.2 million for the years ended December 31, 2001. As of December 31, 2001,
$1.6 million of accrued programming costs were due to affiliates of AT&T
Broadband. Management believes that the programming rates charged by the
affiliates of AT&T Broadband are lower than those available from independent
parties.
6. Long-Lived Assets
Fixed Assets
Fixed assets consist of:
December 31,
2001 2000
-----------------------------------
(in thousands)
Land, buildings and improvements $ 1,418 $ 1,394
Cable equipment 167,922 139,573
Furniture, fixtures and office equipment 496 460
-----------------------------------
169,836 141,427
Less accumulated depreciation and amortization (78,163) (64,840)
-----------------------------------
Total fixed assets $ 91,673 $ 76,587
===================================
F-47
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. Long-Lived Assets (continued)
Intangible Assets
Intangible assets consist of:
December 31,
2001 2000
-----------------------------------
(in thousands)
Franchise costs $ 7,732 $ 7,606
Other intangible assets 268 268
-----------------------------------
8,000 7,874
Less accumulated amortization (7,501) (7,426)
-----------------------------------
Total intangible assets $ 499 $ 448
===================================
7. Commitments and Contingencies
Programming Contracts
The Company enters into long-term contracts with third parties who provide
programming for distribution over the Company's cable television systems. These
programming contracts are a significant part of our business and represent a
substantial portion of our operating costs. Since future fees under such
contracts are based on numerous variables, including number and type of
customers, the Company has not recorded any liabilities with respect to such
contracts.
Operating Lease Agreements
The Company leases land for tower locations, office equipment, office space and
vehicles under various operating lease agreements. Rental expense related to
operating lease agreements was $124,000, $144,000 and $126,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. These amounts exclude
year-to-year utility pole leases of $193,000, $196,000 and $191,000 for the
years ended December 31, 2001, 2000 and 1999, which provide for payments based
on the number of utility poles utilized.
F-48
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. Commitments and Contingencies (continued)
Future minimum rental commitments required under non-cancelable operating leases
as of December 31, 2001 were (in thousands):
2002 $ 64
2003 17
2004 8
2005 8
2006 8
Thereafter 193
--------------
Total $ 298
==============
Litigation
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 the Company's future results of operations or
financial position.
F-49