===============================================================================
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1999
Commission File Numbers: 333-64449-02
333-64449-01
333-64449
Coaxial LLC
Coaxial Financing Corp.
Insight Communications of Central Ohio, LLC
(Exact name of registrants as specified in their charters)
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.
126 East 56th Street
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 371-2266
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. [X ] Yes [ ] No
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Coaxial LLC Not Applicable
Coaxial Financing Corp. Not Applicable
Insight Communications of Central Ohio, LLC Not Applicable
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Coaxial LLC
Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Operations
and Changes in Member's Deficit for the three months
ended September 30, 1999, for the nine months ended
September 30, 1999 and for the period August 21, 1998
to September 30, 1998 (unaudited) 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and for the
period August 21, 1998 to September 30, 1998 (unaudited) 3
Notes to Interim Consolidated Financial Statements (unaudited) 4
Coaxial Financing Corp.
Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 8
Notes to Interim Balance Sheets (unaudited) 9
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 10
Consolidated Statements of Operations and Changes in
Shareholders' Deficit for the three months ended
September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998 (unaudited) 11
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and
September 30, 1998 (unaudited) 12
Notes to Interim Consolidated Financial Statements (unaudited) 13
Phoenix Associates
Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 16
Statements of Operations and Changes in Partners' Deficit for
the three months ended September 30, 1999 and 1998 and for
the nine months ended September 30, 1999 and 1998 (unaudited) 17
Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited) 18
Notes to Interim Financial Statements (unaudited) 19
Insight Communications of Central Ohio, LLC
Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998 21
Statements of Operations and Changes in Members' Deficit for the
three months ended September 30, 1999, for the nine months
ended September 30, 1999 and for the period August 21, 1998
to September 30, 1998 (unaudited) 22
Statements of Cash Flows for the nine months ended
September 30, 1999 and for the period August 21, 1998
to September 30, 1998 (unaudited) 23
Notes to Interim Financial Statements (unaudited) 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K 33
Coaxial LLC
Consolidated Balance Sheets
(in thousands)
September 30, 1999 December 31, 1998
---------------------- -------------------
(Unaudited) (Note 2)
ASSETS
CURRENT ASSETS:
Cash $ 4,342 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $409 and $306 in 1999 and 1998 911 1,186
Other accounts receivable, less allowance for doubtful accounts
of $145 in 1999 and 1998 2,722 1,520
Prepaid expenses and other current assets 161 166
------------------ -----------------
Total current assets 8,136 11,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 86,199 71,032
Equipment 7,918 7,102
Furniture 359 333
Leasehold improvements 71 71
------------------ -----------------
94,807 78,798
Accumulated depreciation and amortization (51,956) (46,898)
------------------ -----------------
Total property and equipment, net 42,851 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,404 7,385
Deferred financing costs and other 3,051 2,712
------------------ -----------------
10,455 10,097
Accumulated amortization (7,664) (7,436)
------------------ -----------------
Total intangible assets, net 2,791 2,661
Note receivable Coaxial DJM LLC 6,750 6,750
Note receivable Coaxial DSM LLC 3,000 3,000
Due from related parties 1,649 640
------------------ -----------------
Total other assets 14,190 13,051
------------------ -----------------
Total assets $ 65,177 $ 56,532
================== =================
LIABILITIES AND MEMBER'S DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 27 $ 123
Accounts payable 3,470 3,230
Accrued interest 573 1,250
Accrued liabilities 4,674 4,404
------------------ -----------------
Total current liabilities 8,744 9,007
NOTES PAYABLE:
Senior discount notes 34,565 31,511
Senior notes 34,435 34,435
Senior credit facility 11,000 -
------------------ -----------------
Total notes payable 80,000 65,946
Capital lease obligations 105 105
Other liabilities 1,711 1,146
Due to related parties 1,130 1,029
------------------ -----------------
Total liabilities 91,690 77,233
COMMITMENTS AND CONTINGENCIES
MEMBER'S DEFICIT (26,513) (20,701)
------------------ -----------------
Total liabilities and member's deficit $ 65,177 $ 56,532
================== =================
See accompanying notes
1
Coaxial LLC
Consolidated Statements of Operations and Changes in Member's Deficit
(Unaudited)
(in thousands)
For the period from
Three months ended Nine months ended August 21, 1998 to
September 30, 1999 September 30, 1999 September 30, 1998
-------------------------------------------------------------------
REVENUES $ 11,802 $ 35,195 $ 5,225
OPERATING EXPENSES:
Service and administrative 7,282 20,523 2,755
Depreciation and amortization 1,846 5,093 413
-------------------- ------------------ -------------------
Total operating expenses 9,128 25,616 3,168
-------------------- ------------------ -------------------
OPERATING INCOME 2,674 9,579 2,057
Other income 5 84 -
INTEREST INCOME (EXPENSE):
Interest income-related parties 371 1,128 143
Interest expense (2,052) (5,978) (864)
-------------------- ------------------ -------------------
Total interest expense, net (1,681) (4,850) (721)
-------------------- ------------------ -------------------
NET INCOME 998 4,813 1,336
MEMBER'S DEFICIT, beginning of period (22,233) (20,701) -
MEMBER CONTRIBUTIONS - 279 10,000
MEMBER DISTRIBUTIONS (5,278) (10,904) (36,122)
-------------------- ------------------ -------------------
MEMBER'S DEFICIT, end of period $(26,513) $(26,513) $(24,786)
==================== ================== ===================
See accompanying notes
2
Coaxial LLC
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the period from
Nine months ended August 21, 1998 to
September 30, 1999 September 30, 1998
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,813 $ 1,336
Adjustments to reconcile Net Income to
Net cash provided by operating activities:
Depreciation and amortization 5,286 444
Accretion of original issue discount on senior discount notes 3,055 439
Changes in certain assets and liabilities:
Subscriber receivables 275 (2,823)
Other accounts receivable, prepaid expenses and other
current assets (1,197) (906)
Accounts payable and accrued liabilities 1,075 3,660
Deferred income - 75
Accrued interest (678) -
Due to related parties (908) -
------------------- -------------------
Net cash provided by operating activities 11,721 2,225
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (16,009) (472)
Due from related parties - 108
Other (19) -
------------------- -------------------
Net cash used in investing activities (16,028) (364)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - 64,435
Payments to relieve prior debt - (26,808)
Payments to related parties - (9,750)
Payment of deferred financing fees (339) (2,186)
Member contributions 279 10,000
Payments on capital lease obligations (96) 22
Member distributions (10,904) (32,726)
Senior credit facility 11,000 -
------------------- -------------------
Net cash provided by (used in) financing activities (60) 2,987
------------------- -------------------
NET (DECREASE) INCREASE IN CASH (4,367) 4,848
CASH, beginning of period 8,709 -
------------------- -------------------
CASH, end of period $ 4,342 $ 4,848
=================== ===================
See accompanying notes
3
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. Business Organization And Purpose
Coaxial LLC (the "Company"), a Delaware limited liability company, was formed on
July 24, 1998 in order to own and hold 67 1/2% of the common stock of Coaxial
Communications of Central Ohio, Inc. ("Coaxial"). The Company has an individual
as its sole member.
Coaxial, an Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio, LLC ("Insight Ohio"), operates a cable
television system which provides basic and expanded cable television services to
homes in Columbus, Ohio and surrounding areas. In connection with the
contribution of Coaxial's cable system to Insight Ohio described below, the
issuance of the senior notes described in Note 4, and the issuance of the senior
discount notes by the Company during 1998, the three individuals who previously
owned the outstanding stock of Coaxial contributed their stock to three separate
limited liability companies including the Company. Accordingly, effective
August 21, 1998, the Company owns 67 1/2% of the outstanding stock of Coaxial.
Other related entities owned or controlled by the majority shareholder of the
Company include Phoenix Associates ("Phoenix"), Coaxial Communications of
Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of Columbus I
("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"), Paxton Cable
Television, Inc. ("Paxton Cable") and Paxton Communications, Inc. ("Paxton
Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to a newly formed subsidiary, Insight Ohio. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and
Insight owns 75% of the non-voting common equity of Insight Ohio. Coaxial also
owns two separate series of voting preferred equity (a $140 million preferred
equity interest and a $30 million preferred equity interest) of Insight Ohio.
The voting preferred equity interest will provide for distributions to Coaxial
and indirectly to Phoenix and the Company in amounts equal to the payments
required on the senior and senior discount notes described in Note 4. IHO serves
as the manager of Insight Ohio.
The Company and Coaxial Financing Corp. are co-issuers of notes payable
described in Note 4(b). Coaxial and Phoenix are co-issuers of the notes payable
described in Note 4(a). The ability of Coaxial Financing Corp., the Company,
Coaxial, and Phoenix to make scheduled payments with respect to the senior and
senior discount notes is dependent on the financial and operating performance of
Insight Ohio. The required distributions on the Series A and Series B Preferred
Interests to Coaxial are designed to provide the cash flow necessary to service
the debt service requirements on the senior and senior discount notes.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
4
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Basis of Presentation (continued)
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
3. Summary Of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of the Company,
Coaxial, and Insight Ohio. All intercompany balances have been eliminated in
consolidation. At September 30, 1999 and September 30, 1998, Coaxial had a
shareholders' deficiency and Insight Ohio had a members' deficiency.
Accordingly, the accompanying financial statements do not include any minority
interest liabilities.
Home Office Expenses
Effective August 21, 1998, Insight Ohio entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues. Fees
under the management agreement aggregated $364,000 and $1,092,000 for the three
and nine months ended September 30, 1999 and $142,000 for the period from August
21, 1998 to September 30, 1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 2000. The Company does not anticipate the adoption of
SFAS No. 133 to have a material impact on its financial statements.
During 1999, the Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 requires that companies capitalize qualifying costs incurred during the
application development stage of a software project. All other costs incurred
in connection with an internal use software project are to be expensed as
incurred. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
4. Notes Payable
Notes payable at September 30, 1999 and December 31, 1998 consisted of:
September 30, 1999 December 31, 1998
------------------------- ------------------------
Senior notes(a) $34,435,000 $34,435,000
Senior discount notes(b) 34,565,000 31,511,000
Senior credit facility 11,000,000 -
------------------------- ------------------------
Total notes payable $80,000,000 $65,946,000
========================= ========================
5
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(a) On August 21, 1998, Coaxial and Phoenix Associates completed an offering of
$140 million 10% Senior Notes ("Senior Notes") due 2006 of which $105.6
million was allocated to Phoenix and $34.4 million was allocated to Coaxial.
Interest accrues on the Senior Notes from August 21, 1998 and is payable in
cash semi-annually on each February 15 and August 15, commencing on February
15, 1999. The Senior Notes are secured by the outstanding Series A Preferred
Interests in Insight Ohio. The Series A Preferred Interests have a
liquidation preference of $140 million and pay distributions in an amount
equal to the interest payments on the Senior Notes. All Series A Preferred
Interests are owned by Coaxial and are pledged to Bank of Montreal Trust
Company, as trustee, for the benefit of the holders of the Senior Notes.
Coaxial will utilize cash distributions made by Insight Ohio on the Series A
Preferred Interests to make payments on the Senior Notes. The Senior Notes
contain covenants that, among other things, restrict the ability of Coaxial,
Phoenix, Insight Ohio and any of their Restricted Subsidiaries to: incur
additional indebtedness; pay dividends and make distributions; issue stock
of subsidiaries to third parties; make certain investments; repurchase
stock; create liens; enter into transactions with affiliates; enter into
sale and leaseback transactions; create dividend or other payment
restrictions affecting Restricted Subsidiaries; merge or consolidate in a
transaction involving all or substantially all of the assets of Coaxial,
Phoenix and their Restricted Subsidiaries, taken as a whole; transfer or
sell assets; use distributions on the Series A Preferred Interests or Series
B Preferred Interests for any purpose other than required payments of
interest and principal on the Senior Notes or Senior Discount Notes,
respectively; and swap assets. In connection with the issuance of the Senior
Notes, the Company incurred financing fees of approximately $1,226,000 that
are being amortized over the life of the Senior Notes. Coaxial, as joint and
several issuer, with Phoenix, of the Senior Notes, provides the funding that
will allow Phoenix to repay its share of the notes payable, as Phoenix has
no operations.
Amortization expense for deferred financing costs related to the Senior
Notes for the three and nine months ended September 30, 1999 was
approximately $39,000 and $114,000 and $17,000 for the period from August
21, 1998 to September 30, 1998. Interest expense on Coaxial's portion of
the Senior Notes was approximately $861,000 and $2,583,000 for the three and
nine months ended September 30, 1999 and $389,000 for the period from August
21, 1998 to September 30, 1998.
(b) On August 21, 1998, the Company and Coaxial Financing Corp., a related
entity, issued senior discount notes ("Senior Discount Notes") due 2008. The
Senior Discount Notes have a face amount of $55,869,000 and approximately
$30 million of gross proceeds were received upon issuance. Approximately
$19.5 million of the gross proceeds were contributed by the sole member of
the Company to certain related entities to repay the indebtedness.
Approximately $9,750,000 was loaned to two related entities by the Company,
which then contributed that amount to certain other related entities to
repay indebtedness. The debt discount of $25,869,000 is being amortized over
five years (until August 15, 2003). Thereafter, interest on the Senior
Discount Notes accrues at 12 7/8% and is payable semi-annually. All of the
Senior Discount Notes were allocated to the Company.
In connection with the issuance of the Senior Discount Notes, the Company
incurred financing fees of approximately $1,465,000 that are being amortized
over the life of the Senior Discount Notes. Amortization expense related to
the deferred financing costs was approximately $28,000 and $79,000 for the
three and nine months ended September 30, 1999 and approximately $14,000 for
the period from August 21, 1998 to September 30, 1998. Interest expense
incurred on the Senior Discount Notes excluding amortization of deferred
financing costs was approximately $989,000 and $3,055,000 for the three and
nine months ended September 30, 1999 and approximately $440,000 for the
period from August 21, 1998 to September 30, 1998.
The Senior Discount Notes are non-recourse, secured by all of the common
stock of Coaxial and the notes issued by Coaxial DJM LLC and Coaxial DSM LLC
to the Company and conditionally guaranteed by Insight Ohio, a subsidiary of
Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. Coaxial Financing Corp.
and the Company were in compliance with these covenants as of September 30,
1999.
The ability of Coaxial Financing Corp. and the Company to make scheduled
payments with respect to the Senior Discount Notes will depend on the
financial and operating performance of Insight Ohio. The required payments
on the Series B Preferred Interests equal the distributions to be made by
Coaxial to the three limited liability companies that own Coaxial to service
the Senior Discount Notes.
6
COAXIAL LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
(c) Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
bank which provides for revolving credit loans of $25 million to finance
capital expenditures and for working capital and general purposes, including
the upgrade of Coaxial's cable plant and for the introduction of new video
services. The Senior Credit Facility has a nine-year maturity, with
reductions to the amount of the commitment commencing after three years. The
amount available for borrowing is reduced by any outstanding letter of
credit obligations. Insight Ohio's obligations under the Senior Credit
Facility are secured by substantially all the tangible and intangible assets
of Insight Ohio. Loans under the Senior Credit Facility bear interest, at
Insight Ohio's option, at the prime rate or at a Eurodollar rate. In
addition to the index rates, Insight Ohio pays an additional margin
percentage tied to its ratio of total debt to adjusted annualized operating
cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness,
incur guaranty obligations, pay dividends or make capital distributions,
including distributions on the Preferred Interests that are required to pay
the Senior Notes and the Senior Discount Notes in the event of a payment
default under the Senior Credit Facility, create liens on assets, make
investments, make acquisitions, engage in mergers or consolidations, engage
in certain transactions with subsidiaries and affiliates and otherwise
restrict certain activities. In addition, the Senior Credit Facility
requires compliance with certain financial ratios, including total leverage,
interest coverage and pro forma debt service coverage ratios.
Management does not expect that such covenants will materially impact the
ability of Insight Ohio to operate its business. As of September 30, 1999,
$11,000,000 was drawn on the Senior Credit Facility. Interest expense on
the Senior Credit Facility was approximately $126,000 for the three and nine
month periods ended September 30, 1999.
5. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations of financial position.
7
COAXIAL FINANCING CORP.
BALANCE SHEETS
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited) (Note 2)
ASSETS:
Cash $ 1,000 $ 1,000
------------------------- -------------------------
Total assets $ 1,000 $ 1,000
========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior discount notes (to be paid by Coaxial LLC - See Note 3) $ - $ -
------------------------- -------------------------
Total liabilities $ - $ -
Common stock, $.01 par value; 1,000 shares authorized, 1,000
shares issued and outstanding 10 10
Additional paid-in capital 990 990
------------------------- -------------------------
Total liabilities and shareholders' equity $ 1,000 $ 1,000
========================= =========================
See accompanying notes
8
COAXIAL FINANCING CORP.
NOTES TO INTERIM BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1999
1. Nature of Business
Coaxial Financing Corp. (the "Company"), a Delaware corporation, was formed on
July 24, 1998 for the sole purpose of being a co-issuer of the discount notes
described in Note 3, which allows certain investors the ability to be holders of
the debt. The Company has no operations. Three individuals own the outstanding
shares of the Company.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1998.
3. Notes Payable
On August 21, 1998, the Company and Coaxial LLC, a related entity, issued Senior
Discount Notes ("Discount Notes") due 2008. The Discount Notes have a face
amount of $55,869,000 and approximately $30 million of gross proceeds were
received upon issuance. Approximately $19.5 million of the gross proceeds were
contributed by the sole member of Coaxial LLC to certain related entities to
repay indebtedness. Approximately $9,750,000 was loaned to two related entities
("Coaxial DJM LLC" and "Coaxial DSM LLC") by Coaxial LLC, which then contributed
that amount to certain other related entities to repay indebtedness. The debt
discount of $25,869,000 is being amortized over five years (until August 15,
2003). Thereafter, interest on the Discount Notes accrues at 12 7/8% and is
payable semi-annually. All of the Discount Notes were allocated to Coaxial LLC.
The Discount Notes are non-recourse, secured by all of the common stock of
Coaxial Communications of Central Ohio, Inc. ("Coaxial") and the notes issued by
Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC and conditionally guaranteed
by Insight Communications of Central Ohio, LLC ("Insight Ohio"), a subsidiary of
Coaxial.
Among other covenants, the borrowers must comply with restrictive covenants
relating to incurrence of additional debt, payment of dividends and
distributions, and the transfer or sale of assets. The Company and Coaxial LLC
were in compliance with these covenants as of September 30, 1999.
The ability of the Company and Coaxial LLC to make scheduled payments with
respect to the Discount Notes will depend on the financial and operating
performance of Insight Ohio.
4. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations of financial position.
9
Coaxial Communications of Central Ohio, Inc.
Consolidated Balance Sheets
(dollars in thousands)
September 30, 1999 December 31, 1998
------------------------ -------------------
(Unaudited) (Note 2)
ASSETS
Cash $ 4,342 $ 8,709
Subscriber receivables, less allowance for doubtful accounts
of $409 and $306 in 1999 and 1998 911 1,186
Other accounts receivable, less allowance for doubtful accounts
of $145 in 1999 and 1998 2,722 1,520
Prepaid expenses and other current assets 161 166
------------------------ -------------------
Total current assets 8,136 11,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 86,199 71,032
Equipment 7,918 7,102
Furniture 359 333
Leasehold improvement 71 71
------------------------ -------------------
94,807 78,798
Less-Accumulated depreciation and amortization (51,956) (46,898)
------------------------ -------------------
Total property and equipment, net 42,851 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,404 7,385
Deferred financing costs and other 1,586 1,447
------------------------ -------------------
8,990 8,832
Less-Accumulated amortization (7,548) (7,399)
------------------------ -------------------
Total intangible assets, net 1,442 1,433
Due from related parties 139 149
------------------------ -------------------
Total assets $ 52,568 $ 45,063
======================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 27 $ 123
Accounts payable 3,470 3,230
Accrued interest 573 1,250
Accrued liabilities 4,674 4,404
------------------------ -------------------
Total current liabilities 8,744 9,007
Senior notes payable 34,435 34,435
Senior credit facility 11,000 -
Capital lease obligations 105 105
Other liabilities 1,711 1,146
Due to related parties 1,130 1,030
------------------------ -------------------
Total liabilities 57,125 45,723
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock--authorized 2,000 shares, 1,080 shares
issued and outstanding in 1999 and 1998 1 1
Paid-in capital 27,777 11,501
Accumulated deficit (32,335) (12,162)
------------------------ -------------------
Total shareholders' deficit (4,557) (660)
------------------------ -------------------
Total liabilities and shareholders' deficit $ 52,568 $ 45,063
======================== ===================
See accompanying notes
10
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Operations and Changes in Shareholders' Deficit
(Unaudited)
(in thousands)
Three months Nine months
ended ended
September 30, September 30,
-----------------------------------------------------------
1999 1998 1999 1998
-------------- --------- -------------- ---------
TOTAL REVENUES $11,802 $ 11,769 $ 35,195 $ 35,037
OPERATING EXPENSES:
Service and administrative 7,282 7,298 20,523 22,164
Depreciation and amortization 1,846 1,137 5,093 3,825
Severance and transaction structure costs - 4,822 - 4,822
-------------- --------- -------------- ---------
Total operating expenses 9,128 13,257 25,616 30,811
-------------- --------- -------------- ---------
OPERATING INCOME 2,674 (1,488) 9,579 4,226
Other income (expense) 5 (318) 84 (433)
INTEREST INCOME (EXPENSE), net:
Interest income--related parties - 640 - 2,823
Interest income 23 - 109 23
Interest expense--related parties - (227) - (1,019)
Interest expense (1,035) (903) (2,844) (2,583)
-------------- --------- -------------- ---------
Total interest (expense), net (1,012) (490) (2,735) (756)
-------------- --------- -------------- ---------
Net Income (Loss) Before Extraordinary Item 1,667 (2,296) 6,928 3,037
Extraordinary Item - debt retirement - (847) - (847)
-------------- --------- -------------- ---------
NET INCOME (LOSS) 1,667 (3,143) 6,928 2,190
SHAREHOLDERS' (DEFICIT) EQUITY, beginning of period (946) 58,516 (660) 54,327
CAPITAL DISTRIBUTIONS (5,278) (81,246) (10,825) (82,390)
SHAREHOLDER CONTRIBUTIONS - 20,563 - 20,563
-------------- --------- -------------- ---------
SHAREHOLDERS' DEFICIT, end of period $(4,557) $ (5,310) $ (4,557) $ (5,310)
============== ========= ============== =========
See accompanying notes
11
Coaxial Communications of Central Ohio, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine months ended
September 30,
1999 1998
--------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,928 $ 2,190
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and amortization 5,207 4,268
Extraordinary item - 846
Changes in operating assets and liabilities:
Subscriber receivables 275 (1,882)
Other accounts receivable, prepaid expenses and other
Current assets (1,197) 55
Accounts payable, accrued liabilities and other 1,076 2,458
Accrued interest (678) -
Due to related parties 110 -
--------------------- ------------------------
Net cash provided by operating activities 11,721 7,935
--------------------- ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (16,009) (4,214)
Increase in intangible assets (158) -
--------------------- ------------------------
Net cash used in investing activities (16,167) (4,214)
--------------------- ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable - 34,435
Principal payments on notes payable - (26,808)
Increase in deferred financing fees - (1,340)
Contributions from shareholders - 5,673
Principal payments on capital lease obligations (96) (148)
Capital distributions (10,825) -
Senior credit facility 11,000 -
Increase in amounts due to/from related parties - (11,259)
--------------------- ------------------------
Net cash provided by financing activities 79 553
--------------------- ------------------------
NET (DECREASE) INCREASE IN CASH (4,367) 4,274
CASH, beginning of period 8,709 574
--------------------- ------------------------
CASH, end of period $ 4,342 $ 4,848
===================== ========================
See accompanying notes
12
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. Business Organization And Purpose
Coaxial Communications of Central Ohio, Inc. ("Coaxial" or the "Company"), an
Ohio corporation, through its controlling voting interest in Insight
Communications of Central Ohio, LLC ("Insight Ohio"), operates a cable
television system which provides basic and expanded cable television services to
homes in the eastern parts of Columbus, Ohio and surrounding areas. In
connection with the contribution of the Company's cable system described below,
the issuance of the Senior Notes described in Note 4, and the issuance of the
Discount Notes by the Company's majority shareholder and an affiliate during
1998, the three individuals who previously owned the outstanding stock of the
Company contributed their stock to three separate limited liability companies.
Accordingly, at September 30, 1999, the Company was a subsidiary of Coaxial LLC,
which owns 67 1/2% of its outstanding stock.
Other related entities affiliated with Coaxial include Coaxial Financing Corp.,
Coaxial DJM LLC, Coaxial DSM LLC, Phoenix Associates ("Phoenix"), Coaxial
Communications of Southern Ohio, Inc. ("Southern Ohio"), Coaxial Associates of
Columbus I ("Columbus I"), Coaxial Associates of Columbus II ("Columbus II"),
Paxton Cable Television, Inc. ("Paxton Cable") and Paxton Communications, Inc.
("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a contribution
agreement (the "Contribution Agreement") pursuant to which on August 21, 1998,
Coaxial contributed substantially all of the assets and liabilities comprising
its cable system to Insight Ohio, a newly formed subsidiary. In connection
therewith, Insight Holdings of Ohio, LLC ("IHO"), a wholly owned subsidiary of
Insight, contributed $10 million in cash to Insight Ohio. As a result of the
Contribution Agreement, Coaxial owns 25% of the non-voting common equity and IHO
owns 75% of the non-voting common equity of Insight Ohio. Coaxial also owns two
separate series of voting preferred equity (a $140 million preferred equity
interest and a $30 million preferred equity interest) of Insight Ohio. The
voting preferred equity interest will provide for distributions to Coaxial and
indirectly to Phoenix and Coaxial LLC in amounts equal to the payments required
on the senior and senior discount notes. IHO serves as the manager of Insight
Ohio.
In connection with the Contribution Agreement, the Company incurred severance
costs and transaction structuring costs totaling $4,822,078, which have been
reflected in the accompanying statements of operations.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
13
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies
Principles of Consolidation
As a result of Coaxial's ownership of all of the voting equity of Insight Ohio
at September 30, 1999, the accompanying financial statements include the
accounts of Insight Ohio. All intercompany balances have been eliminated in
consolidation. At September 30, 1999, Insight Ohio had a members' deficiency,
accordingly, the accompanying financial statements do not include a minority
interest liability for Insight's 75% common equity interest in Insight Ohio.
Home Office Expenses
Home office expenses of approximately $400,000 and $1,131,000 for the three and
nine months ended September 30, 1998 (included in selling and administrative
expenses) include billings for legal fees, management fees, salaries, travel and
other management expenses for services provided by an affiliated services
company. Effective August 21, 1998, IHO provides such services for which it
earns a management fee which approximated $364,000 and $1,092,000 for the three
and nine months ended September 30, 1999 and $142,000 for the period from August
21, 1998 to September 30, 1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 2000. The Company does not anticipate the adoption of
SFAS No. 133 to have a material impact on its financial statements.
During 1999, the Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 requires that companies capitalize qualifying costs incurred during the
application development stage of a software project. All other costs incurred
in connection with an internal use software project are to be expensed as
incurred. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
4. Notes Payable
Notes payable at September 30, 1999 and December 31, 1998 consisted of Senior
Notes with an outstanding principal balance of $34,435,092 and borrowings under
a Senior Credit Facility of $11,000,000.
On August 21, 1998, Coaxial and Phoenix completed an offering of $140 million
10% Senior Notes ("Senior Notes") due 2006 of which $105.6 million was allocated
to Phoenix and $34.4 million was allocated to Coaxial. Interest accrues on the
Senior Notes from August 21, 1998 and is payable in cash semi-annually on each
February 15 and August 15, commencing on February 15, 1999. The Senior Notes are
secured by the outstanding Series A Preferred Interests in Insight Ohio. The
Series A Preferred Interests have a liquidation preference of $140 million and
pay distributions in an amount equal to the interest payments on the Senior
Notes. All Series A Preferred Interests are
14
COAXIAL COMMUNICATIONS OF CENTRAL OHIO, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Notes Payable (continued)
owned by Coaxial and are pledged to Bank of Montreal Trust Company, as
trustee, for the benefit of the holders of the Senior Notes. Coaxial will
utilize cash distributions made by Insight Ohio on the Series A Preferred
Interests to make payments on the Senior Notes. The Senior Notes contain
covenants that, among other things, restrict the ability of Coaxial, Phoenix,
Insight Ohio and any of their Restricted Subsidiaries to: incur additional
indebtedness; pay dividends and make distributions; issue stock of
subsidiaries to third parties; make certain investments; repurchase stock;
create liens; enter into transactions with affiliates; enter into sale and
leaseback transactions; create dividend or other payment restrictions
affecting Restricted Subsidiaries; merge or consolidate in a transaction
involving all or substantially all of the assets of Coaxial, Phoenix and their
Restricted Subsidiaries, taken as a whole; transfer or sell assets; use
distributions on the Series A Preferred Interests or Series B Preferred
Interests for any purpose other than required payments of interest and
principal on the Senior Notes or Discount Notes, respectively; and swap
assets. In connection with the issuance of the Senior Notes, the Company
repaid all outstanding loan balances under a 1994 loan agreement between
Coaxial, Phoenix, Southern Ohio, Columbus I and Columbus II and a lead bank
and several other financial institutions. An extraordinary loss of $846,641
was recorded upon this refinancing of debt. Also, in connection with the
issuance of the Senior Notes, the Company incurred financing fees of
approximately $1,226,000 that are being amortized over the life of the Senior
Notes. Coaxial, as joint and several issuer, with Phoenix, of the Senior
Notes, provides the funding that will allow Phoenix to repay its share of the
notes payable, as Phoenix has no operations.
Amortization expense for deferred financing costs related to the Senior
Notes for the three and nine months ended September 30, 1999 was approximately
$39,000 and $114,000 and approximately $17,000 for the three and nine months
ended September 30, 1998. Interest expense on Coaxial's portion of the Senior
Notes excluding amortization of deferred financing costs was approximately
$861,000 and $2,583,000 for the three and nine months ended September 30, 1999
and approximately $389,000 for the three and nine months ended September 30,
1998.
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
bank which provides for revolving credit loans of $25 million to finance
capital expenditures and for working capital and general purposes, including
the upgrade of the cable system's plant and for the introduction of new video
services. The Senior Credit Facility has a nine-year maturity, with reductions
to the amount of the commitment commencing after three years. The amount
available for borrowing is reduced by any outstanding letter of credit
obligations. Insight Ohio's obligations under the Senior Credit Facility are
secured by substantially all the tangible and intangible assets of Insight
Ohio. Loans under the Senior Credit Facility bear interest, at Insight Ohio's
option, at the prime rate or at a Eurodollar rate. In addition to the index
rates, Insight Ohio pays an additional margin percentage tied to its ratio of
total debt to adjusted annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the
Senior Credit Facility, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, engage in certain
transactions with subsidiaries and affiliates and otherwise restrict certain
activities. In addition, the Senior Credit Facility requires compliance with
certain financial ratios, including with respect to total leverage, interest
coverage and pro forma debt service coverage. Management does not expect that
such covenants will materially impact the ability of Insight Ohio to operate
its business. As of September 30, 1999, $11,000,000 was drawn on the Senior
Credit Facility. Interest expense on the Senior Credit Facility was
approximately $126,000 for the three and nine months ended September 30, 1999.
5. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's results of
operation or financial position.
15
Phoenix Associates
Balance Sheets
(in thousands)
September 30, 1999 December 31, 1998
------------------------- -------------------------
(Unaudited) (Note 2)
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Interest receivable 57 57
------------------------- -------------------------
Total current assets 57 57
OTHER ASSETS:
Due from related parties 406 406
Notes receivable--related parties 550 550
Deferred financing fees, net 3,292 3,400
------------------------- -------------------------
Total other assets 4,248 4,356
------------------------- -------------------------
Total assets $ 4,305 $ 4,413
========================= =========================
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES:
INTEREST PAYABLE $ 1,378 $ 3,841
NOTES PAYABLE 105,565 105,565
------------------------- -------------------------
Total liabilities 106,943 109,406
------------------------- -------------------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT (102,638) (104,993)
------------------------- -------------------------
Total liabilities and partners' deficit $ 4,305 $ 4,413
========================= =========================
See accompanying notes
16
Phoenix Associates
Statements of Operations and Changes in Partners' Deficit
(Unaudited)
(in thousands)
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
EXPENSES $ - $ 11 $ - $ 63
INTEREST EXPENSE (INCOME)
Interest income--related parties - (186) - (641)
Interest expense--related parties - 605 - 2,666
Interest expense 2,757 2,680 8,266 7,580
----------------- ------------- ----------------- ------------
Total interest expense, net 2,757 3,099 8,266 9,605
----------------- ------------- ----------------- ------------
Net Loss Before Extraordinary Item 2,757 3,110 8,266 9,668
Extraordinary Item - gain on settlement of
Columbus II note receivable - (100) - (100)
----------------- ------------- ----------------- ------------
NET LOSS 2,757 3,010 8,266 9,568
PARTNERS' DEFICIT, beginning of period 105,159 176,969 104,993 170,411
PARTNERS' CONTRIBUTIONS - (78,358) - (78,358)
CAPITAL CONTRIBUTIONS (5,278) 768 (10,621) 768
----------------- ------------- ----------------- ------------
PARTNERS' DEFICIT, end of period $102,638 $102,389 $102,638 $102,389
================= ============= ================= ============
See accompanying notes
17
Phoenix Associates
Statements of Cash Flows
(Unaudited)
(in thousands)
Nine months ended
September 30,
-----------------------------------------------
1999 1998
-------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,266) $ (9,567)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Amortization of deferred financing fees 349 52
Changes in operating assets and liabilities:
Other accounts receivable, prepaid expenses, and other - 1,102
current assets
Accrued interest (2,463) -
-------------------- ----------------------
Net cash used in operating activities (10,380) (8,413)
-------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in amounts due from related parties - 7,039
-------------------- ----------------------
Net cash provided by investing activities - 7,039
-------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable - (105,926)
Payment of deferred financing fees (241) (3,416)
Proceeds from issuance of notes payable - 105,565
Capital contributions 10,621 77,590
Increase in amounts due to related parties - (72,439)
-------------------- ----------------------
Net cash provided by financing activities 10,380 1,374
-------------------- ----------------------
NET INCREASE (DECREASE) IN CASH - -
CASH, beginning of period - -
-------------------- ----------------------
CASH, end of period $ - $ -
==================== ======================
See accompanying notes
18
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. Business Organization and Purpose
Phoenix Associates ("Phoenix") is a Florida general partnership organized for
the primary purpose of purchasing promissory notes, mortgages, deeds of trust,
debt securities and other types of securities, and purchasing and acquiring
rights in any loan agreements or other documents relating to those securities.
Phoenix has no operations. Its ability to satisfy debt and other obligations is
dependent upon funding from related entities, which are under the common control
of the owners of Phoenix. Phoenix is a co-issuer and joint and several obligor
of the debt described in Note 4, along with an affiliate, Coaxial Communications
of Central Ohio, Inc ("Coaxial").
Phoenix is owned by three separate LLC's whose sole members are individual
partners who share profits and losses in the ratio of 67 1/2%, 22 1/2% and 10%,
respectively.
Other related entities affiliated with Phoenix include Coaxial LLC, Coaxial
Financing Corp., Insight Communications of Central Ohio, LLC ("Insight Ohio"),
Coaxial Communications of Southern Ohio, Inc. ("Southern Ohio"), Coaxial
Associates of Columbus I ("Columbus I"), Coaxial Associates of Columbus II
("Columbus II"), Paxton Cable Television, Inc. ("Paxton Cable") and Paxton
Communications, Inc. ("Paxton Communications").
On June 30, 1998, amended on July 15, 1998 and August 21, 1998, Coaxial and
Insight Communications Company, L.P. ("Insight") entered into a Contribution
Agreement (the "Contribution Agreement") pursuant to which Coaxial contributed
substantially all of the assets and liabilities comprising its cable system to a
newly formed subsidiary, Insight Ohio, and Insight Holdings of Ohio, LLC
("IHO"), a wholly owned subsidiary of Insight, contributed $10 million in cash
to Insight Ohio. As a result of this Contribution Agreement, Coaxial owns 25% of
the non-voting common equity and IHO owns 75% of the non-voting common equity of
Insight Ohio. Coaxial also owns two separate series (a $140 million preferred
equity interest and a $30 million preferred equity interest of voting preferred
equity) of Insight Ohio. The voting preferred equity interest provides for
distributions to Coaxial equal in amount to the payments on the Senior Notes and
senior discount notes. Coaxial will make distributions which will enable
Phoenix to fund the required payments on the Senior Notes.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
19
PHOENIX ASSOCIATES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Phoenix does not
anticipate that the adoption of SFAS No. 133 will have a material impact on its
financial statements.
During 1999, the Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 requires that companies capitalize qualifying costs incurred during the
application development stage of a software project. All other costs incurred
in connection with an internal use software project are to be expensed as
incurred. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
4. Notes Payable
Notes payable at September 30, 1999 and December 31, 1998 consisted of Senior
Notes with an outstanding principal balance of $105,565,000.
On August 21, 1998 Coaxial and Phoenix completed an offering of $140 million
10% Senior Notes ("Senior Notes") due 2006. The proceeds of the Senior Notes
were allocated $105.6 million to Phoenix and $34.4 million to Coaxial. Interest
accrues on the Senior Notes from August 21, 1998 and is payable in cash semi-
annually on each February 15 and August 15, commencing on February 15, 1999. The
Senior Notes are secured by the outstanding Series A Preferred Interests in
Insight Ohio. The Series A Preferred Interests have a liquidation preference of
$140 million and pay distributions in an amount equal to the interest payments
on the Senior Notes. All Series A Preferred Interests are owned by Coaxial and
are pledged to Bank of Montreal Trust Company, as trustee, for the benefit of
the holders of the Senior Notes. Coaxial will utilize cash distributions on the
Series A Preferred Interests to make payments on the Senior Notes including
distributions to Phoenix. The Senior Notes contain covenants that, among other
things, restrict the ability of Coaxial, Phoenix, Insight Ohio and any of their
Restricted Subsidiaries to: incur additional indebtedness; pay dividends and
make distributions; issue stock of subsidiaries to third parties; make certain
investments; repurchase stock; create liens; enter into transactions with
affiliates; enter into sale and leaseback transactions; create dividend or other
payment restrictions affecting Restricted Subsidiaries; merge or consolidate in
a transaction involving all or substantially all of the assets of Coaxial,
Phoenix and their Restricted Subsidiaries, taken as a whole; transfer or sell
assets; use distributions on the Series A Preferred Interest or Series B
Preferred Interests for any purpose other than required payments of interest and
principal on the notes or Discount Notes, respectively; and swap assets. In
connection with the issuance of the Senior Notes, Phoenix incurred financing
fees of approximately $3,800,000 that are being amortized over the life of the
Senior Notes. Amortization expense related to the deferred financing costs was
approximately $119,000 and $349,000 for the three and nine months ended
September 30, 1999 and approximately $52,000 for the three and nine months ended
September 30, 1998. Interest expense incurred on the Senior Notes excluding
amortization of deferred financing costs was approximately $2,638,000 and
$7,917,000 for the three and nine months ended September 30, 1999 and
approximately $1,202,000 for the three and nine months ended September 30, 1998.
Phoenix is a co-issuer and joint and several obligor of the debt, along with an
affiliate, Coaxial.
5. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations of financial position.
20
Insight Communications of Central Ohio, LLC
Balance Sheets
(in thousands)
September 30, 1999 December 31, 1998
------------------------- --------------------------
(Unaudited) (Note 2)
ASSETS
CURRENT ASSETS:
Cash $ 2,342 $ 6,709
Subscriber receivables, less allowance for doubtful
Accounts of $409 and $306 in 1999 and 1998 911 1,186
Other accounts receivable, less allowance for doubtful
Accounts of $145 in 1999 and 1998 2,722 1,520
Prepaid expenses and other current assets 161 166
------------------------- --------------------------
Total current assets 6,136 9,581
PROPERTY AND EQUIPMENT, at cost:
Land and land improvements 260 260
CATV systems 86,199 71,032
Equipment 7,918 7,102
Furniture 359 333
Leasehold improvements 71 71
------------------------- --------------------------
94,807 78,798
Less-Accumulated depreciation and amortization (51,956) (46,898)
------------------------- --------------------------
Total property and equipment, net 42,851 31,900
INTANGIBLE ASSETS, at cost:
Franchise costs 7,404 7,385
Other intangible assets 360 300
Less-Accumulated amortization (7,382) (7,348)
------------------------- --------------------------
Total intangible assets, net 382 337
DUE FROM RELATED PARTIES 139 149
------------------------- --------------------------
Total assets $ 49,508 $ 41,967
========================= ==========================
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 27 $ 123
Accounts payable 3,470 3,230
Accrued interest 126 -
Accrued liabilities 4,674 4,404
Series preferred A dividend payable 1,750 5,211
Series preferred B dividend payable 4,420 1,438
------------------------- --------------------------
Total current liabilities 14,467 14,406
Capital lease obligations 105 105
Other deferred credits 1,711 1,146
Due to related parties 1,130 1,029
Preferred A interest 140,000 140,000
Preferred B interest 30,000 30,000
Senior credit facility 11,000 -
------------------------- --------------------------
Total liabilities and preferred interests 198,413 186,686
Members' deficit (148,905) (144,719)
------------------------- --------------------------
Total liabilities and members' deficit $ 49,508 $ 41,967
========================= ==========================
See accompanying notes
21
Insight Communications of Central Ohio, LLC
Statements of Operations and Changes in Members' Deficit
(Unaudited)
(in thousands)
For the period from
Three months ended Nine months ended August 21, 1998
September 30, 1999 September 30, 1999 September 30, 1998
--------------------- -------------------- --------------------
REVENUE $ 11,802 $ 35,195 $ 5,225
OPERATING EXPENSES:
Service and administrative 7,282 20,523 2,755
Depreciation and amortization 1,846 5,093 413
--------------------- -------------------- --------------
Total operating expenses 9,128 25,616 3,168
--------------------- -------------------- --------------
OPERATING INCOME 2,674 9,579 2,057
Other income 5 84 -
Interest expense (135) (147) (5)
Interest income 23 109 -
--------------------- -------------------- --------------
INTEREST EXPENSE, net (112) (38) (5)
--------------------- -------------------- --------------
NET INCOME 2,567 9,625 2,052
Accrual of preferred interests (4,571) (13,291) (2,034)
Members' deficit, beginning of period (146,901) (144,719) -
Members' contributions - - 34,457
Preferred membership interest - - (170,000)
Capital distributions - (520) (8,079)
--------------------- -------------------- --------------
Members' deficit, end of period $(148,905) $(148,905) $(143,604)
===================== ==================== ==============
See accompanying notes
22
Insight Communications of Central Ohio, LLC
Statements of Cash Flows
(Unaudited)
(in thousands)
For the period from
Nine months ended August 21, 1998
September 30, 1999 September 30, 1998
---------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,625 $ 2,052
Adjustments to reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 5,093 413
Changes in certain assets and liabilities:
Subscriber receivables 275 (2,571)
Other accounts receivable, prepaid expenses and other current assets (1,197) 135
Accounts payable, accrued liabilities and other 1,075 3,066
Accrued interest 126 -
Due to/from related parties 111 -
---------------------- -------------------
Net cash provided by operating activities 15,108 3,095
---------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (16,009) (472)
Increase in other intangible assets (79) -
---------------------- -------------------
Net cash used in investing activities (16,088) (472)
---------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital distributions (520) (8,079)
Principal payments on capital lease obligations (96) (22)
Capital contributions - 10,000
Contributed cash - 326
Preferred interest distributions (13,771) -
Senior credit facility 11,000 -
---------------------- -------------------
Net cash (used in) provided by financing activities (3,387) 2,225
NET (DECREASE) INCREASE IN CASH (4,367) 4,848
CASH, beginning of period 6,709 -
---------------------- -------------------
CASH, end of period $ 2,342 $ 4,848
====================== ===================
See accompanying notes
23
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the "Company")
was formed on July 23, 1998 in order to acquire substantially all of the assets
and liabilities comprising the cable television system of Coaxial Communications
of Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television system for which Coaxial received a 25% non-voting common membership
interest in Insight Ohio as well as 100% of the voting preferred membership
interests of Insight Ohio ("Series A and Series B Preferred Interests"). In
conjunction therewith, Insight Holdings of Ohio, LLC ("IHO") contributed $10
million in cash to Insight Ohio for which it received a 75% non-voting common
membership interest in Insight Ohio. Insight Ohio provides basic and expanded
cable services to homes in Columbus, Ohio and surrounding areas.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior Notes
are non-recourse and are secured by all issued and outstanding Series A
Preferred Interest in Insight Ohio and are conditionally guaranteed by Insight
Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related
entities, issued 12 7/8% Senior Discount Notes due 2008 ("Discount Notes"). The
Discount Notes have a face amount of $55,869,000 and approximately $30 million
of gross proceeds were received upon issuance. The Discount Notes are non-
recourse, secured by 100% of the common stock of Coaxial, and conditionally
guaranteed by Insight Ohio.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1998.
3. Summary of Significant Accounting Policies
Home Office Expenses
Effective August 21, 1998, the Company entered into a management agreement with
IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues.
Fees under this management agreement aggregated $364,000 and $1,092,000 for the
three and nine months ended September 30, 1999 and $142,000 for the period from
August 21, 1998 to September 30, 1998.
24
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
3. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 2000. The Company does not anticipate the adoption of
SFAS No. 133 to have a material impact on its financial statements.
During 1999, the Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 requires that companies capitalize qualifying costs incurred during the
application development stage of a software project. All other costs incurred
in connection with an internal use software project are to be expensed as
incurred. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
4. Credit Facility
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a bank
which provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the Company's cable plant and for the introduction of new video services. The
Senior Credit Facility has a nine-year maturity, with reductions to the amount
of the commitment commencing after three years. The amount available for
borrowing is reduced by any outstanding letter of credit obligations. Insight
Ohio's obligations under the Senior Credit Facility are secured by substantially
all the tangible and intangible assets of Insight Ohio. Loans under the Senior
Credit Facility bear interest, at Insight Ohio's option, at the prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the Senior
Credit Facility, create liens on assets, make investments, make acquisitions,
engage in mergers or consolidations, engage in certain transactions with
subsidiaries and affiliates and otherwise restrict certain activities. As of
September 30, 1999, $11,000,000 was drawn on the Senior Credit Facility.
Interest expense on the Senior Credit Facility was approximately $126,000 for
the three and nine months ended September 30, 1999.
5. Commitments and Contingencies
Insight Ohio is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either Insight Ohio's future results of operations
or financial position.
25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the financial
statements and related notes which are included elsewhere in this report.
Forward-Looking Statements
This report contains "forward-looking statements," including statements
containing the words "believes," "anticipates," "expects" and words of similar
import, which concern, among other things, the operations, economic performance
and financial condition of the System (as defined below), including, in
particular, the likelihood of the System's success given its new management by
Insight Holdings of Ohio, LLC ("IHO"). All statements other than statements of
historical fact included in this report regarding Coaxial 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
have been correct. Important factors that could cause actual results to differ
materially from expectations include, without limitation, (i) the ability of
Coaxial LLC and Coaxial Financing Corp. to make scheduled payments with respect
to the Discount Notes (as defined below) will depend on the financial and
operating performance of Insight Ohio; (ii) a substantial portion of Insight
Ohio's cash flow from operations is required to be dedicated to the payment of
principal and interest on its indebtedness and the required distributions with
respect to the Series A Preferred Interests (as defined below) and the Series B
Preferred Interests (as defined below), thereby reducing the funds available to
Insight Ohio for its operations and future business opportunities; (iii) Coaxial
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 (iv) the indenture governing the terms of the
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.
Private Offering of Senior Discount Notes, 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 Senior Discount Notes in connection with
the Financing Plan discussed below, which included the contribution of Coaxial's
cable television system (the "System") to Insight Ohio. 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, which 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".
On August 21, 1998, a financing plan was implemented to facilitate the
organization of Insight Ohio, the acquisition of the System by Insight Ohio and
to provide for the System's liquidity and operational and financial flexibility
(the "Financing Plan"). Pursuant to the Financing Plan:
. Coaxial contributed to Insight Ohio substantially all of the assets
comprising the System for which Coaxial received a 25% non-voting common
membership interest in Insight Ohio as well as the voting Series A Preferred
Interest and Series B Preferred Interest in Insight Ohio (together the
"Preferred Interests"), which provide for distributions to Coaxial that will
be used to pay interest and principal on the Senior Notes and to pay
dividends to the Individual LLCs that will be used to pay interest and
principal on the Senior Discount Notes;
26
. IHO contributed $10.0 million in cash to Insight Ohio for which it received a
75% non-voting common membership interest in Insight Ohio;
. Coaxial and Phoenix effected the Senior Notes Offering;
. Coaxial LLC and Coaxial Financing Corp. effected the Senior Discount Notes
Offering; and
. a portion of the existing bank indebtedness of Coaxial and Phoenix and
certain of their affiliates was repaid and the balance was purchased by CIBC
Oppenheimer Corp. ("CIBC") and restructured in accordance with an agreement
among the parties.
As part of the Financing Plan, 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 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. As a result of the Financing Plan,
Coaxial has only nominal assets except for its ownership of 25% of the non-
voting common membership interests in Insight Ohio and 100% of the voting
Preferred Interests.
The gross proceeds received by Coaxial LLC and Coaxial Financing Corp. from
the Senior Discount Notes Offering were approximately $30.0 million. Proceeds
from such private offering were used for the repayment of outstanding
indebtedness (approximately $28.9 million). CIBC purchased certain outstanding
indebtedness (approximately $136.4 million) of Coaxial and Phoenix and
restructured that debt in accordance with the Financing Plan. CIBC funded such
purchase with proceeds from the Senior Notes Offering. The remaining proceeds
from the Senior Notes Offering and the Senior Discount Notes Offering and the
$10.0 million cash contribution from IHO were used for working capital
(approximately $2.9 million), deferred compensation and severance payments
(approximately $3.0 million) and fees and expenses (approximately $8.8 million).
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial. The distributions from the Series A Preferred
Interests will be used to pay interest and principal on the Senior Notes and the
distributions from the Series B Preferred Interests will be used to pay
dividends to the Individual LLCs, which dividends will be used to pay interest
and principal on the Senior Discount Notes. Distributions by Insight Ohio will
be subject to certain financial covenants and other conditions set forth in its
Senior Credit Facility.
Coaxial LLC does not conduct any business and is dependent upon the cash flow
of Insight Ohio to meet its obligations under the Senior Discount Notes. IHO, a
wholly-owned subsidiary of Insight, serves as the manager of the Insight Ohio.
The following discussion relates to the historical operations of Coaxial LLC
for the three and nine month periods ended September 30, 1999 compared to the
historical operations of Coaxial for the three and nine months ended September
30, 1998. On August 21, 1998, substantially all of the assets and liabilities
comprising the System were contributed to Insight Ohio. Subsequent to the
consummation of the Financing Plan, Insight Ohio was deemed to be a subsidiary
of Coaxial and, as such, the financial statements of Insight Ohio are
consolidated into the financial statements of Coaxial and Coaxial was deemed to
be a subsidiary of Coaxial LLC and, as such, the financial statements of Coaxial
are consolidated into the financial statements of Coaxial LLC. Financial results
related to historical information reflect the operation and management of the
System by Coaxial through August 21, 1998 and by IHO from August 21, 1998 to
September 30, 1999. The historical operating results of Coaxial LLC presented
below reflect the actual results of the System in addition to certain financing
activities unrelated to the operation of the System. These financing activities
relate primarily to the offering of the Senior Discount Notes and Senior Notes
discussed above as well as certain borrowings and repayments of debt with
affiliated companies. These activities resulted in related financing and
interest costs. The historical results of Coaxial LLC presented below appear
elsewhere in this report under the heading "Coaxial LLC."
27
Overview
Revenues generated by the System are primarily attributable to monthly
subscription fees charged to basic customers for basic and premium cable
television programming services. Basic revenues consist of monthly subscription
fees for all services (other than premium programming) as well as monthly
charges for customer equipment rental. Premium revenues primarily consist of
monthly subscription fees for programming provided on a per channel basis. In
addition, other revenues are derived from installation and reconnection fees
charged to basic customers to commence or discontinue service, pay-per-view
charges, late payment fees, franchise fees, advertising revenues and commissions
related to the sale of goods by home shopping services.
System operating expenses consist of service and administrative expenses, home
office expenses and depreciation and amortization. Service and administrative
expenses include direct costs, such as fees paid to programming suppliers,
expenses related to copyright fees, bad debt expense, and franchise and use
fees. Programming fees have historically increased at rates in excess of
inflation due to increases in the number of programming services offered by the
System and improvements in the quality of programming. Service and
administrative expenses also include costs attributable to the operation of the
System, including wages and salaries and other expenses related to plant
operating activities, customer service operations, marketing, billing,
advertising sales and video production. Prior to August 21, 1998, service and
administrative expenses also included costs attributable to finance and
accounting, human resources and other administrative functions. Upon
consummation of the Financing Plan, such expenses were replaced by the
management fee arrangement with IHO.
The System relies on IHO for all of its strategic, managerial, financial and
operational oversight and advice. IHO also centrally purchases programming and
equipment and provides the associated discount to the System. In exchange for
all such services provided to the System and subject to certain restrictions
contained in the covenants with respect to Insight Ohio's Senior Credit
Facility, the Senior Notes and the Senior Discount Notes, IHO is entitled to
receive management fees of 3.0% of gross operating revenues of the System. Such
management fee is payable only after distributions have been made in respect of
the Preferred Interests and only to the extent that such payment would be
permitted by an exception to the restricted payments covenants of the Senior
Notes and the Senior Discount Notes as well as Insight Ohio's Senior Credit
Facility. Such management fee is included in service and administrative
expenses.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues for the three months ended September 30, 1999 and 1998 were $11.8
million. For the three months ended September 30, 1999, subscribers served
averaged 84,989 compared with 90,701 during the same time period in 1998.
Revenues remained flat despite a 6.3% decrease in customers as Insight Ohio
ended previous management's program of deeply discounting subscriber rates.
Average revenue per customer per month for the three months ended September 30,
1999 totaled $46.29 versus $43.25 for the three months ended September 30, 1998.
Service and administrative expenses remained flat at $7.3 million for the
three months ended September 30, 1999 and 1998. A decrease of 6.6% in basic
programming expenses from $2.0 million in 1998 to $1.9 million in 1999,
reflects savings realized through Insight's purchasing discounts. Similarly, pay
programming expenses dropped 11.2% during the three months ended September 30,
1999 versus the three months ended September 30, 1998 to $990,000. Prior to the
consummation of the Financing Plan, the System was charged home office expenses
that included costs incurred by the owners of Coaxial and their direct employees
relating to the System including salaries, benefits, legal fees, travel and
entertainment, accounting fees and other office expenses. For the three months
ended September 30, 1998, such expenses totaled approximately $400,000. Upon
consummation of the Financing Plan, IHO commenced providing management services
to the System for which it receives a management fee, which totaled
approximately $364,000 for the three months ended September 30, 1999. Personnel
costs for the three months ended September 30, 1999 totaled approximately $1.5
million, a decrease of 25.5% from the three months ended September 30, 1998 as
Insight Ohio eliminated duplicative positions upon consummation of the Financing
Plan.
28
Offsetting the expense decreases described above, marketing expenses increased
186.7% from approximately $244,000 for the three months ended September 30, 1998
to approximately $698,000 for the three months ended September 30, 1999. The
Company significantly increased its marketing activity over the prior period in
connection with efforts directed at customer awareness of the Company's upcoming
launch of its new products and activation of its new network.
Severance and transaction structure costs totaling $4.8 million were incurred
during the three months ended September 30, 1998 as a result of the Financing
Plan and the System acquisition. These costs consisted of severance costs of
$960,000 and professional fees of $3.8 million.
Depreciation and amortization expenses for the three months ended September
30, 1999 increased by 62.4% over the three months ended September 30, 1998 to
approximately $1.8 million reflecting additional capital expenditures resulting
from upgrades to the System's network.
Operating income for the three months ended September 30, 1999 totaled $2.7
million versus a loss of $1.5 million for the three months ended September
30,1998. The loss reported for the three months ended September 30, 1998 was
primarily due to the severance and transaction structure costs described above.
Net interest expense totaled approximately $1.7 million for the three months
ended September 30, 1999 primarily resulting from interest on the Senior
Discount Notes and Senior Notes issued on August 21, 1998.
An extraordinary loss of $846,641 was recorded during the three months ended
September 30, 1998 as a result of the refinancing of outstanding loan balances
in connection with the Financing Plan.
Net income increased to $1.0 million for the three months ended September 30,
1999 from a net loss of $3.1 million for the three months ended September 30,
1998 for the reasons set forth above.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues for the nine months ended September 30, 1999 were $35.2 million,
compared to $35.0 million for the nine months ended September 30, 1998. For the
nine months ended September 30, 1999, subscribers served averaged 86,123, as
compared with 91,094 during the same time period in 1998. Revenues remained
essentially flat despite a 5.5% decrease in customers as Insight Ohio ended
previous management's program of deeply discounting its rates. Average revenue
per customer per month for the nine months ended September 30, 1999 totaled
$45.41 versus $42.74 for the nine months ended September 30, 1998.
Service and administrative expenses decreased to $20.5 million for the nine
months ended September 30, 1999, compared to $22.2 million for the nine months
ended September 30, 1998, a decrease of $1.7 million or 7.4%. Basic programming
expenses decreased by 10.3%, from $6.0 million in 1998 to $5.4 million in 1999,
reflecting savings realized through Insight's purchasing discounts. Similarly,
pay programming expenses dropped 13.4% during the nine months ended September
30, 1999 versus the nine months ended September 30, 1998 to $2.9 million. Prior
to the consummation of the Financing Plan, the System was charged home office
expenses that included costs incurred by the owners of Coaxial and their direct
employees relating to the System including salaries, benefits, legal fees,
travel and entertainment, accounting fees and other office expenses. For the
nine months ended September 30, 1998, such expenses totaled approximately $1.1
million. Upon consummation of the Financing Plan, IHO commenced providing
management services to the System for which it receives a management fee, which
totaled approximately $1.1 million for the nine months ended September 30, 1999.
Personnel costs for the nine months ended September 30, 1999 totaled
approximately $4.3 million, a decrease of 20.1% from the nine months ended
September 30, 1998 as Insight Ohio eliminated duplicative positions upon
consummation of the Financing Plan. Offsetting these expense decreases was an
increase in marketing expenses in connection with increased marketing activity
over the prior period in connection with efforts directed at customer awareness
of the Company's upcoming launch of its new products and activation of its new
network.
Severance and transaction structure costs totaling $4.8 million were incurred
during the nine months ended September 30, 1998 as a result of the Financing
Plan and the System acquisition. These costs consisted of severance costs of
$960,000 and professional fees of $3.8 million.
Depreciation and amortization expense for the nine months ended September 30,
1999 increased by 33.2% over the nine months ended September 30, 1998 to
approximately $5.1 million reflecting additional capital expenditures resulting
from upgrades to the System's network.
Operating income for the nine months ended September 30, 1999 totaled $9.6
million, a 126.7% increase over operating income of $4.2 million reported for
the nine months ended September 30, 1998.
29
Net interest expense totaled approximately $4.9 million for the nine months
ended September 30, 1999 primarily resulting from interest on the Senior
Discount Notes and Senior Notes issued on August 21, 1998.
An extraordinary loss of $846,641 was recorded during the nine months ended
September 30, 1998 as a result of the refinancing of outstanding loan balances
in connection with the Financing Plan.
Net income increased to $4.8 million for the nine months ended September 30,
1999 from net income of $2.2 million for the nine months ended September 30,
1998 for the reasons set forth above.
Liquidity and Capital Resources
The cable television business is a capital-intensive business that generally
requires financing for the upgrade, expansion and maintenance of the technical
infrastructure. Capital expenditures relating to Coaxial totaled $5.7 million
and $16.0 million for the three and nine months ended September 30, 1999. These
expenditures were primarily for the rebuild of cable plant and for serving new
homes. Capital expenditures are financed by cash received from the Financing
Plan and cash flows from operations.
IHO is rebuilding the technical platform of the System by upgrading the plant
serving the majority of customers. The capability for high-speed data
transmission, impulse pay-per-view, digital tiers of service and additional
analog channels is intended to be provided by further deployment of fiber
optics, an increase in the bandwidth to 870 MHz, activation of the reverse plant
to allow two-way communications and the installation of digital equipment.
In addition to cash flow from operations, Insight Ohio has available a $25
million Senior Credit Facility to support its upgrade program. As of September
30, 1999, $11 million has been drawn under the Senior Credit Facility and $14
million remains available for borrowing.
Inflation and Changing Prices
Coaxial LLC's costs and expenses are subject to inflation and price
fluctuations. Although changes in costs can be passed through to customers, such
changes may be constrained by competition. Management does not expect inflation
to have a material effect on Coaxial LLC's results of operations.
Year 2000
The Year 2000 will pose a unique set of challenges to those industries reliant
on information technology. As a result of the methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether. Insight
Ohio and other companies in the same business are vulnerable to their dependence
on distribution and communications systems.
Insight Ohio's greatest Year 2000 exposure is presented by its third party
billing system which is responsible for mailing monthly bills to customers and
maintaining customer data. Insight Ohio has recently engaged Convergys as its
billing service provider. Convergys has informed Insight Ohio that testing of
the billing system, for Year 2000 compliance, was completed by the first quarter
of 1999.
Management believes that the remaining systems of Insight Ohio will be fully
Year 2000 compliant by the end of the fourth quarter of 1999. Insight Ohio has
completed an inventory of all areas which are at risk and has replaced and
upgraded all critical equipment and software as needed. Due to Insight's
affiliation with AT&T Broadband & Internet Services ("AT&T BIS"), Insight Ohio
is a member of AT&T BIS's Year 2000 task force. This allows Insight Ohio access
to AT&T BIS's extensive database which details various vendors', suppliers' and
programmers' Year 2000 compliance. Management estimates that the total
cumulative costs relating to its efforts to make its systems Year 2000 compliant
will be approximately $35,000 of which approximately $20,000 has been incurred
as of September 30, 1999.
30
Management believes that the expenditures required to bring Insight Ohio's
systems into compliance will not have a materially adverse effect on Insight
Ohio's performance. However, the Year 2000 problem is pervasive and complex and
can potentially affect any computer process. Accordingly, no assurance can be
given that Year 2000 compliance can be achieved without additional unanticipated
expenditures and uncertainties that might affect future financial results.
Moreover, to operate its business, Insight Ohio relies on governmental
agencies, utility companies, telecommunications companies, shipping companies,
suppliers and other third party service providers over which it can assert
little control. Insight Ohio's ability to conduct its business is dependent upon
the ability of these third parties to avoid Year 2000 related disruptions.
Insight Ohio has contacted and received compliance statements from its third
party service providers about their Year 2000 readiness. If Insight Ohio's key
third party service providers do not adequately address their Year 2000 issues,
Insight Ohio's business may be materially affected, which could result in a
materially adverse effect on Insight Ohio's results of operations and financial
condition.
Insight Ohio is developing contingency plans, which will be in place by
November 30, 1999, in the event Insight Ohio or any key third party providers
should fail to become Year 2000 compliant.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. Coaxial LLC, Coaxial Financing Corp. and Insight
Ohio do not anticipate the adoption of this statement to have a material impact
on their respective financial statements.
During 1999, the Company adopted Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-
1). SOP 98-1 requires that companies capitalize qualifying costs incurred
during the application development stage of a software project. All other costs
incurred in connection with an internal use software project are to be expensed
as incurred. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
31
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Coaxial LLC, Coaxial Financing Corp. and Insight Ohio do not engage in trading
market risk sensitive instruments and do not purchase hedging instruments or
"other than trading" instruments that are likely to expose any of them to market
risk, whether interest rate, foreign currency exchange, commodity price or
equity price risk. Coaxial LLC, Coaxial Financing Corp. and Insight Ohio have
not entered into forward or future contracts, purchased options or entered into
swaps.
32
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 27.1 - Financial Data Schedule of Coaxial LLC
27.2 - Financial Data Schedule of Coaxial Financing Corp.
27.3 - Financial Data Schedule of Insight Communications of Central Ohio,
LLC
(b) Reports on Form 8-K
None
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial LLC
(Registrant)
Dated: November 15, 1999
By: /s/ Michael S. Willner
_________________________
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
_________________________
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Coaxial Financing Corp.
(Registrant)
Dated: November 15, 1999
By: /s/ Michael S. Willner
_________________________
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
_________________________
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Insight Communications of Central Ohio, LLC
(Registrant)
Dated: November 15, 1999
By: /s/ Michael S. Willner
_________________________
Michael S. Willner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kim D. Kelly
_________________________
Kim D. Kelly
Executive Vice President, Chief Financial
and Operating Officer and Treasurer
(Principal Financial and Accounting Officer)